Wednesday, October 4

Are Foreign Direct Investments Facing a Decline in India?

Foreign Direct Investment which means the investment that is made by a person or a firm in any business interest situated in another country seems to be showing a new record in the financial year 2018.

However, according to a report, over the last fifteen years, the FDI flows into the country show that they do not have much to do with the political organization at the Centre. The United Progressive Alliance 2 (UPA-2) started off on a high note but later fell victim to ‘policy paralysis’ at the end of its duration.

However, it showed major declines in FDI inflows in two consecutive years, and also it saw a bounceback in FDI in its final year. The National Defence Academy (NDA) flagged off with 20% plus FDI growth rates in its first two years. Instead of bringing in reforms in GST, it had to struggle with subside FDI flows lately.



Economic, not political

In the previous ten years, heavy GDP growth prints in the country have naturally been followed by an upward surge in the strength of FDI. The highest annual growth in FDI as of now, from $7.6 billion in 2005 to $20.3 billion in 2006 reached at this point after India improved its GDP growth from 7.8% to 9.3%.

In the same way, in 2008, the record flows of $47 billion witnessed a GDP growth print of 9.8% in 2007. The FDI revival in 2015 unfolded after the economy returned to 8% growth. From an average of $5 billion a year from 1998 to 2002, the annual flow curved to $12 billion in 2002-2007, further jumped to $34 billion in 2007-2012 and stood at $38 billion in the previous five years to 2017.



Performing at a level lower than should be expected

Depending on the size of the economy, the larger the economy and its consumer market, the more interested foreign investors are likely to be done.

As a part of India’s GDP, FDI floated at 1-2% for many years before reaching up to 3.6% in the immediate by-product of the global financial crisis in 2008. But in 2009, India’s growth slumped and FDI flows decreased, lowering to 1.3% of GDP by 2012. Internationally, the FDI flows average 2.4% of GDP.

FDI flows into countries is based on not just the local economic expectations, but also on the total capital that global investors are willing to invest overseas in a given year. This pool is decided by global financial market conditions.



Share of pool

According to the data from the World Bank, after performing well in 2008 when India managed to take in 3.2% of the global FDI pool, its share decreased steadily to 1.5% in 2012. That was the year in which GDP growth hit the most unsuccessful point of 5.5%.

Since then, of the global FDI pool share in India has shown a smart recovery, hitting back to 2.8% by 2017. This shows that the collapse in India’s FDI flows in the last few years was responsible more because of the struggling global FDI pool rather than by domestic reasons.

And now for FDI to keep its pace into India, it needs to maintain a major focus on sustaining 8%-plus growth.