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Foreign pressure

Higher repatriation by investors must be studied

FDI
Business Standard Editorial Comment Mumbai
3 min read Last Updated : May 23 2024 | 10:03 PM IST
India has recovered strongly from the pandemic-induced disruption and is growing over 7 per cent. Most economists expect India to continue being a bright spot in the medium term, even as the global economy is anticipated to grow at a relatively slow pace. While government capital expenditure has played a significant role in post-pandemic recovery in India, the revival of private-sector investment will be crucial for sustaining the growth momentum. Although private investment is reportedly picking up in some sectors, the latest numbers for foreign direct investment (FDI), published in the monthly bulletin of the Reserve Bank of India this week, paint a sober picture of India’s capacity to attract and endure investment. The headline number showed while gross inflows/investments in India were stable at about $71 billion in 2023-24, net FDI declined to $10.6 billion from about $28 billion in the previous year, largely due to higher repatriation, which is worrying for medium-term growth prospects.

FDI by India increased from about $14 billion in 2022-23 to around $16 billion last financial year, which is understandable. In a large economy like India, some firms will find overseas opportunities. However, increasing repatriation and disinvestment by existing foreign investors are worrying and need policy attention. In 2023-24, for example, foreign investors sent back over $44 billion, which was over 50 per cent higher than in the previous year. It is worth noting there has been a sustained increase in repatriation. As highlighted in these pages recently, while the share of repatriation declined for a few years after 2014, the trend changed from 2016-17. Although gross FDI continued to increase, the share of repatriation increased to about 30 per cent, compared to about 19 per cent in 2015-16. After a decline during the pandemic, it again increased. Last financial year, it was over 60 per cent of gross FDI.

Again, in a large economy like India, it is natural to expect some churn. Some existing investors will move out and new investors will come in. Funds also flow out on account of dividend distribution to shareholders. However, the level of repatriation and disinvestment being witnessed, particularly last financial year, raises concerns and must be properly understood by policymakers. FDI will help India if the scale increases over time. It will add to the productive capacity of the country and improve growth prospects. One important aspect of FDI is foreign investors also bring technological expertise, which helps the broader economy over time.

From the macroeconomic management perspective, since India runs a sustained current-account deficit and needs to import foreign savings, FDI serves as the most stable source of foreign funding. If repatriation and disinvestment are on account of business difficulties, it would eventually affect the gross flow of FDI. The global environment, in any case, is challenging because of both economic and geopolitical factors. Thus, India must aim to consistently increase the ease of doing business. Increased attractiveness of India will not only help the country secure more FDI but also incentivise foreign firms and investors to reinvest earnings from India in India itself. Improvements in the business environment will also likely prompt domestic investors who have been on the sidelines to start investing in a big way.

Topics :FDIBS OpinionBusiness Standard Editorial CommentInvestors

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