Revival in FDI: Temporary relief or long-term succour?

C. J. Punnathara | Updated on March 12, 2018

Like bad tidings, it seems good news also comes in droves.

First it was the Lehman Brothers collapse in US. Rich economies of the West bore the brunt of an economic slow down that followed. India's West-dependant exports plunged while imports spiralled up, fuelled in good measure by increased crude oil and petroleum imports.

The current account deficit widened and the value of the Indian currency plunged. Inflation reared its ugly head, stoking fears of further erosion in the value of the rupee. Economic growth faltered and foreign investors gave a wide berth to the ravaged economy.

Then began the good news: NRI deposits recorded a three-fold growth last year. Remittances were also seen to be doing reasonably well. There was a spurt in foreign direct investment which grew by 34 per cent to a record $46.8 billion in 2011-12. India's foreign exchange reserves should be looking relatively more comfortable. But we are still not out of the woods. Not by a long measure. This was evident from the sharp plunge in the value of the rupee last week.

Good tidings

However, coming on the back of two years of negative growth, tidings on the FDI front are certainly welcome.

According to the World Investment Report 2010 and the Unctad Investment Trend Monitor, FDI into India had slipped from $40 billion in calendar year 2008 to $35 billion in 2009 and further to $24 billion in 2010. And then came the good news and possibly reversal in India's fortunes.

An RBI report had tried to gather evidence on why exactly the actual FDI to India fell short of its potential level during 2010-11. One of the reasons it suggested was the high levels of inflation as well as policy uncertainty.

So what has changed? For most part of 2011-12, for which FDI figures are available, the country was ravaged by high levels of inflation, often running up to double digit levels. The declining trend is a more recent phenomenon and its impact should be evident only during the current year.

The second major deterrent was said to be the looming policy uncertainty. What has changed here?

The current FDI spurt was led by some big ticket purchases in the Indian markets: London-based Vedanta's acquisition of Cairn India for $9 billion, British major BP paid $7.2 billion for stake in Reliance Oil and Vodafone chipped in purchasing the stake of Essar Group with $5.46 billion, for their telecom business in India.

Policy uncertainty

These investments were all made in an environment of policy uncertainty. It was pointed out that one major policy deterrent to FDI was the effective articulation and implementation of environmental regulations. The huge coal blocks and reserves which were lying in forests and other environmentally sensitive areas soon became just assets on paper.

There are similar rules now in iron ore mining and port development which deterred the likes of South Korea-based steel giant Posco from setting up big-ticket projects in India.

But FDI into other sectors are booming. The drugs and pharmaceutical sector saw a 15-fold jump in FDI in 2011-12. Services sector attracted the maximum investments during this period. But it would seem that mining and power generation were the laggards along with automobiles, housing and real estate.

Does this mean that there is churning in the portfolio for FDI investments? If that were the case, then it would be a welcome development. No doubt, India too would have to enforce its ecological and environmental laws far more stringently for a variety of reasons, not the least of which being containing pollution, reducing effluent discharge and adopting global best practices to contain global warming.

The question remains: do we welcome large investors from countries which have strict environmental rules to set up shop in India and exploit the weak policy framework and inefficient enforcement system prevalent in the country. The answer would be an obvious no. And the result could be a welcome churn in the investment portfolio of foreign direct investors.

FDI and development

There can be no doubt that the slump in FDI flows had affected India's development. Several studies had shown FDI as the principal catalyst which spurred India's growth to new highs. The resultant growth took India to the high table along with Brazil, Russia, China and South Africa (BRICS) as the group of emerging nations that accelerated rate of economic growth.

There was even talk of this comity of nations, BRICS, reviving the global economic momentum, even as the development process began to falter among the rich countries of the West.

It is possible that faltering FDI flows have affected India's economic growth process and undermined its position among BRICS nations. Although the slip-up in FDI could be surmised as a temporary blip over couple of years, the same could be said about the equally transitory revival. Only time will tell if the revival in FDI is here to stay. Transitory or not, revival in FDI flows is certainly good news for the economy.


Published on May 20, 2012

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