The government is so obsessed with the rising flow of foreign direct investment (FDI) in India that it seems to have ignored what may well be a more significant development. India's direct investments abroad have seen a steep fall. Indian companies invested $9.2 billion in foreign countries in 2013-14. But this fell to $1.8 billion in 2014-15, a drop of 80 per cent.
The two years in question are politically significant - 2013-14 was the last year of the United Progressive Alliance (UPA) government and 2014-15 was the first year of the National Democratic Alliance (NDA) government. What happened? But before jumping to any conclusion, it is important to look at the long-term trend of investments made by Indian companies abroad in the last decade and a half.
At the start of the century, Indian companies were reluctant to invest abroad. Only about $760 million was invested in projects or companies in foreign countries in 2000-01. This began rising slowly to $1.4 billion in 2001-02 and then to $2.3 billion in 2004-05, when the UPA formed its government at the Centre. A dramatic jump in direct investments abroad came in 2006-07, with the amount going up to $15 billion. Believe it or not, this was as high as two-thirds of the total direct investments made by foreign companies in India.
For the next two years, Indian companies' investments abroad kept rising. They were estimated at $18.9 billion in 2007-08 and $19.4 billion in 2008-09 -the year of the global financial meltdown triggered by the collapse of Lehman Brothers in the United States. There was no corresponding collapse in Indian companies' investments overseas in the following years, though they maintained an erratic but downward trend - down to $15 billion in 2009-10, going up to $17.2 billion in the following year and again falling to $10.9 billion in 2011-12. In 2012-13, Indian companies invested only $7.1 billion abroad - a six-year low, before bouncing back to $9.2 billion in 2013-14 - the last year of the UPA regime.
According to those who have seen the Indian corporate sector from close quarters, the sharp rise in Indian direct investments abroad was reflective of the growing confidence of India Inc to spread its footprint globally, backed by a string of high-value acquisitions of some of the world's biggest companies in different sectors - prominent of which would be the Tatas' takeover of Corus and JLR and the Aditya Birla group's acquisition of Novelis. It was the sign of a new, rejuvenated India Inc that was encouraged and prompted to acquire companies abroad, which in turn fuelled the robust rise in Indian investments abroad.
Also helping that rise was an appreciating rupee, whose value steadily rose from about Rs 48 a dollar in 2002-03 to about Rs 40 in 2007-08. For the next four years till 2011-12, the exchange rate of the rupee against the dollar fell, but stayed within a narrow band of Rs 46-48. This is also the period when India Inc's investments abroad declined a bit. If it declined further in 2012-13, the falling rupee (which ruled at Rs 54 a dollar that year) must have been one of the factors.
But what happened in 2013-14 is even more significant. The rupee fell to around Rs 60 a dollar and yet Indian companies' investments abroad spurted to over $9 billion.
Industry experts argue that this rise took place because the domestic political environment was not conducive to investments within the country. The so-called policy paralysis had adversely impacted domestic investment prospects and many Indian companies decided to move their investments abroad, in spite of a fall in the value of the rupee. If that diagnosis is true, then the fall in India Inc's investments abroad in 2014-15 could be because of the restoration of its confidence in the domestic political environment, when the NDA government was formed with the hope that policy reforms would spur economic growth.
These reasons have not been validated and nobody as yet can say with certainty what may have actually triggered this directional change in India Inc's investments abroad. But the political leadership of the NDA government must make an effort to assess the possible implications of this drop in investments abroad even as foreign investments in India are on the rise. It should get exercised about this at least now that the data on India Inc's direct investments abroad in first quarter of 2015-16 have just come in, indicating another directional change. India Inc's investments abroad in April-June 2015 have once again risen to $1.3 billion, compared to just $149 million in the same quarter of 2014.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
