Once FDI-Averse, Modi Opens Doors at a Time When Global Investment Flows Are Shrinking

Six years after Modi stated FDI in retail would help "Italian businessmen", his government has done away with mandatory sourcing conditions.

The narrative being built by the Modi government that India has beaten China in the race for FDI inflows is misleading. Credit: Reuters

New Delhi: Once a self-proclaimed crusader against foreign capital in the Indian retail business, Narendra Modi has taken a U-turn and is aggressively wooing foreign investment after taking over as prime minister. On Wednesday, in a cabinet meeting, the Modi government approved 100% foreign direct investment (FDI) in single-brand retail, a move that will open the doors for multinational retailers like Apple, IKEA and Nike.

However, his feverish efforts to open up the Indian economy to foreign capital may have come a bit too late with global FDI inflows starting to ebb away after witnessing an impressive growth of 11% in 2015.

Moreover, the narrative being built by the Modi government that India has beaten China in the race for FDI inflows is misleading, with the latter now advertising itself as a big exporter of capital rather than top recipient, unlike India.

In 2012, the Bharatiya Janata Party had strongly opposed the UPA government’s decision to allow FDI in multi-brand retail. Modi, who was Gujarat’s chief minister at the time, fiercely attacked the UPA government’s decision.

Dubbing Prime Minister Manmohan Singh as “Singham for foreigners”, Modi had, on September 12, 2012, said the country wanted to know how many “Italian businessmen” would benefit by the decision to allow FDI in retail. “You (prime minister) are allowing foreign traders to enter India…..what would be the percentage of businessmen from Italy, the country wants to know,” Modi had said.

“How many businessmen from Italy are going to take advantage of this? How many businessmen from Italy are going to come to India to run grocery stores?,” Modi had insinuated while addressing a youth convention in Bhavnagar.

But on Wednesday, both the BJP and Modi reversed their earlier position. Not only has the hurdle to 100% FDI in single-brand retail been removed, the mandatory condition for sourcing 30% goods locally too has been diluted to attract foreign multinationals.

During the meeting, the cabinet also removed restrictions barring foreign airlines from acquiring assets of the national carrier, Air India, which is to be put on the block soon, and liberalised FDI norms for real estate broking business and power exchanges.

However, these efforts may not yield commensurate results as global FDI inflows have started slowing down since 2016. Global flows of FDI fell 13% in 2016 to an estimated $1.52 trillion as global economic growth remained weak and world trade volumes posted anaemic gains, according to the latest UNCTAD Global Investment Trends Monitor.

The trend continued in the first half of 2017. As per data compiled by the Organisation for Economic Cooperation and Development (OECD), global FDI inflows during January-June 2017 were 3% lower compared with the same period last year. FDI inflows shrunk by 11% in the April-June quarter after posting a 3% growth in the January-March period, said the OECD in its six-monthly report published last October.

An Air India Airbus A320neo plane takes off in Colomiers near Toulouse, France, December 13, 2017. Credit: Reuters/Regis Duvignau/File Photo

In FDI inflows, India overtook China in 2015 and stayed ahead of the dragon in 2016 as well, as per a report published by fDi Intelligence, a division of Financial Times.

The Modi government has cited these robust FDI figures to claim that its economic policy is on the right track. However, data show that significant chunks of FDI inflows have gone into buying out stressed assets rather than in creation of new ones, exposing the hollowness of the government’s claim.

The comparison being drawn by the Modi government between India and China on FDI inflows, too, is quite misleading.

Sitting on a pile of forex reserves, China is encouraging its companies to invest abroad. In 2016, Chinese firms made a direct non-financial investment of $170.11 billion in 7,961 enterprises located across 164 countries and regions, a 44% jump over the preceding year, as per data compiled by China’s department of outward investment and economic cooperation.

China’s foreign exchange reserves rose for the 11th month in a row to $3.14 trillion at the end of December 2017, the highest since September 2016, according to the People’s Bank of China. The reserves gained $20.7 billion from a month earlier, faster than the market forecast, which estimated the reserves to stand at $3.13 trillion.

In comparison, India’s forex reserves, which stood at $409.36 billion as on December 29, is much smaller.

However, foreign investment alone doesn’t go far enough in propelling the economy if the country’s economic management is poor. This has proved true in case of India, which went into slowdown after the Modi government demonetised high-value currency notes in November 2016. This sparked a slowdown which worsened when the government rolled out the Goods and Services Tax (GST) later without due preparations. Robust FDI inflows have failed to reignite the slowing economy.

India’s GDP growth is projected to slow to 6.5% in 2017-18 from 8% in 2015-16, with lingering effects of ill-advised demonetisation and shoddy implementation of GST taking a heavy toll on the economy. Shortfalls in GST collections in October and November have thrown a wrench in the government’s fiscal arithmetic.

Exports have bounced back in November after turning negative in October. However, questions remain over the sustainability of export growth in the coming months.

Meanwhile, rising oil prices have stoked inflation fears and, if the trend continues, this could also lead to a widening of the country’s current account deficit, fiscal deficit and a rise in inflationary pressures. If macro fundamentals continue to worsen, overseas investors could flee the country, further plunging the rupee. The Reserve Bank of India, too, could turn hawkish and start hiking interest rates, leaving little scope for supporting economic recovery.

The threat to India’s macro fundamentals is not unreal given the recent upswing in the global oil market. Oil prices have rallied by 13% since early December.

US West Texas Intermediate (WTI) crude futures reached December-2014 high of $63.67 per barrel on Wednesday while Brent futures hit $69.37 a barrel, the highest level since an intra-day spike in May 2015.

Against India’s interests

Swadeshi Jagran Manch (SJM), a Sangh affiliate, has strongly protested the cabinet’s decision to allow 100% foreign direct investment (FDI) in single brand retail and the move to lift the restriction barring foreign airlines from buying Air India’s assets. It has asked the government to review these decisions.

“SJM firmly believes that easing the norms for FDI in single brand retail would go against the best interests of the country,” said the outfit’s national co-convenor Ashwani Mahajan in a release.

“More worrisome is the decision to set off the condition of mandatory sourcing requirement of 30% of purchases from India, for five years after the opening of the first store by the foreign company. As a result of this decision foreign companies would get freedom of procuring the products from anywhere in the globe. This would go against the interests of the domestic manufacturing and also would discourage the future investment in manufacturing in India and therefore would go against the own declared policy of the government of encouraging Make in India,” the release further stated.

The outfit has also expressed unhappiness over the cabinet’s decision to allow foreign airlines to buy up to 45% stakes in Air India.