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Should India Bet On FDI To Rein In Investment Crunch? – Analysis

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Investment in India has plunged abysmally low. New investment announced fell by over two-third in 2020-21, compared to its preceding year. In contrast, Foreign Direct Investment (FDI) in India increased by over 19 percent, albeit global FDI fell by over 42.7 percent. 

FDI from USA was the trigger for foreign investment surge in the country. It sparked by over 297 percent in 2020. Nevertheless, other major foreign investors also followed suit to reap the benefits of India’s FDI attraction , despite the pandemic ravaged the economy. FDI from Singapore – the biggest foreign investor in India – increased by 25.6 percent and from  Netherland – the third biggest investor – it increased by 21.3 percent. This manifested that FDI in India was resilient to pandemic, despite its  GDP fell by 7.3 percent and the domestic investors were reluctant to invest during pandemic.   

Global FDI collapsed in 2020, falling 42.7  percent, from US$1.5 trillion in 2019 to estimated US$859 billion in 2020, according to UNTACT Investment Trend Monitor. The developed nations were hardest hit. FDI in USA dropped by 49 percent. 

Notwithstanding, FDI spurred in India. The factor attributing to the FDI attraction was that the Indian economy is heading for a new look during pandemic, with  structural changes on the cusp. Given the large penetration in mobile phone and internet connections, along with large pool of IT talents, India is heading for a big  digitization in the economy, which works during pandemic. It emerged sixth largest digitized economy, even surpassing Japan – the techno hub in the world. Besides, it gained the global  stint for “pharmacy of the world”. It is one of the three big manufacturers of COVID 19 vaccines along with USA and China in the world. 

FDI plays a key role for developing nations for finance. It generates potential to bolster economy and employment and resilience during crisis.  It germinates economic transformation, helping developing nations for growth.  Surge in US investment  in India is a case in point. Amid COVID 19, US investment lend a big support to India’s digitization – a mega economic transformation in the country. 

Even though Indian government claimed that its FDI policy is one of the smoothest and less barrier laden, FDI  policy has been crafted without taking into cognizance of the investors choices, investment risks and comparable to other developing nations.  

Given the situation, where India’s FDI potential proved resilient to the Covid 19 pandemic, a new look to FDI policy is warranted. India’s FDI policy has always been under the xenophobia of foreign power foray, instead of looking at it a stimulant to qualitative investment for growth. Hitherto, the foreign investment policy prior to 1991 economic reforms was sensitive to foreign power dominance, like British predators. A major liberalization was made after 1991 reforms to attract foreign investment and play an important role in the economy. Notwithstanding, foreign xenophobia continues to loom. 

FDI in multi-brand retail is a case in point. For years, foreign investors have been urging to open the multi-brand retail to foreign investment. During UPA regime, FDI in multi-brand retail was opened. It heralded a big promise by the MNCs. Alas, with the change in the government, FDI in multi-brand retail was put under selves by NDA  government as it would hit the pop-and-mom shops, who are the supporters of the government. Political whims and fear of foreign power predatory outsmarted the economic gains of FDI in multi-brand retail. Fear of minimizing of Mom and Pop shops became the major headwind to the FDI in multi-brand retail. This raised an outrage among the foreign investors and the reliability of investment security in the country. 

The COVID pandemic outbreak brought a new dynamism in the retail market. Most of the retailers have seen more than 10 percent growth in their online customers during the pandemic  period, according to a survey by Mackinsey & Co. This braces for a big scope for E-commerce. Many consumers said that they preferred online shopping even if the lockdown eased. Eventually, this bestows more free hand to the government to re-introduce FDI in multi-brand without raising much ire from Mom and Pop shops. Indian retail industry is one of the biggest in the world. Size of retail industry is estimated over US$1.2 trillion. It is expected to reach US$1.7 trillion by 2026, according to one estimate.      

The housing sector is another area, which should embolden FDI attraction in the country. The government liberalized FDI policy in housing sector, opening the door to 100 percent FDI under automatic route. Notwithstanding, there were few takers. This is because the liberalized policy was embargoed with riders, such as pre-requisite of minimum built up area, minimum capitalization norm and others. These decimated the interests of MNCs to invest in building residential houses.

Driven by sustained demand and supporting policy of the Government, housing is expected to make a robust growth both in short and long term. At present, there is a 10 million shortage of housing in the urban areas.  An additional 25 million affordable housing units are required to meet the demand for urban population by 2030. Against these backdrops, a new FDI policy with limited riders is imperative to stoke the growth of residential houses, given the fact that domestic investors are yet to come forward to mitigate the housing shortages in urban areas.  

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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