India's FDI inflows cross the USD 50bn mark in 2015-16, as forecast by Orbis Economics

India received a record FDI inflow of USD 55.5bn in 2015-16 as per numbers released recently by the DIPP. This is a significant 18.4% jump over the previous high of USD 46.9bn seen in 2011-12. India was off to a strong start on the FDI numbers in the first quarter of 2015-16 itself. 

Based on this, and other factors such as greater political and policy stability, efforts to reach out to the world and relatively better performance by India compared with emerging economy peers, we at Orbis Economics had correctly forecast that this will be a year when FDI inflows will cross USD 50bn (Orbis Economics Special Report: India's foreign direct investments set to cross USD 50bn in 2015-16; October 3, 2015). Further, based on evolving trends, our forecasts indicated that FDI inflows could also be closer to USD 60bn. While the mark was not quite reached, inflows did reach the halfway mark between the initial and revised forecasts.

This post extracts the detailed reasons from the forecast report that clearly indicated a strong year for FDI inflows. The reasons were as follows:

#1. Policy certainty: Besides the policy paralysis that plagued the UPA-2 government, which turned out to be a relatively weak coalition, resulting in deadlocks on important FDI changes like those proposed in retail, uncertainty around policies like retrospective taxation also spooked investors. Moreover, a spate of scams from telecom to coal, eroded confidence in the functioning of the Indian government. So far, the NDA government by comparison has had a relatively smooth run, and it has made it a point to reassure investors of policy certainty, even though the reforms process has not been as speedy as many stakeholders in the economy would have liked. Also, a number of related steps like easing doing business in India have been stressed. The NDA government does not have majority in the upper house of the parliament, which blocks some key policy steps, but a number of sectoral actions have been undertaken to bring in more investments.

#2.Deeper foreign economic ties: Though largely in the realm of diplomacy, some of the bilateral economic visits, either by the PM to other countries or visits by key policy makers from other countries to India has resulted in some concrete developments, which could pay dividends down the road. For instance, Japan has assured US$ 3bn in investments in India, particularly in support of the Make in India programme. Further, an India-UAE infrastructure investment fund is underway, which has a target of US$ 75bn and is aimed at supporting India in developing next generation infrastructure. Most recently, the PM has made a pitch to financial sector CEOs in the US encouraging them to invest in sectors ranging from insurance to agriculture. Specifically, collaborations with technology majors like Google and Apple have been explore in a bid to realise the Digital India goal, which, among other things aims to connect India’s 600,000 villages with broadband internet connectivity.

#3. Domestic turnaround: The Indian economy has seen a downturn in the recent years – as is evident from the drought year last year, tepid industrial production, poor corporate results and still muted business confidence, even if the latest GDP data series so far give a less clear picture, due to the limited historical data availability so far. However, the first signs of a cyclical turnaround are now visible, driven by some recovery in consumption demand. While itis unlikely that the economy will go back to an economic boom anytime soon, the return of moderate economic health is to be expected, which will encourage more investments in the economy.

#4. Relative performance: With the Chinese economy slowing down significantly, it is anticipated that India will grow faster than China in 2015, with the latter expected to grow at 6.8% as per IMF estimates while India’s growth is expected to by 7.5%. Here too, a change in base and calculation methodology for India’s economic numbers has no doubt lent statistical assistance to India outpacing China, but the point we are driving here is that it makes India a relatively attractive emerging economy. The FDI report could well be a reflection of exactly this trend. India is in any case far ahead of other major emerging economies like Brazil and China in terms of economic performance. As a result, India could well look far more appealing to the long term investor in emerging economies.

Read the full report here:

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