Even as the debate continues over the nature of the relaxations and whether substantial discretion has still been retained by the government in giving investment clearances, it will be instructive to assess these decisions in the context of the latest FDI numbers that have been released by the Department of Industrial Policy and Promotion. Yes, overall FDI flows into India rose by 23 per cent to $55 billion in 2015-16. There is no doubt that FDI flows have taken off, after a decline of 26 per cent in 2012-13. After a modest recovery of five per cent in 2013-14, when FDI flows were estimated at $36 billion, they rose by 25 per cent in 2014-15 to reach $45 billion. In this context, here are four important trends that emerge from the latest numbers.
Equity stronger than overall flows: Remember that the overall FDI inflows include a significant chunk of reinvested earnings by existing foreign investors. In each of the last five years, the share of these reinvested earnings in total FDI inflows have ranged from 18 per cent to 34 per cent. Thus, the story of fresh FDI equity inflows is even better - for instance, equity inflows from overseas sources went up by over 29 per cent to $40 billion last year. This increase was even higher than the 27 per cent rise in FDI equity inflows seen at $31 billion in 2014-15.
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Policy relaxed for sectors with low FDI flows: The sectors that saw liberalisation in their FDI norms last week account for a small share in the overall investment inflows. Apart from trading and pharmaceuticals, not one of the other sectors figures in the top 10 items accounting for India’s FDI equity inflows. Trading (including retail) and pharmaceuticals accounted for a little over four per cent share each in total overseas equity inflows in the last 16 years. For broadcasting, aviation and defence, the shares are very low, ranging between 0.1 per cent and 1.7 per cent. This is understandable. Till recently, there has been very little FDI relaxation in the areas of defence, aviation and broadcasting. Hopefully, discretionary rules do not play spoilsport and the new relaxations start improving their share in total FDI equity inflows in the coming years.
Manufacturing and core sectors continue to be laggards in FDI: The numbers show that the share of the manufacturing and infrastructure sectors in FDI equity could improve further, improving prospects for more blue-collar jobs. Construction, telecommunications, automobile, chemicals and power account for only 27 per cent of the total foreign equity flows in the last 16 years. Compared to that, the services sector alone draws around 18 per cent of the $288 billion of equity that have flowed in from April 2000. Services sector largely includes investments in financial companies, banks, insurance and business outsourcing firms. While foreign equity flows into the services sector have been rising annually in the last three years, those into the manufacturing and infrastructure sectors have been showing a decline or very marginal increases.
The rise of Singapore: Last year, Mauritius lost its numero uno status as the largest source of FDI equity inflows for India. At $8.35 billion, Mauritius was number two to Singapore, which was ahead by investing $13.7 billion in 2015-16. In the last five years at least, Singapore has been trying to race ahead of Mauritius and indeed it did so in 2013-14. With the new amendments to India's tax treaty with Mauritius, Singapore has a good chance to retain its number one status for some years at least until similar tax treaty amendments are enforced on it as well. Cumulatively in the last 16 years, Mauritius accounts for a third of India’s total FDI equity inflows and Singapore has a share of only 16 per cent. That ranking, however, will not change for some time.
On the whole, the overall FDI policy landscape is changing and can change faster. FDI inflows, too, are improving. But more policy reform is needed to attract more FDI into manufacturing and infrastructure sectors. And the dominance of Mauritius as the single-largest contributor of cumulative FDI is not likely to be over soon.