Foreign investment has emerged a driver of India’s fast-paced economy, as the government has added momentum to a liberalisation push begun in the 1990s just as private investment by highly leveraged Indian companies has been plummeting.
The rate of FDI has surged since Prime Minister Narendra Modi took to Delhi the liberal agenda and decisive leadership that characterised his 12 years as chief minister of the northwestern industrialised state of Gujarat. Total announced greenfield FDI reached $138bn in his first 2½ years in office to December 2016, 22 per cent shy of the $177bn in the full five-year term of his predecessor Manmohan Singh, according to fDi Markets, an FT data service.
In 2016, greenfield FDI was about $62.3bn, making India the world’s top destination for the second year running, ahead of China ($59.1bn) and the US ($48.1bn), fDi Markets figures show.
Manufacturing accounted for 40 per cent of the total as global corporations such as Lenovo (China), Samsung (South Korea), Coca-Cola (US) and Volvo (Sweden) made public new plans to tap into India’s quickly growing domestic market. GDP is expanding at about 7 per cent a year in India, which has a large pool of skilled labour. The influx continues: this month, authorities in the southern state of Karnataka made official Apple’s plans to open its first iPhone assembly line in India in May.
With long-time political associate Arun Jaitley at the finance ministry, Mr Modi has made it easier for foreign companies to invest in several sectors of the economy. The so-called automatic route does not require government approval, which is, however, needed for foreign investment beyond certain thresholds in sensitive sectors such as defence, air transport, mining, the media, banking and retail.
The government has pushed through other investment-related reforms such as a long-awaited overhaul of the century-old bankruptcy code.
Mr Modi’s timing has been fortuitous. India’s reforms have come just as its rivals for foreign investment have been hit by domestic and external troubles, including the end of the commodities supercycle that has taken such a heavy toll on Brazil, South Africa and Russia.
Yet despite its advances, India remains a tricky place to do business. Even in liberalised sectors such as single-brand retail and ecommerce, foreigners must comply with strict rules, for example on minimum levels of local content and technology transfer. India has also asserted the primacy of its domestic courts over international arbitration, making it harder for foreign investors to settle disputes with Indian counterparties. For example, the Mumbai-based Tata Group has been prevented by local regulators from making an agreed payout to Japan’s NTT DoCoMo after their telecoms joint venture turned sour.
India ranks at 130 out of 190 countries in the World Bank’s latest annual Ease of Doing Business report, and at 39 out of 138 in the World Economic Forum’s Global Competitiveness ranking. It has advanced in both rankings as Mr Modi’s reform agenda has gained traction.
“In the last few years the government’s efforts to focus in a business-like way on the obstacles to ease of doing business have been notable,” said Robert Blake Jr, a long-time US diplomat in Delhi. “For the first time in a long time we are seeing real progress in many of these issues,” said Mr Blake, senior director for India at consultancy firm McLarty Associates.
In its economic survey published in January, the ministry wrote that foreign investment was helping support growth at a time when the “twin balance sheet problem — in the corporate and banking sectors — remains a millstone around the economy’s neck, casting a pall over private investment and hence aggregate growth”.
Debt-distressed companies announced investment projects worth 1,410bn rupees ($20.9bn) in the last quarter of 2016, 40 per cent below the average of the previous three quarters, according to the Mumbai-based Centre for Monitoring Indian Economy. Mr Modi’s draconian demonetisation announced on November 8, which overnight withdrew 90 per cent of banknotes from circulation, further hampered investment by creating uncertainty and leaving consumers and businesses to deal with an unexpected cash crunch.
FDI will be crucial if the government is to meet its midterm GDP growth target of 8-10 per cent a year. Presenting his budget this month, Mr Jaitley said “further liberalisation of FDI policy is under consideration”. Foreign investors will be watching.
Jacopo Dettoni is deputy editor of fDi Magazine, an FT publication
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