Global investments flow into India

Buckling a global trend, Foreign Direct Investment (FDI) to India grew by 6 percent to US$42 billion in 2018 with strong inflows in the manufacturing, communication and financial services sectors, and cross-border merger and acquisition activities, according to a new UN report.

The latest World Investment Report 2019, by the United Nations Conference on Trade and Development (UNCTAD), ranked Indiaamong the top 20 host economies for FDI inflows in 2017-18 and accounted for the largest chunk of the $54 billion that flowed into South Asia last year. The Asian region as a whole remained the world’s largest FDI recipient, absorbing 39 percent of global inflows in 2018.

India was among the countries that had positive foreign investment inflows during 2018. Globally, FDI fell by 13 percent in 2018 from the $1.5 trillion in 2017 to $1.3 trillion last year, said the report. This fall to the lowest level since the global financial crisis marked the third consecutive annual decline and underlined the lack of growth in international investment this decade, said UNCTAD.

The UN report also showed that prospects for FDI inflows into South Asia are largely determined by expectations of growing investment into India. Announced greenfield investment in the country doubled to $56 billion in 2018, with projects in a number of manufacturing industries, including automotive.During 2018-19, FDI equity inflows were the highest from Singapore ($16.23 billion), followed by Mauritius ($8.08 billion), Netherlands ($3.87 billion), USA ($3.14 billion), and Japan ($2.97 billion).

The report added that the growth in cross-border mergers and acquisitions (M&As) for India from $23 billion in 2017 to $33 billion in 2018 was primarily due to transactions in retail trade, which includes e-commerce, and telecommunication. Among the mega retail deals inked last year were the $16 billion acquisition of Flipkart, India’s biggest e-commerce platform, by American giant Walmart, and the deal in telecommunication involving Vodafone and American Tower which  amounted to $2 billion.

Foreign direct investment is critical for countries, especially for nations in the developing and emerging market. International funding and technical expertise help companies in the developing world expand their operations and grow more competitive in the global marketplace; it also helps countries to develop infrastructure, energy, and water projects that increase jobs and wages.

Inclusive sustainable development depends on a global policy environment that is conducive to cross-border investment, said UN Secretary-General António Guterres in a foreword to the UNCTAD report. “The significant acceleration required to meet the investment needs associated with the Sustainable Development Goals (SDGs) is not yet apparent. We need to raise ambition on climate action, address debt vulnerabilities and reduce trade tensions to foster environments that are conducive to scaling up long-term and sustainable investments,” said the UN Chief.

It is not just developing countries, developed economies, such as the European Union and the United States, also need FDI. Enterprises in these countries draw FDI mainly through their merger and acquisitions and use it for either restructuring or refocusing on core businesses.

Apart from FDI accounting for 14.2 percent of Indian GDP in 2018 and being a crucial driver of economic growth, foreign investments are a major source of non-debt financial resource for the economic development of India. Some of the other recent significant FDI announcements include:

In October 2018, VMware, a leading software innovating enterprise of US announced an investment of $2 billion in India between by 2023. In August 2018, Bharti Airtel received approval of the Government of India for sale of 20 percent stake in its DTH arm to an America based private equity firm, Warburg Pincus, for around $350 million. In June 2018, the Department of Telecommunication approved an appeal by Idea, a leading provider of telecommunication services, for 100 percent FDI and merger with Vodafone (UK) to create Vodafone Idea, the largest telecom operator in India. In February 2018, Ikea announced its plans to invest up to $12 million in the state of Maharashtra to set up multi-format stores and experience centres.Kathmandu based conglomerate, CG Group is looking to invest $156 million in India by 2020 in its food and beverage business.The International Finance Corporation (IFC), the investment arm of the World Bank Group, is also planning to invest about $6 billion through 2022 in several sustainable and renewable energy programmes in India.

Another major reason why countries court FDI is that it helps offset the volatility created by ‘hot money’ — asset bubbles created by short-term lenders and currency traders when they invest large amounts of money in one lot, and then sell their investments just as fast to make a profit. But this creates a ‘boom-bust’ cycle that ruins economies and brings down political regimes. Foreign direct investment is a more long-term strategy by investors and takes longer to set up, as such it tends to have a more permanent footprint in a country.

The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.In September 2018, the Government of India released the National Digital Communications Policy, 2018 which envisages increasing FDI inflows in the telecommunications sector to US$ 100 billion by 2022.