Why in the News?
India is in the spotlight as recent UNCTAD data reveals a significant decline in net FDI inflows, falling to a 15-year low in FY24, even though gross inflows remain strong.
What are the key reasons behind the global decline in FDI flows, particularly to EMDEs?
- Geopolitical Instability: Rising geopolitical tensions such as the Russia-Ukraine war, Middle East conflicts, and US-China rivalries have weakened investor confidence, especially in Emerging Markets and Developing Economies (EMDEs) due to increased risk perception. Eg: After the Ukraine war, many European investors pulled out from Eastern European nations due to security concerns.
- Protectionist Policies: Countries have adopted more protectionist measures, including tighter FDI regulations, screening laws, and withdrawal from bilateral investment treaties (BITs), limiting foreign investor access. Eg: India terminated several Bilateral Investment Treaties post-2016, including with the Netherlands and Germany, leading to investor uncertainty.
- Supply Chain Realignment: Due to disruptions from the COVID-19 pandemic and rising geopolitical tensions, companies are shifting towards nearshoring and friend-shoring, bypassing many EMDEs. Eg: Several U.S. firms moved manufacturing from China to Mexico or Vietnam rather than to India or African countries.
Why has India experienced a sharp fall in net FDI despite rising gross inflows?
- High Repatriation of Earnings: While gross FDI inflows have increased, foreign investors are repatriating more profits, dividends, and disinvestments, leading to a decline in net FDI. Eg: In FY24, gross inflows were around $71 billion, but outflows (disinvestment/repatriation) rose sharply, reducing net FDI to $10.6 billion.
- Increased Disinvestment by Foreign Investors: Foreign companies have sold off stakes or exited Indian ventures due to regulatory uncertainties or global consolidation strategies. Eg: Vodafone’s reduction in stake in Vodafone Idea and exits by foreign private equity firms.
- Shift in Investment Strategy: There is a growing trend toward private equity and venture capital, which often involves short-term investments and quicker exits compared to traditional FDI. Eg: Start-up funding peaked in 2021–22 but many investors exited via IPOs or mergers within 2–3 years.
How can trade agreements and FTAs boost India’s FDI inflows and global integration?
- Market Access and Investor Confidence: Trade agreements and FTAs offer preferential market access, reduce tariff and non-tariff barriers, and provide a stable regulatory environment, encouraging foreign investors. Eg: The India-UAE CEPA (2022) led to a 34% rise in bilateral trade and boosted UAE investments in sectors like logistics and infrastructure.
- Integration into Global Value Chains (GVCs): FTAs help India plug into regional and global supply chains, making it a more attractive hub for FDI in manufacturing and exports. Eg: The India-ASEAN FTA improved electronics and automobile component exports, drawing FDI from Japan and South Korea into India.
- Legal and Dispute Resolution Frameworks: Comprehensive FTAs often include investment protection clauses and dispute resolution mechanisms, which reduce investor risk and boost inflows. Eg: India’s negotiation of Investment Protection Agreements (IPAs) with the EU has raised interest among European investors in clean energy and pharma.
Why is state-level reform crucial in India’s strategy to enhance FDI inflows?
- Ease of Doing Business at Ground Level: State-level reforms simplify land acquisition, labour regulations, and approval processes, making local environments more investor-friendly. Eg: Andhra Pradesh ranked top in the Business Reforms Action Plan (BRAP) 2020 for streamlining industrial approvals and digitizing services.
- Sector-Specific Policy Innovation: States can tailor sectoral incentives, infrastructure, and skill policies to attract targeted FDI in areas like textiles, electronics, or renewable energy. Eg: Tamil Nadu’s Electric Vehicle Policy attracted investments from Ola Electric and Hyundai in the EV sector.
- Healthy Inter-State Competition: Reform-oriented states create competitive pressure, encouraging others to improve investment climates, creating a national uplift in FDI appeal. Eg: Gujarat’s proactive approach in renewable energy prompted states like Rajasthan to fast-track their solar park approvals.
Way forward:
- Institutionalize Competitive Federalism: Strengthen the ranking framework for states based on FDI-related reforms (like BRAP), and link a portion of central incentives or grants to reform performance.
- Build State-Capacity for Investor Facilitation: Enhance training for state-level bureaucrats, establish single-window clearance systems, and promote public-private dialogue platforms to address investor concerns proactively.
Mains PYQ:
[UPSC 2014] Though 100 percent FDI is already allowed in non news media like a trade publication and general entertainment channel, the Government is mulling over the proposal for in creased FDI in news media for quite some time. What difference would an increase in FDI make? Critically evaluate the pros and cons.
Linkage: Evaluating the “pros and cons” necessitates an understanding of the challenges and opportunities associated with foreign investment inflows, reflecting a part of India’s FDI challenge in attracting and managing capital effectively. This question directly related to the implications of increasing FDI in a specific sector.
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