Finance Ministry pushes for reforms to spur FDI inflows

“India needs to watch FDI data closely and continue to take measures to facilitate FDI inflows.” 
| Photo Credit: V. Sudershan

The Finance Ministry has made a strong pitch for measures to facilitate Foreign Direct Investment (FDI) flows, that dipped last year and may remain subdued in coming months, mooting greater attention from policymakers to resolving challenges faced by global investors, including last-mile infrastructure issues and the inability to set up larger factories.

Blaming the dip in FDI inflows in 2022-23 to inflationary pressures and tighter monetary policies, the ministry noted that FDI flows may also be impacted by “political distance more than geographical distance” as “geopolitics has dominated geography”.

Gross FDI flows moderated 16% last year from the record high of $84.8 billion in 2021-22, while net inflows fell a sharper 27.4%. In its annual economic review of 2022-23 published Thursday, the Ministry has said this phenomenon is “not unique to India” as net FDI inflows to emerging market economies declined 36% in 2022.

Identifying the external sector as a possible challenge for India’s growth outlook in 2023-24, the review noted that “escalation of geopolitical stress, enhanced volatility in global financial systems, sharp price correction in global stock markets, a high magnitude of El-Nino impact, and modest trade activity and FDI inflows owing to frail global demand” could constrain growth.

“India needs to watch FDI data closely and continue to take measures to facilitate FDI inflows. Last-mile infrastructure issues, labour availability and measures to facilitate large capacity creation will be needed. This policy space may need India’s increasing attention in the coming months and years,” the ministry said.

“Friend shoring” of FDI by increasing investments in countries which are geopolitically aligned to each other is leading to a fragmentation in FDI flows across the globe, the ministry noted, citing research from the International Monetary Fund (IMF). Inflows from foreign portfolio investors (FPIs) into the Indian markets have become less volatile, the ministry asserted.

On the trade front, the ministry identified the European Union’s introduction of the Carbon Border Adjustment Mechanism (CBAM), for which carbon content reporting will be mandatory from October 1, 2023, as an impending downside risk to India’s exports. It also cautioned about “polarisation risks arising out of the prevailing geopolitical situation reflected in the possible adoption of trade-restrictive measures”.

Taking on criticism about an uneven recovery, the review said that job creation played a key role in boosting demand in the economy from 2020-21 to 2022-23 so “it bespeaks the rising inclusivity in the growth of the Indian economy”.

“Rising inclusivity is neither temporary nor transitional. It is now becoming deep-rooted with increasing job creation in the formal sector as the latter continues to expand on the back of Aadhaar, the e-shram portal for registration of unorganised workers, registration of MSMEs on the Udyam Portal and the implementation of GST, among others,” it argued.

“Going forward, employment levels are expected to remain buoyant, mainly driven by rapid digitalisation, technological advancement, and the expanding implementation of the PLI [Production-Linked Incentive] scheme, thereby creating employment avenues for both semi-skilled and skilled workers,” the review underlined.

Stating that the growth momentum from last year, when GDP grew an estimated 7.2%, has continued so far this year, the review said the public capex spends have begun to crowd in private investment, while rural demand is likely to get stronger with a healthy crop, higher minimum support prices and wage revisions under the rural unemployment guarantee scheme.