Overall foreign direct investment (FDI) into India may have declined but there are reasons to be sanguine with the country seeing interest in greenfield investments amid the first-ever decline posted by China, experts said.
Last week, in a detailed presentation to the finance ministry, the United Nations Conference on Trade and Development (UNCTAD) pointed to the positive developments, people aware of the deliberations said. The UN agency reiterated its recent findings that India is among the top three in greenfield FDI announcements. This suggests that the country may be pulling in fresh global capacity expansion as part of supply chain diversification, a senior finance ministry official told ET. It expects these to translate into higher investment flows by 2024, the official said.
The latest Chinese data shows a first-ever quarterly FDI deficit in the July-September period.
Part of global supply chains
This comes amid a global push to de-risk supply chains currently excessively reliant on China.
Policymakers say that India may not be the only possible destination for FDI looking out of China but there were indications of the country becoming part of global supply chains.
“What we are seeing, in the last few months and in specific sectors, is that India is becoming part of the global supply chains,” said Bibek Debroy, chairman of the Economic Advisory Council to PM (EAC-PM).
“India has been trying to build an environment that is conducive for FDI while also trying to reduce its dependence on China, particularly more so after Covid. Moreover, other countries, because of various other pressures, are also looking at reducing their dependence on China.”
Former chief economic adviser and International Monetary Fund executive director KV Subramanian said India holds an advantage as China faces challenges.
“As investors are looking for opportunities to generate high returns, the negative trends on FDI in China presents a crucial opportunity for India,” he said. “To ensure that we avail this opportunity, we must continue to undertake structural reforms and complete the several reforms that were initiated post Covid. The window of opportunity for India to benefit from this negative trend is finite!”
China’s negative FDI flow is symptomatic of the structural problems that its economy is facing with significant demographic headwinds, he said.
“The same demographic dividend that helped China grow significantly from the 1980s onwards has turned negative. Secondly, huge problems in their financial sector with significant bad loans having built up, (and the) real estate sector (is) also facing difficulties with significant oversupply and over investment,” Subramanian said. India pared corporate tax rate to 15% to boost new investment in manufacturing and has also launched production-linked incentive (PLI) schemes for multiple sectors to attract funds.
FDI outflow
India’s FDI equity inflows dropped 34% to $10.9 billion in the June quarter from the year-ago period. Economists said the decline in India’s FDI is largely because of the prevailing high interest rates and global economic uncertainty that has impacted mergers and acquisitions activity worldwide.
They said the outlook for India remains positive.
“India’s FDI intentions remain high, but like the rest of the world, higher interest rates are biting into FDI investments in India also. One needs to thus distinguish between the challenging outlook in the next six months and a fairly positive view three years out,” said Rahul Bajoria, managing director and head of EM Asia (ex-China) economics at Barclays.
