Understanding India’s FDI Flows

Context: An analysis of the declining trend in the Foreign Direct Investment in India can help formulate a policy that can promote foreign investment in a sustainable manner.

Trends in FDI

• Gradual Overall Decline: 

• In 2014-15, FDI rose by 25% to $45 billion and in 2015-16, it jumped by over 23% to $56 billion.
• However, in 2016-17, the growth was just 8 % which further fell to 1.7% in 2018-19. 
• This period also saw a deceleration in India GDP growth — from 8.3 % in 2016- 17 to 7 % in 2017-18 and further down to 6.1 % in 2018-19.

• Trends in Components of FDI: FDI inflows are categorized under 4 components:

• FDI equity--Saw an increase in 2019-20 by about 13% to about $50 billion.
• Equity Capital flows into unincorporated bodies— rose to $1.2 billion
• Reinvested earnings—increased at a slower rate of just 3% to $14 billion.

• Slower pace of reinvested earnings could reflect relative lack of confidence on the part of foreign investor to earn back its dividends.
• It could also mean that the returns were not growing rapidly enough to allow higher reinvestment of such earnings.

• Other capital (quasi equity in nature like preference capital)—rose by 150% to $8 billion.

• This is mainly due to the culture of revisions in the government data collection system.

• Trends in Contribution of countries:

• Drop in FDI from China: From a high of $1.23 billion in 2018-19, FDI inflows from China dropped to $0.16 billion in 2019-20.
• Gradual decline of Mauritius as the source: due to a double-tax avoidance treaty between India and Mauritius.

• • • • In 2018-19 and 2019-20, Mauritius has ceded its top position (as FDI source) to Singapore.

• Rise of the contribution from Tax Havens:

• • • Cayman Islands: FDI rose — from about $1 billion each in 2017-18 and 2018-19 to $3.7 billion in 2019-20. 
    • The Netherlands with its low tax rates is treated by many as a tax haven and FDI inflows have also been rising steadily — from $3.87 billion in 2018-19 to $6.7 billion in 2019-20.

Way Forward: Some of these trends deserve a closer study and the conclusions from that should help formulate a policy that can promote foreign investment in a sustainable manner.