Direct impact

The decline in FDI must be addressed

Reserve Bank of India (RBI) Governor Shaktikanta Das noted on Wednesday the growth rate for 2022-23 could be higher than the official projection of 7 per cent. While the data will be released next week and that will reveal the position for the fiscal year ended March 31, the real issue worth debating would be the medium-term growth outlook for the Indian economy at a time when global growth is likely to remain below trend, along with tighter global financial conditions. The medium-term growth outlook, to a large extent, will depend on a durable pick-up in real investment. Foreign direct investment (FDI) in this context will be crucial. The news on this front, however, is not encouraging. The RBI in its latest monthly bulletin has reported that gross FDI in 2022-23 declined by 16.3 per cent year-on-year to $71 billion. FDI at net level declined by over 27 per cent to $28 billion, driven by lower gross inflows and a rise in repatriation.

According to the RBI, manufacturing, computer services, and communication services witnessed the steepest decline over the previous fiscal year. In terms of flows, the decline was led by the US, Switzerland, and Mauritius. More would be known once the details are available. On the positive side, it was reported that India was the second-largest recipient of FDI in semiconductors, after the US, in 2022. However, it is the headline number that needs more attention at this stage. The outlook for FDI is likely to remain challenging in the foreseeable future. Slow or below-trend global growth will affect long-term capital flows and it is likely that global corporations will not be encouraged to increase capacity. The hardening of global financial conditions would also have a bearing on flows. The start-up world, for example, which was attracting substantial foreign investment, is finding it difficult to raise funds. Given that the inflation rate in advanced economies, particularly the US, is still higher than the target, financial conditions are likely to remain tight in the near term.

Further, the reallocation of supply chains by large corporations out of China doesn’t seem to be happening in favour of India in a big way as was expected by many. A decline in the flow of FDI will have multiple implications. It will straightaway affect the level of investment, with implications for growth and jobs. Besides money, foreign multinationals bring technology, which increases overall efficiency in the economy. Additionally, since FDI is by definition for the long run, it provides stability to external accounts. Although the current account deficit is projected to moderate in the current fiscal year to about 2 per cent of gross domestic product, compared to 2.6 per cent in 2022-23, higher FDI will help. Thankfully, since India has ample foreign exchange reserves, external accounts are not a big source of macroeconomic risk at the moment. Policymakers, nonetheless, would need to make more efforts to increase FDI. This would effectively mean increasing the ease of doing business in India markedly. India will need clear policies to attract multinationals. Concessions for individual firms should be avoided because they create confusion. The government would also do well to review the trade policy too see if it is obstructing FDI. Higher tariffs increase costs and affect the movement of goods in modern supply chains.