Why India Is Still An Attractive Investment Destination Despite A Falling Rupee, Inflation, Other Challenges
According to a report of CII-EY, India has a potential to attract FDI flows of $475 billion in the next five years
India aspires to become a developed and high-income country over the next 25 years. Though the global Covid-19 pandemic, rising inflation, and the ongoing conflict in Ukraine have dented the growth story of every country on the planet, India has been able to effectively handle the economic setbacks through fiscal support. Economic activities in India are now back on the track, though there are certain challenges.
According to the IMF, while the global economic growth will slow down from 6 per cent in 2021 to 3.2 per cent this year to 2.7 per cent next year, India is expected to grow by 6.8 per cent in 2022, the fastest in the world during the year and 6.1 per cent in 2023. The World Bank expects the global growth will be 4.1 per cent and India’s growth will be 6.5 per cent in 2022, whereas the RBI keeps the growth rate of India at 7 per cent for 2022-23.
India has overtaken the United Kingdom as the fifth-largest economy and is likely to be the fourth largest economy by 2027 and third largest by 2029 at current growth rate, according to State Bank of India. India’s share in global GDP reached 3.5 per cent in 2022 from 2.6 per cent in 2014. In the words of Sanjeev Sanyal, a member of the Economic Advisory Council (EAC) to the Prime Minister, India remains an attractive destination for direct as well as portfolio investment.
A survey by Deloitte states that a large proportion of global business leaders remain confident in India’s prospects and are readying plans to make additional and first-time investments in the country. India has the strongest positive perception in the global economy compared to China, Brazil, Mexico and Vietnam. It is against the grain. The corporates in the US and the UK are on the same page and have expressed greater confidence in the macroeconomic stability in India.
India offers a growing and thriving environment for investments for both domestic and foreign investors. And these results are supported by facts. According to a report of CII-EY, India has a potential to attract FDI flows of $475 billion in the next five years.
Does India look like an attractive destination for investors?
The attractiveness of India as a preferred destination for investment could be understood from the large increase in FDI inflows to India. It grew from $6 billion in 2002 to almost $38 billion in 2009.
But why is that India looks like an attractive destination for investors even though it is facing geo-political challenges, unemployment, higher inflation and rupee depreciation? The first reason is that India is one of the fastest growing economies in the world. India’s continuous wide-ranging economic reforms, skilled workforce and vast consumer base make the country a sought-after destination for foreign investments. India’s GDP stands at almost $2.97 trillion and according to the Union Budget of 2022, it is expected that to reach almost $3.19 trillion (1USD=80.85 INR) in 2023.
Second, at the time when the global economic growth is likely to be lower than previously expected, India’s nominal GDP has been clocking in double digits since the January-March quarter of the financial year 2020-21. GDP in the April-June quarter of the current fiscal has surpassed the pre-Covid level. The first quarter data shows the economy is on the growth path. It is expected that India will become a $5 trillion economy in 2020s if it keeps the same pace of the GDP growth in dollar terms.
Third, India’s current population is expected to rise from 121 crore to 152 crore. The country has a large and increasing middle class who are willing to spend. This provides a major market potential for a wide range of products and services across industrial sectors. It is a huge draw for foreign investors looking to expand to developed markets outside.
Fourth, India has a young working population that will increase to 15 crore from 2022 to 2050. Of that 50 per cent of the population is under the age of 25 and more than 65 per cent under the age of 35 years. India has a consistent supply of skilled and semi-skilled workforce at a low cost. The availability of labour at a cheaper cost lowers production cost and increases competitiveness. It will be a key driver of economic growth over the long term.
What India can expect on the investment front
As per the UNCTAD’s Global Investment Trend, global foreign direct investment flows showed a strong rebound in 2021. This has become possible because of the action taken by the government on the fronts of FDI policy reform, investment facilitation and ease of doing business.
According to the UNCTAD’s World Investment Report-2022, as many as 108 new international project finance deals have taken place in the country against the 20 projects on average for the last 10 years. The largest projects include the construction of a steel and cement plant for $13.5 billion and a new car manufacturing facility for $2.4 billion.
Inviting foreign investment in the manufacturing sector marks a milestone. It was a vital part of the successful economic plan of the country as it is inching up to reach its next goal of being the third largest economy of the world. Investment in renewable energy has been the main engine of growth in international project finance for the last few years. In the same line India has secured finance for 23 renewables energy international projects.
What kind of investors India should reach out to?
Investment can invest through the automatic and government routes. Under the automatic route, investors can put in money without prior approval of the government or the RBI in sectors specified in FEMA regulation-16. The government route requires prior approval, and there is a procedure to follow. The RBI permits foreign institutional investors (FIIs), non-resident Indians (NRIs), and persons of Indian origins (PIOs) to invest in the primary and secondary capital market and acquire shares, debentures and share warrants of Indian Inc via portfolio investment scheme (PIS).
The Deloitte survey mentioned above suggests that India can target attracting greater FDI into seven capital-intensive areas that have secured $181 billion of merchandise exports in 2020-21. These areas are — food processing, chemical, vehicle and parts, textile and apparel, pharmaceuticals, electronics, and capital goods. On the other hand, the RBI specifies manufacturing, communication services, computer services, retail and wholesale trade sectors, and financial services, which accounted for the major stake of FDI inflow during April-August 2022.
Blended support
Foreign investors are playing a crucial role in the development of the Indian economy. The government is working towards reducing compliance issues for improving ease of doing business and attracting foreign investors. The introduction of insolvency and bankruptcy code (IBC) was on this line. As for continuing improvement in the business environment, India’s rank in ease of doing business has improved from 142 in 2014 to 63 in 2020 and the country climbed up to the 40th rank in the global innovation index.
The government has taken a few steps to streamline labour laws to provide a conducive business environment. India has begun the National Single-window System, which will become a one-stop shop for approval and clearances desired by investors, entrepreneurs and Business Inc.
The government is also working on an investor-friendly strategy to encourage FDI. The country is allowing 100 per cent foreign participation in the telecommunication services through the automatic route. There is no need for any approval of the government for investment from non-resident investors and/or Indian companies.
The FDI ceiling in insurance business has increased from 49 percent to 74 percent. The government action towards liberalised FDI policy has resulted in higher FDI inflows in India even amidst the heavy selling by foreign portfolio investors. According to the monthly bulletin of the RBI, gross FDI flows are on the rise. It has increased to $83.6 billion in 2022 from $82 billion in 2021 and $74.4 billion in 2020.
According to UNCTAD’s World Investment Report-2022, net FDI inflows to India increased to an all-time high to $60 billion in 2020 from $51 billion in 2019. However, it declined to $45 billion in 2021 and according to the RBI, declined again to $39.3 billion in 2022 due to macroeconomic instability, higher outward investment by Indian Inc and repatriation of foreign investors.
Challenges and the way forward
Several tax-related cases have attracted public attention. The high-profile examples that were on the knife edge include imposition of capital gain taxes in the case of Vodafone vs India and Cairn vs India. In the case of Vodafone, India’s retrospective demand of capital gains and withholding tax dented India’s reputation as a country governed by the rule of law.
However, the government enacted a new legislation in 2021 to repair the damaged reputation. It dropped all such demands and refunded about Rs 8,100 crore. Similarly, the government has refunded a seized Rs 7,900 crore to Cairn Energy in 2022. This was done to restore investor confidence by providing a predictable and stable tax regime.
The government should raise its game through political stability, making favourable legislations, restructuring goods and services tax rates, and providing a conducive business environment to encourage foreign investment. The government has initiated a National Infrastructure pipeline to provide world class infrastructure across the country. However, the government will have its task cut out as inadequate infrastructure is a negative factor, as indicated by potential investors in the Deloitte survey.
Dr Vinay K Srivastava is an Associate Professor at the Institute of Technology & Science, Ghaziabad.
[Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal.]
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