Context: India had attracted a total foreign direct investments (FDI) inflow of $6.24 billion in April, up by 38 per cent year-on-year, according to data released by the Department for Promotion of Industry and Internal Trade (DPIIT) last week. 

• Total FDI includes equity capital of unincorporated bodies, reinvest earnings and other capital. FDI equity inflow grew 60 per cent to $4.44 billion in April.
• Mauritius is the top investing country with 24 per cent of the equity inflows in April. This is followed by Singapore that continues to remain one of the top sources of FDI for India with inflows at 21 per cent and Japan at 11 per cent, respectively.
• As far as states are concerned, Karnataka is the top recipient state during April, 2021 with 31 per cent share of the total FDI Equity inflows, followed by Maharashtra at 19 per cent and Delhi at 15 per cent.
• In this edition of Big Picture we analyse the rise in India's FDI. 

Background

• In a recent press release, the Ministry of Commerce and Industry announced that India has attracted the highest ever total FDI inflow (U.S.$81.72 billion) during the financial year 2020-21.
• This is 10 percent higher than the last financial year 2019-20.
• Also, given that there was a decline in global FDI inflows in 2020 by 42% compared to 2019, and inflows to developing countries had fallen by 12%, this is a significant development.
• Effective implementation of FDI policy reforms, investment facilitation, and ease of doing business were credited for the record level of FDI inflows.
• However, an analysis of FDI inflow data reveals that the reality of FDI in the Indian economy does not help India’s development priorities.

Why FDI inflows accounted for the year 2020-21 will not benefit India’s development priorities?

First, the nature of the bulk of the investments involves just a mere transfer of shares without creating productive assets in the country. This is contrary to the expectation that FDI can contribute to the revival of the economy

• For instance, take the case of Reliance Group companies, the largest recipients of FDI for the year 2020-21. It accounted for 54.1% of the total equity inflows during the three quarters.
• In this case, FDI inflows were meant to facilitate Reliance Industries to withdraw its investments already made in the form of Optionally Convertible Preference Share.
• This, therefore, amounted to the indirect acquisition of shares held by Reliance Industries.
• Optionally Convertible preference shares: This class of shares can be converted into equity shares either at the option of the holder or at the option of the company. The convertible portion can be in full or in part

Second, according to RBI, though FDI inflows were stronger in 2020-21, their distribution was highly skewed.

• For instance, the manufacturing sector received just 17.4% of the total inflows during 2020-21.
• Whereas, the services sector attracted nearly 80% of the total inflows, with information technology-enabled services (ITeS) being the largest component.
• Further, according to the RBI, non-acquisition-related inflows into the manufacturing sector were the lowest in 2020-21.

Third, the bulk of the investments in Reliance Group companies will not facilitate sharing of managerial experience and technical expertise. Because investors’ share is pegged at 9.9%. For instance, Facebook’s shareholding in Jio Platform was pegged at 9.9%.

• According to the International Monetary Fund and also the RBI, a foreign investor, holding 10% or more of voting shares in a company, can exercise a significant influence on its management.

Finally, there are other issues related to FDI inflows in India for the year 2020-21. For example,

• According to RBI data, there was a 47.2% increase in repatriation/disinvestment in the year 2020-21.
• Further, RBI reports that there was a high increase in portfolio investment (FII) for the year 2020-21. This was the second-highest level of FIIs’ involvement in India.
• Surely, sustained sizeable repatriation of the long-term FDI, together with a large increase in speculative capital (FII’s) is not good for a country’s Economic Health.

Road Ahead

• The rise in FDI is a good thing but most of the investment has come in the form of foreign portfolio investment which is very volatile most of the investments are coming in completed projects and for brownfield projects, greenfield projects continue to be an issue, multiple levels of bureaucracy is keeping serious investors away. The lack of an exit policy and lengthy timeless processes are major deterrents, the lack of time limit or closure in commercial cases is another big factor. Manufacturing is dependent on many other services like power, land, transport, accessibility to ports etc unless we have these in place you won't see the kind of investment that we desire.