Strong fundamentals and reforms have helped India attract top FDI

While the jury is still out on the extent of capital account convertibility, capital account reforms have been strong enough to attract the highest foreign direct investment (FDI), according to a study by economists from RBI.

An analysis of recent trends in FDI flows globally and between regions/countries suggests that India has generally attracted higher FDI flows and continues to remain among the top attractive destinations for international investors, in line with its strong domestic economic performance and its progressive liberalization. FDI policy as part of the prudent process of capital account liberalisation.

“An empirical analysis of the factors influencing FDI inflows, looking at leading countries in terms of FDI stock position in India, shows that FDI inflows are strongly influenced by trade openness, outlook for economic growth, market size, cost of labor and capital account openness of the host country,” says a study published in the latest monthly bulletin of the Reserve Bank of India.

In addition, foreign trade had a substantial share in the activity where import intensity in purchases remained higher than export in sales for foreign affiliates, notes the study.

FDI in India initially picked up in the mid to late 1990s following a series of policy measures aimed at liberalizing and strengthening the FDI environment in the country. But they slowed down after the global financial crisis of 2008 because it affected India’s macro fundamentals which continued until FY 2013-14. FDI again received a major boost in September 2014 after the government launched the “Make in India” initiative to facilitate investment, foster innovation and build the best manufacturing infrastructure.

The reform has created a positive climate for foreign investment in India and has helped to increase the growth of FDI inflows, mainly due to large investments in the three main industrial beneficiaries, namely “manufacturing”, “communication and “financial services,” the study notes. From 2015 to 2019, India received a cumulative inflow of FDI amounting to $173.3 billion and the share of the top five investing countries in India stood at 76.7%. Three major sectors, namely “manufacturing”, “communication services” and “financial services”, together accounted for more than 50% of FDI inflows, or US$89.6 billion between 2015 and 2019.

During the period, the quality of FDI data also improved to best global standards. A number of databases on FDI statistics for India are now available. Global concepts help in understanding the statistical methodologies that countries employ to compile the statistics and the resulting statistics can be used for comparison between countries, although countries with liberal investment regimes encounter major difficulties in estimate of foreign investment.

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