NEW DELHI: India, the world’s fastest-growing major economy in recent years, is struggling to find a consistent flow of foreign investment as investors are spooked by the lack of steady and sustainable policies by New Delhi, economists said.
Raghuram Rajan, former Reserve Bank of India governor, and Surjit Bhalla, former part-time member of Prime Minister Narendra Modi’s Economic Advisory Council told ET Online that uncertainty concerning policies has increased, which is disturbing the flow of foreign investments in India.
“Businesses are worried about the government changing the terms on them, about them privileging the tax authority to raise demands all the time. Eventually, these demands get thrown out of courts, but it is five or ten years of uncertainty,” Rajan said.
Net FDI flow into India rose from $22 billion in FY14 to $31 billion in FY19. However, the figure has more than halved to $13 billion in April-September 2023, down from $38 billion in the same period the year before, HSBC wrote in a note earlier this year.
Bhalla said that while he doesn’t see any hesitation from the companies’ end, a host of policy issues mean that uncertainty has gone up for foreign investors and has called for ‘consistency’ in tax reforms.
“I think our tax rates are too high. Be it income tax rates, or direct income tax rates, they are too high. We have got a real distortion in our investment tax rate which is now 25 per cent and 42 per cent. We 100 per cent need reforms in our direct tax code for it to be consistent with corporate taxes,” Bhalla said.
Tariffs subject to whims & fancies?
Both economists expressed displeasure over tariff policies which are announced and then rolled back, spurring uncertainty for companies, both foreign and domestic.
India in 2023 announced compulsory licensing requirements for tech importers to boost local production, to the shock of prominent companies like Apple, Samsung, HP, Dell Technologies and others. However, it later withdrew the stringent measures.
“Now, what is the trade-off? Do we want the Narayana Murthys of the future to keep making trips to New Delhi to allow for their laptops to be imported, to arrange for their laptops to be imported? Rightfully, the government has withdrawn this proposal. I hope it stays dead,” Rajan said.
“One day I wake up and say this tariff is going to go up and then another day I say something else. That kind of change of terms on which they came in is something that foreign investors worry about as it can make their economics unpredictable,” he said.
“Apart from making it easier to do business, you have to make government policy more predictable. It should be less subject to whims & fancies,” Rajan added.
Another policy that the government rolled back was the plan to tax credit card spending overseas.
“Thankfully, it never got implemented. But the government came up with this bright idea that your credit card spending abroad will be effectively taxed,” Bhalla recalled. “Yes, no government is perfect. Thankfully, that policy did not get implemented and the can has been kicked down the road,” Bhalla said.
Rajan added that the government must make it easy for businesses to set up in India. “Don’t keep changing the rules every month. It will be helpful for Indian companies and foreign businesses both,” Rajan added.
India, resolved to be an attractive investment destination
India under the leadership of Prime Minister Narendra Modi-led Bharatiya Janata Party has been able to attract the attention of global bigwigs like Apple and Tesla, supported by a focus on boosting manufacturing prowess.
This comes at a time when companies are looking to reduce their exposure to China.
Giving further fillip to India’s prospects to attract foreign investments, Indian debt will be included in global bond indices led by JPMorgan Chase & Co in June and Bloomberg Emerging Market Local Currency Government Index from January 2025.
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The government has been on a drive to reduce the culture of red-tapism that existed for decades and created impediments to foreign investments.
The growth rate of the Indian economy and its potential makes it an attractive destination. Drawing comparisons with the 8.4 per cent Q3FY24 GDP growth rate reading of India, former Chief Economic Adviser Arvind Subramanian noted the dip in foreign investment in recent years.
“You can see foreign direct investment actually collapsed quite a bit,” he said, while wondering if India is such an attractive place, and why their FDI flows are not higher.
RBI data showed that net FDI inflows fell from $4.8 billion in H1FY24 to $19.6 billion in H1FY23. HSBC economists in their note attributed this fall to a shift in investor appetite rather than a loss of interest in India’s economic prospects.
(This discussion is a part of ET Online’s Election Special Decoding Bharat & Its Economy with Raghuram Rajan and Surjit Bhalla. Readers can catch the video series on Economic Times’ YT Channel)
