FDI Share in GDP More Than Halved in Two Decades
Chennai: Foreign investment share in the GDP has more than halved in the past two decades. Despite ups and downs, the trajectory has been largely downwards and India’s net FDI over GDP is lower than its Asian peers.
India is among the top-10 global FDI destinations, but the share of net FDI in GDP has remained subdued despite substantial liberalization.
FDI over GDP averaged 1.6 per cent over the past two decades, compared to nearly 5 per cent for Vietnam, 3.3 per cent for Malaysia, 3.1 per cent for China, and 2.8 per cent for Organization for Economic Cooperation and Development (OECD) members, finds the World Bank.
As per RBI data, India’s net FDI as a share of GDP stood at 3.75 per cent in 2009-10. It came down to 1.42 per cent in 2013-14 and went up to 3.6 in FY15. However, the trajectory has been downwards thereafter and in FY24 it stood at 1.51 per cent.
According to the OECD’s “FDI Regulatory Restrictiveness Index”, regulatory restrictions were halved over 2003-20, particularly in services subsectors like broadcasting, media, retail, communications, and telecommunications. However, India still imposes equity restrictions in several sectors, especially in legal and accounting services, real estate, and business services. Compared to financial or tax incentives, regulatory changes to reduce entry barriers are relatively more important for attracting FDI.
Inconsistencies between national and state-level policies, coupled with weak capacity at the state-level to formulate and implement investment policies, are some of the factors that limit the ability to attract efficiency-seeking FDI. Five states—Maharashtra, Gujarat, Tamil Nadu, Karnataka, and the National Capital Territory of Delhi—account for over three-fourths of total FDI.
The most prominent FDI restrictions in India exist in the form of limitations to “FDI equity”. In some cases, 100 percent FDI is permitted in a sector, but sectoral laws and regulations impose conditions that make it commercially infeasible to invest in the sector.
Foreign investment in multi-brand retail trading, for instance, is subject to a minimum investment of $100 million. At least 50 per cent of the first tranche of this amount needs to be invested in “back-end infrastructure” within three years. Although 100 per cent FDI is allowed in tourism under the automatic route, some tourism-related areas are included in restricted lists.
India needs to rationalize minimum investment requirements in certain sectors, assist companies to meet the mandatory local sourcing requirements, minimise inconsistencies between national and state-level policies, and strengthen capacity of the states to formulate and implement investment policies, finds the World Bank.
