Greenfield FDI into India in the first half of 2015 was $31 billion. Growth this year is forecast to be 45% Image Credit: Sutterstock

The Indian government predicts foreign direct investment (FDI) flows into the country will continue to surge this year, building on the impressive levels reached in 2014 and 2015. Indeed, last year is expected to have been a milestone year for India after mid-year data indicated it surpassed China and the US as the number one country attracting FDI globally.

This surging FDI is, to a large extent, the result of economic reforms Prime Minister Narendra Modi has started to introduce since he took office in 2014 — which has boosted investor confidence in India as a place to do business. It is also the result of the overall positive outlook for the country’s economy, especially when compared to other emerging market economies where growth has stagnated.

“Our main observation is that FDI flows are likely to continue to rise in line with the planned but much delayed modernising of India’s tax system and energy markets, and strengthening in its business climate, such as through simplifying regulations and improving contract enforcement and trade,” Kyran Curry, an Analyst at credit ratings agency Standard & Poor’s, tells GN Focus.

In the first six months of 2015, India attracted $31 billion (about Dh114 billion) in greenfield FDI, about $3 billion more than China and $4 billion more than the US, according to fDi Markets, a data and monitoring service. This is more than double the $12 billion in FDI India attracted over the same period the previous year.

Meanwhile, India’s ease of doing business ranking jumped 12 places in the World Bank’s 2016 Doing Business report. It is now 130 out of 189 countries, up from 142 previously.

“A forward movement of 12 spots in the ease of doing business by an economy of the size of India is a remarkable achievement,” the World Bank’s Chief Economist and Senior Vice-President, Kaushik Basu, said when the report was released in October. “It gives a good signal about the way things are moving in India.”

Opening for business

In November, the government eased FDI rules in 15 sectors, including mining, defence, construction, real estate, civil aviation, broadcasting and private banking. It also allowed the Foreign Investment Promotion Board to approve proposals of as much as Rs50 billion (about Dh2.8 billion), up from Rs30 billion.

Unveiling the new rules, the Prime Minister’s Office tweeted: “India is unstoppable on the path of economic progress. Govt. wants the world to see the tremendous opportunities India offers.”

A report by Fitch Ratings following the announcement called the measures “a significant structural macroeconomic reform”.

These latest measures build on other initiatives including the Make in India scheme introduced in late 2014, designed to promote India as a manufacturing hub, and Digital India launched in July to bring connectivity to more rural areas and create jobs. Earlier this month, the government also launched the Start-Up India programme, aimed specifically at young entrepreneurs.

Last year Modi embarked on an intensive schedule of overseas trips to promote India as a buzzing business destination. Of the 25 places he visited, highlights included the UK — the first time an Indian prime minister visited the country, a historic trade partner, in more than a decade — Singapore, Silicon Valley in the US, and the UAE.

Foreign cash influx

Since the Make in India campaign was launched, FDI has rocketed 40 per cent over the previous year, Amitabh Kant, Secretary of the Department of Industrial Policy and Promotion, said at the end of December. The main sectors are manufacturing, consumer goods, logistics and food processing. He added that the government expects FDI to increase at a rate of 45 per cent this year thanks to its reforms.

“Foreign direct investment into India surged in fiscal year 2014, largely due to a relaxation in government restrictions and the strong economic potential of the country,” says Angela Bouzanis, Senior Economist at Focus Economics. “Attracting FDI is a pillar of Modi’s Make in India campaign, and the government has eased regulation and made efforts to improve the business climate, which has encouraged inflows.

“Going forward, additional efforts by the government are expected and, in February, a Make in India week will be held in Mumbai with more than 1,000 foreign companies and delegates expected.”

Under the campaign, more than 100 Chinese mobile manufacturers met in New Delhi earlier this month. India’s own sector could see up to $3 billion invested over the next two years.

FDI inflows are likely “to broadly track efforts to close significant gaps in India’s infrastructure, such as in road, rail and air transport, energy and other utility markets,” says Curry.

While other emerging markets in Asia have suffered as a result of the China slowdown, India has fared better. Focus Economics analysts expect the economy to expand at 7.4 per cent in the 2015 financial year, and up to 7.6 per cent during the 2016 financial year.

This doesn’t mean there aren’t risks. “The outlook for FDI is susceptible to external shocks which could weigh on future inflows,” says Bouzanis. “Furthermore, concerns over the country’s pace of reforms or criticisms that certain industries should stay protected are downside risks to the FDI outlook.”