India must seize the opportunity in the FDI domain

Sushma Ramachandran
Senior Financial Journalist

THE government that will assume office next month will inherit an economy that is fast moving towards full recovery after the ravages of the Covid-19 pandemic and the impact of geopolitical tensions. Over the past few months, multilateral institutions and global investment agencies have revised their growth estimates for India in the light of the latest economic data. The International Monetary Fund recently revised growth estimates for 2024-25 from 6.2 to 6.5 per cent. The United Nations has gone a step further and projected growth in 2024 to reach 6.9 per cent from the earlier estimate of 6.2 per cent. The driver of this higher growth is expected to be strong public investment and resilient private consumption.

Fitch Ratings, Moody’s and Goldman Sachs have made similar upward revisions and their expectations now range between 6.6 and 7 per cent for the current financial year.

The catalyst for these changes is the fact that most economic indicators are showing an upswing. Overall GDP growth in the third quarter of 2023-24 has touched a robust 8.4 per cent, following over 8 per cent growth in the earlier quarters. Similarly, the index of industrial production has risen by 5.8 per cent during 2023-24 compared to 5.2 per cent in the previous fiscal. The core sector industries have recorded 7.5 per cent growth over this period, while GST collections reached a record high of Rs 2.1 lakh crore in April this year.

Inflation is also largely under control, though food prices continue to remain an area of concern. During April, retail inflation touched an 11-month low at 4.83 per cent, but food inflation has remained at the double-digit levels. The mid-year update of the UN’s World Economic Situation and Prospects 2024 expects inflation to decelerate from 5.6 per cent in 2023 to 4.5 per cent in 2024, thus staying within the ambit of the central bank’s range of 2 to 6 per cent.

It is in this backdrop that developed economies like the US are finding investment in this country increasingly attractive. Significantly, India has found its mojo, as it were, at a time when the relations between the world’s two economic superpowers — the US and China — are witnessing discontent. Analysts are expecting the East Asian giant to become more aggressive and yet more closed in its economic policies than ever before. At the same time, the Biden administration has begun to impose export controls aimed at China on sensitive high-technology products like semiconductors, along with their tools and personnel. This has more to do with security issues than any economic rationale as the curbs will likely hurt American industry. India’s ban on TikTok for similar security reasons is now being viewed as a worthy precedent.

It is the US-China friction as well as the recognition during the pandemic that concentrating investments in a single location can be counter-productive that have spawned the China Plus One policy. India is being viewed as a ‘friendly’ developing country and multinationals are thus looking at it through a fresh lens. It has not hurt that tech giant Apple has taken a big leap by shifting its established infrastructure here from our northern neighbour. It has begun making its latest models in this country, while investments in new plants have risen exponentially in the southern states of Tamil Nadu, Karnataka and Andhra Pradesh.

Some Western economists are describing the strategic shifts in the US-China relations as a decoupling that has now reached an inflection point. It is for the new government to seize this opportunity and ensure that the investment climate becomes easier for companies seeking to set up projects outside China.

In fact, improving the ease of doing business here will have to be one of the priority items on its agenda. Despite efforts made by the current regime to reduce regulatory tangles, bureaucratic red tape continues to bedevil foreign investors. In contrast, countries like Vietnam and Indonesia have easier investment terms and many companies are preferring to shift there. India will thus need to unravel much of its regulatory complexities especially at the level of state governments. Much streamlining has been done by the Centre, but several states continue to have onerous approval processes. This is one of the reasons that states in the south, for instance, tend to have a higher inflow of foreign investments.

The growing protectionism that had accompanied the Make in India initiative has also been a worry for investors. Average import tariffs have been gradually rising over the past few years. On the bright side, top industry ministry officials recently warned domestic industry to prepare for a lower tariff regime as the country looks to sign more free trade agreements (FTAs). Thus, it looks as if protective tariff walls may slowly shrink, which is all to the good.

The drive to enter into FTAs also indicates greater flexibility in the approach towards market access. This has enabled the conclusion of FTAs with the UAE, Australia and Mauritius. The latest trade pact entered into with the European Free Trade Association has even taken an innovative approach involving a commitment of $100 billion of investments from the group. Similarly, FTAs with the European Union, the UK and Oman are currently under negotiation.

The urgency of creating a conducive investment climate has grown as foreign direct investment (FDI) flows have dwindled in the past two years. One reason has been the slowdown in global transnational investment flows owing to geopolitical factors. Even so, concerted efforts must be made to reverse the trend and bring more FDI into the country.

Though many issues are bound to be on the agenda of the new government, FDI has to rank high. A protectionist attitude must be shed and outdated regulatory processes reviewed so that setting up a business does not entail hundreds of approvals. A window of opportunity exists right now in the arena of foreign investments due to shifts in geoeconomic ties. It must be utilised rapidly or the country will lose out in the long run.