Talking Point. Much ado about foreign investment flows

The recent media hype over India surpassing China and the US in FDI inflows is supposedly an affirmation of the success of ‘Make in India’. The ‘Make in India’ twitter handle has used this data to project evidence of success of this initiative. India, with a greenfield FDI inflow of $31 billion in the first half of 2015, had an impressive 47 per cent year-on-year jump over the $24 billion FDI inflow in full year 2014.

But is this a case of hyperventilation?

Stretched projection It is indeed true that there has been an increase in FDI inflows (including greenfield and cross-border M&A) into India in the hope of a turnaround in growth outlook, and this bodes well for the external sector to withstand potential balance of payment (BoP) volatility arising from potential decline in global excess liquidity.

However, we believe it will be premature to extrapolate the recent upsurge in FDI as concrete proof of a revival in the investment cycle or aiding the objectives of ‘Make in India.’ Further, the disaggregated data on FDI inflow and outflow (greenfield and cross-border M&A) indicates a much different picture compared to the general perception.

For instance, while FDI into greenfield projects in India at $31 billion was 29 per cent higher than China, the gross FDI inflows into China at $43 billion, including M&A flows, was actually 65 per cent higher than $26 billion into India. Available information for India shows that gross FDI flows, after deducting repatriation/disinvestment, grew by a modest 15.6 per cent year-on-year in the first half of 2015. This is lower than the impressive 2.6x expansion for greenfield projects. Significantly, repatriation/disinvestment for India in the first half of 2015 shot up by 79 per cent to $56 billion, compared to $31 billion in the first half of 2014. China’s lower net FDI is due to higher investments abroad.

The profile of recent FDI flows is indicative of investments done to tap the domestic consumption rather than to boost exports. Substantial inflows in the last two years have been in the areas of e-commerce, automobiles and cash & carry. Employment-intensive sectors, for instance, construction, have seen sharp decline. Likewise, conventional manufacturing/investment-oriented sectors, such as metals, power, oil and gas have seen muted flows. FDI investment in the automobile sector is mostly aimed at targeting domestic demand.

Nearly 50 per cent of the top private equity deals in 2014 were in consumer technology, which experienced CAGR of around 140 per cent. However, with the majority of such investments going into the initial phase of funding with valuations getting expensive, there is a possibility of flows diminishing. Rather than encouraging manufacturing, e-tailing investments have fuelled imports of consumer electronics; this is clearly not aligned to the spirit of ‘Make in India’.

In contrast to India’s overindulgence with FDI flows to resuscitate domestic investment cycle, global trends since 2007 show a consistent decline in the relevance of FDI in funding investments. The share of FDI to world gross fixed capital formation (FDI/GFCF) has declined to 9 per cent from its peak of 14 per cent in 2007. In India, it has declined to 5 per cent from 11 per cent. As a corollary, it appears that global monetary easing has inflated the financial markets, including emerging markets in Asia and Latin America, rather than aiding real investments.

Global FDI inflows have considerably moderated from $2 trillion in 2007 to $1.3 trillion in 2014. As an investing country, the US has seen a sizeable decline to just $86 billion in 2014, about a third of 2013 inflow. Europe has seen retrenchment/disinvestment on both sides (inflows and outflows). Net FDI flows into China averaged around $1 billion for the 12 months ending August 2015, much lower than the $2.9 billion for India. While truncated data like this may have prompted some to conclude that India trumped China, if we consider only the inflows, China has consistently maintained gross inflows of around 3.6x that of India. Importantly, China has been growing its investments abroad over the past several years, growing at 27-30 per cent since 2009, possibly diversifying fixed investments across the world.

Our analysis of FDI flows supports our earlier thesis of expecting improvement in urban consumption; positive for automobiles on the back of new launches in passenger cars. Higher data usage could be a positive for telecom companies — giving some respite from the constraints faced by the sector. The proliferation of consumer technology could continue to be disruptive for the organised retailers in the foreseeable future. Based on our analysis we are still not convinced of changing our cautious stance on the capital goods sector.

The writer is Head-Institutional Research, Economist & Strategist, Emkay Global Financial Services Ltd

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