India Will Be the Foreign Direct Investment Magnet In the Post COVID-19 World
The country is set to benefit from one of the most liberal FDI policies in the world
Like many other spheres of lives and businesses, the outbreak of COVID-19 has been reshaping the international trade order and global supply chains. For global businesses and investors trying to hedge their risk and tap new markets, India has emerged as the top destination for foreign direct investment (FDI).
Some of the key triggers for these investors to look towards India are: The larger geopolitical scenario, a liberal and welcoming FDI policy in India, sectoral schemes and structural reforms introduced by the government at the Centre and at the state levels. Apart from this, India also offers a large and rapidly growing consumer market. This is an ideal situation for any global business seeking newer growth avenues.
If we look from the historical standpoint, since economic liberalization in early 90s, India has grown from strength-to-strengthen in attracting FDI. India’s FDI inflows grew from $36 billion in FY14 to $73.46 in FY20. This flow has grown steadily, with shaper rise in the last 4-5 years. Moreover, the FDI to GDP ratio is another good indicator of how India is being preferred as an FDI destination over some other emerging nations. During 2000-2018, India’s FDI inflow as a fraction of GDP has doubled from 0.77 per cent to 1.55 per cent. At the same time, in China (a good reference market for comparison), FDI to GDP ratio fell from 3.48 per cent to 1.50 per cent.
Due to COVID-19, border issues with India, and a global trade war, China has come under the scanner of global multinationals. In other words, the world is having a second thought about its over-reliance on Chinese supply chains and market. As these companies and investors look for alternative destinations for evading the geopolitical risks and diversify their base, India will be the top destination on their list. Moreover, the Indian government is playing an active role in encouraging these potential investors to persuade them to shift base here by providing an enabling environment. An outcome of this effort is that India has moved 14 places to be 63rd among 190 nations in the World Bank’s Ease of Doing Business Ranking and Report for 2020. Moreover, NITI Aayog announced in August 2020 that the country attracted close to $22 billion in FDI in March-July period. The number indicates how the global business and investor community trusts India as a manufacturing/service base and a promising market, even in the face of a pandemic.
NITI Aayog also argues that India has one of the most liberal FDI policies in the world, where FDI of up to 100 per cent are permitted under the automatic route in most of the sectors. There are only a few sectors where there are specific restrictions or approval requirements on FDI. Moreover, with the recent emphasis on Atmanirbhar Bharat, the government has introduced several FDI reforms. The announcement to increase FDI investments in the defense manufacturing sector by up to 74 per cent shows government’s intent to open up the economy even further for global investment, innovation, and an inclusive growth. Thus, the government’s endeavor is to turn an adversity such as COVID-19 into a multi-billion-dollar opportunity. In other words, India is announcing to the world that we welcome businesses.