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India Economist/Strategist

Ashutosh Datar

Macroeconomics

<p>FDI in India has declined in the first 5 months of the current financial year. At current rate full year FDI will be the lowest in the last 4-5 years. Both relative to India's history and relative to other emerging markets India is currently receiving a small amount of FDI. A key drag on FDI has been the sharp increase in divestment/repatriation of existing FDI - Repatriation/Divestment of FDI has increased 4x in the last 4 years. This despite the government's focus on improving ease of doing business, its flagship 'Make in India' program and the tariff barriers created to encourage relocation of manufacturing in India. On one hand this is a failure of government policy and on the other hand it makes the exchange rate more volatile - since portfolio flows drive a larger part of capital flows. It seems clear to me that the only way to reverse this trajectory of FDI is not to focus on FDI or foreign investors but to focus on the domestic economy. If we can get the business cycle up and running, investments will follow – Make in India or no Make in India, Tariffs or no tariffs. And this means reforms have to go beyond the headline and onto more substantive areas such as public sector banks, corporate stress, legal reforms, labour laws etc.</p>

FDI in India has declined in the first 5 months of the current financial year. At current rate full year FDI will be the lowest in the last 4-5 years. Both relative to India's history and relative to other emerging markets India is currently receiving a small amount of FDI. A key drag on FDI has been the sharp increase in divestment/repatriation of existing FDI - Repatriation/Divestment of FDI has increased 4x in the last 4 years. This despite the government's focus on improving ease of doing business, its flagship 'Make in India' program and the tariff barriers created to encourage relocation of manufacturing in India. On one hand this is a failure of government policy and on the other hand it makes the exchange rate more volatile - since portfolio flows drive a larger part of capital flows. It seems clear to me that the only way to reverse this trajectory of FDI is not to focus on FDI or foreign investors but to focus on the domestic economy. If we can get the business cycle up and running, investments will follow – Make in India or no Make in India, Tariffs or no tariffs. And this means reforms have to go beyond the headline and onto more substantive areas such as public sector banks, corporate stress, legal reforms, labour laws etc.

India's FDI Problem