Impact of re-vitalised economy

Even as global foreign direct investment fell by 16 per cent in 2014 to $1.23 trillion, India leads regional FDI inflows to South Asia that rose to $41 billion. The FDI inflows to India surged by 22 per cent to about $34 billion. Developing economies attracted $681 billion worth of FDI. India improved its position to the ninth top host country for FDI in 2014, over its rank of 15th in 2013, the UN Conference on Trade and Development’s World Investment Report 2015 says. 

India was also the investor in outward FDI with $9.8 billion, marking an increase of 486 per cent over 2013. However, it does not figure in the first top 20 countries for FDI outflows. The WIR came out with the positive note about India and nine other developing countries including Brazil, China, Hong Kong and Singapore.

The report is hopeful that FDI inflows to India are likely to maintain an upward trend in the current year as economic recovery gains ground. The observation is in sync with the latest assertions of Union Minister for Finance Arun Jaitley during his recent visit to the US. The WIR says that in terms of the sectoral composition of FDI inflows, manufacturing is likely to gain strength, as policy efforts to revitalise the industrial sector are sustained to provide boost to the Make in India initiative. 

India, according to UNCTAD, remains the most promising economy for investors. It remains among the top seven economies for outward FDI and the third prospective home economies. India’s policy initiative during the last one year by Narendra Modi Government in increasing the FDI cap, 47 liberalisation moves and 16 other steps were noted as boosting not only the Indian economy but also of the entire region. India can be the top favourite if it can be free of corruption, politicking on economic issues and Centre-State disputes are reduced for a clear investment path.

The WIR notes the fragility of the global economy, policy uncertainty for investors and geo-political risks, particularly in the Eurozone. New investments were also offset by some large disinvestments in the developed world. One of the biggest disinvestments was by Vodafone Wireless in the US. China became the largest recipient of FDI at a whopping $129 billion, followed by Hong Kong at $103 billion and the US with $92 billion. The figures also highlight the risks for India, particularly from China, which is increasing investments in Pakistan. Chinese companies will invest $45.6 billion in Pakistan in the electricity and transport infrastructure — projects that give mainland China access to the Arabian Sea and the Indian borders. 

China has become the largest source of FDI to Sri lanka as well. A joint venture between two lankan companies and China Merchants Holdings has invested $500 million in Colombo container terminal. A China-Sri lanka free trade agreement is ready to be signed. This would open up Sri lankan business to exploit the Chinese market. Trade between the two countries has reached $3.6 billion. With Chinese efforts at building Maritime Silk Route more Chinese investments are to flow into large infrastructure projects. 

The report stated that the strong balance sheets of local enterprises allow China’s capital markets to have a steady source of funds and help keep the yuan’s exchange rate stable. This is something that India and its corporate sector have to learn in order to strengthen the rupee.The automotive industry has been identified as one of the key sectors that can spur Indian growth. India bagged a majority of greenfield investment projects by global auto-makers and first-tier spare parts suppliers in South Asia during 2013-14, including 12 projects above $100 million. Inward FDI has led to the emergence of a number of industrial clusters in India, including those around Delhi, Mumbai, Chennai and Bangalore. Despite difference in the pattern of development, the report notes possibilities of new FDI flow. 

On a smaller but significant scale, Bangladesh, Nepal, Pakistan and Sri lanka recorded greenfield investments. India’s Mahindra & Mahindra is investing $200 million in a light commercial vehicles plant in Bangladesh. The growing automotive industry shows potential of a positive spill-over effect to productive capacity building in South Asia. The WIR notes the capacity of India to become an investment source for South Asia and to create a regional market.

Foreign sales and assets of multinationals globally expanded faster than their domestic units. It generated added value of about $7.9 trillion. But there is a catch to it. It also caused immense losses to the developing economies. The MNCs shifted out profits affecting sustainable development of the developing countries.

Many tax havens like Mauritius, luxemburg and British Virgin Islands accounted for 30 per cent of the FDIs. Recently Mauritius has agreed to exchange information from 2017. But it remains a concern for countries like India. Globally developing economies lose about $100 billion as taxes to offshore hubs.

Pointing to the wide tax-evasion practices by multi-national corporations, the UN body noted that this needed to be checked vigorously through international efforts. However, it also noted that foreign affiliates of MNCs contribute about $730 billion in taxes, royalty, and licence payments. About 50 per cent of the outgo is for corporate income tax, customs duties and labour costs.

The manufacturing worldwide has received less attention. Since 2012, services accounted for 63 per cent of global FDI, more twice the share of manufacturing at 26 per cent. This remains a challenge for Make in India and needs to be corrected. The path is not easy with an open global trade and some manufacturing hubs in China and the East meeting most global needs. It requires incentivising localised manufacturing in a number of ways. India’s moves are lauded but are not considered sufficient.

Overall the investment climate is improving and the world economy is trying to come out of the recent worst recession of 2008. The FDI inflows are projected to grow by 11 per cent to $ 1.4 trillion in 2015 and to $1.7 trillion in 2017. Developed countries are to see increases of three per cent a year.   India would see expansion of its economy; its FDI flow may touch $50 billion a year in the next two years —something to rejoice over in an intensely competitive world.