With end of uncertainty, FDI flows may perk up

With the NDA set to form the government once again with full majority, Foreign Direct Investment (FDI) is likely to receive a boost.

While the FDI flow increased sharply between 2014-15 and 2016-17, over April-December 2018, it dropped 3 per cent to $46.6 billion compared with the same period last year. This, experts say, was due to the political uncertainty in the country.

Policy reforms to help

One of the top priorities when Narendra Modi became Prime Minister in 2014 was to attract more foreign companies to invest in the country’s Make-in-India programme.

Sectors facing capital crunch were identified and FDI regulations relating to those were relaxed.

These sectors included defence, construction and infrastructure (including railway infrastructure), telecommunication, automobile and manufacturing. For instance, 100 per cent approval was given under the Automatic Route for sectors such as food product retail trading, construction and development, industrial parks and NBFCs.

Under the central government approval route, sectors such as airport transport services, telecom services, broadcasting content services, defence and railway infrastructure were given approval for receiving FDI up to 100 per cent.

Though the UPA government had also introduced reforms in the FDI policy in retail, civil aviation, broadcasting and infrastructure sectors and allowed foreign direct investment in power trading exchanges, big-ticket investments did not materialise due to stringent rules.

Annual FDI inflows declined from about $41.8 billion in FY09 to $34.2 billion in FY13. But under the NDA, FDI inflow increased 18.6 per cent (CAGR) between 2013-14 and 2016-17.

In 2016-17, it was at a record high of $60.2 billion. In 2017-18, growth moderated, but absolute inflows still hit a new high of $60.9 billion.

Initiatives such as Digital India, Smart Cities and Startup India, in addition to relaxation of FDI regulations, made it easier for foreign investors to access India. Some of the companies that have entered the Indian markets in recent years are Amazon, Ikea and Walmart. Further, smartphone companies such as Xiaomi and Samsung have opened multiple manufacturing plants.

FDI inflows have moderated in the last two years, growing at 8 per cent in FY17 and at an even slower pace of 1 per cent in FY18. This could be due to domestic jitters including political uncertainty and changes in the FDI policy on e-commerce, say experts. But changing global market scenario with the US Fed raising rates and rising geopolitical tensions are also disturbing FDI inflows, says Madan Sabnavis, Chief Economist, CARE Ratings.

However, he added that the environment is favourable for FDI flows now thanks to the recent reforms.

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