The Indian Finance Ministry is urging for reforms to boost Foreign Direct Investment (FDI) inflows, which experienced a decline last year and are expected to remain subdued in the coming months. The ministry is calling for policymakers to address the challenges faced by global investors, including issues related to last-mile infrastructure and the establishment of larger factories.
The ministry attributes the decrease in FDI inflows in the 2022-23 period to inflationary pressures and tighter monetary policies. Additionally, it suggests that political factors have played a significant role in impacting FDI flows, stating that geopolitics has dominated geography.
In 2022, gross FDI flows decreased by 16% compared to the record high of $84.8 billion in 2021-22, while net inflows saw a more substantial decline of 27.4%. The Finance Ministry’s annual economic review for 2022-23 highlights that this trend is not unique to India, as emerging market economies experienced a 36% decline in net FDI inflows.
The review points out that the external sector poses potential challenges to India’s growth outlook for 2023-24. Factors such as geopolitical stress, volatility in global financial systems, sharp price corrections in global stock markets, the impact of El-Nino, and weak global demand could potentially limit growth.
The Finance Ministry emphasizes the need for India to closely monitor FDI data and take measures to facilitate FDI inflows. It suggests that addressing last-mile infrastructure issues, ensuring the availability of labor, and implementing measures to support large-capacity creation will be crucial. The ministry believes that these areas warrant increasing attention in the coming months and years.
The ministry also highlights the phenomenon of friend shoring, wherein countries strategically increase investments in geopolitically aligned nations, leading to fragmented FDI flows worldwide. It cites research from the International Monetary Fund (IMF) to support this assertion. Inflows from foreign portfolio investors (FPIs) in Indian markets have become less volatile, according to the ministry.
On the trade front, the ministry identifies the European Union’s Carbon Border Adjustment Mechanism (CBAM) as a potential risk to India’s exports. The CBAM, scheduled to enforce mandatory carbon content reporting from October 1, 2023, could have adverse implications. The ministry also warns of polarisation risks stemming from the prevailing geopolitical situation, which may result in the adoption of trade-restrictive measures.
Addressing criticism regarding an uneven recovery, the Finance Ministry contends that job creation has played a significant role in boosting demand in India’s economy from 2020-21 to 2022-23. It argues that this demonstrates the increasing inclusivity of the Indian economy’s growth. The ministry asserts that rising inclusivity is a permanent and deep-rooted trend, citing the expansion of the formal sector through Aadhaar, the e-shram portal, the registration of MSMEs on the Udyam Portal, and the implementation of GST, among other factors.
Looking ahead, the Finance Ministry anticipates buoyant employment levels, driven by rapid digitalization, technological advancements, and the widespread implementation of the Production-Linked Incentive (PLI) scheme. These factors are expected to create employment opportunities for both semi-skilled and skilled workers.
The review confirms that the growth momentum from the previous year, with an estimated GDP growth rate of 7.2%, has continued into the current year. Public capital expenditure is stimulating private investment, and rural demand is expected to strengthen due to a healthy crop, higher minimum support prices, and wage revisions under the rural unemployment guarantee scheme.
In conclusion, the Finance Ministry emphasizes the need for reforms to encourage FDI inflows and overcome challenges faced by global investors. It acknowledges the impact of geopolitical factors on FDI flows and calls for attention to last-mile infrastructure issues, labor availability, and measures to support large-capacity creation. The ministry also highlights risks in the external sector, including the EU’s CBAM and potential trade-restrictive measures. It asserts that job creation and inclusivity have been instrumental in driving India’s economic growth and predicts continued employment growth driven by digitalization, technological advancements, and the implementation of the PLI scheme.
