Seizing the moment

| Updated on January 20, 2018 Published on April 25, 2016

Both infrastructure and ease of doing business need to improve if India’s to retain its current lead in attracting foreign investments

Last week, The Financial Times reported that India had toppled China as the top recipient of greenfield foreign direct investment (FDI) in 2015. That’s a cause for celebration — it reflects that India is considered a viable alternative to a slowing China by foreign investors. For the Narendra Modi government, it is a reason to believe that its efforts over the past two years to position India as a destination for setting up manufacturing plants is beginning to yield results. It also reflects that investors are getting convinced about steps being taken to make India an easier place to do business. Commitments of greenfield FDI into India jumped 174 per cent in 2015 to $63 billion, after climbing 47 per cent to $23 billion in 2014. Also noteworthy is the fact that average commitments per project have grown larger — overall FDI grew from $23 billion in 641 projects in 2014 to $63 billion in 697 projects in 2015. China, in comparison, received $57 billion (789 projects) in 2015, down from $75 billion (932 projects) in 2014. The fall of China from the top position was largely a result of build-up of excess capacity in the country and its economic slowdown, and a move, after years of building global factories, to diversify risks on the part of foreign investors. In contrast, India is seen as an oasis of high growth in a slowing world economy.

But it is too early to conclude that the NDA government’s Make in India mission has been achieved. That is still a work in progress, needing substantially more investments to be successful. In India’s context, greenfield FDI is a lot more desirable than foreign investment that is attracted by mergers and acquisitions deals because it involves creation of new facilities and new jobs, and helps in raising the level of economic activity in a nation. FDI inflows emanating from M&A deals, in contrast, result in reallocation of resources — and only a portion of that may go into the creation of new assets, plants and jobs. Direct investments in projects are also much more stable and long-term than portfolio investments in financial assets, and help build up the country’s foreign exchange reserves, necessary to keep the exchange rate stable as well as pay for imports.

But in order to attract FDI on a sustained basis — in both greenfield and brownfield projects — India needs to markedly improve the quality of its infrastructure. Without considerably improved connectivity through better roads and highways, railway networks and ports, uninterrupted and affordable power, adequate water and good communication networks — all areas where China is literally a generation ahead — the current surge may dry up if growth revives in China. In a sense, it is a chicken-and-egg situation. The country needs investments in all these areas. Some of that will have to come in the form of FDI, and investments come only when certain basic facilities are in place.

Published on April 25, 2016
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