Declining FDI inflows

As Narendra Modi-led NDA government is getting ready to take reins for second consecutive term on May 30, one key development sends a worrying signal.

Foreign Direct Investment (FDI), a true measure of investors' confidence in a country, witnessed decline in FY19. It is for the first time in last six years that FDI inflows have registered a downward trend.

As per the data released by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows in FY19 fell to $44.37 billion from $44.85 billion in the preceding fiscal year i.e. FY18.

Last time the country witnessed downward trend in this space was in 2012-13 when FDI plunged by 36 per cent to $22.42 billion from $35.12 billion in 2011-12. Since then, the inflows maintained upward trajectory till FY18.

Interestingly, it was telecom sector which registered highest drop in foreign fund flows in FY19. This key sector attracted just $2.67 billion in foreign inflows last fiscal, less than half of $6.21 billion the sector got in FY18.

With most of the telecom companies incurring losses post the entry of Reliance Jio, it is understandable that foreign investors may not be keen to put their funds in India's telecom sector.

Pharmaceutical is the other sector which registered steep decline in FDI inflows. This key sector attracted $266 million in FDI in FY19, which is nearly a fourth of $1 billion the sector received in FY18.

However, the good tiding is that some sectors have clocked decent growth. Among them are services, computer software & hardware, trading and automobile.

Further, Singapore replaced Mauritius as the country's top source for FDI inflows. India received inflows of staggering $16.22 billion, more than a third of total, from Singapore, while Mauritius accounted for $8 billion.

Both the countries accounted for nearly 50 per cent of total FDI that came into India in FY19.

Slowing FDI inflows have multiple ramifications for the country. Lower FDI will leave adverse impact on balance of payments which will in turn put pressure on rupee.

More importantly, decline in inflows came in at a time when India is looking for more and more funds to improve basic infrastructure across the country.

It's no exaggeration to say that India can't achieve its targets on infrastructure front without attracting more FDI inflows. That way, the Narendra Modi government has its task cut out in the second term.

In this backdrop, it is worth mentioning here what Nomura, a Japanese financial services giant, has said. According to Nomura, India is capable of attracting FDI to the tune of 1.5-2 per cent of its GDP if it further improves on ease of doing business.

India's current FDI inflows account for just 1-1.5 per cent of the country's GDP. But India can't attract such a high level of foreign investments without improving infrastructure.

Therefore, the central government should initiate steps to attract more FDI into infrastructure sector during its second term.

If it succeeds on this front, Indian economy can easily log in double-digit growth, a much needed one for the country to eliminate poverty at faster rate.