Decline in India’s FDI and an increase in disinvesting

Source: The post Decline in India’s FDI and an increase in disinvesting has been created, based on the article “Rising repatriation: As worrying as the recent decline in gross foreign direct investment is the increasing pace of disinvestment” published in “Business standard” on 8th May 2024.

UPSC Syllabus Topic: GS Paper 3- Economy-mobilisation of resources, growth, and development.

Context: This article highlights a decline in India’s foreign direct investment (FDI) and an increase in existing foreign investors repatriating or disinvesting. It suggests that slow application approvals and government restructuring may have contributed to this trend, requiring institutional revamps. Decline in India’s FDI and an increase in disinvesting

What is the status of foreign direct investment (FDI) in India?

Recently, 46 FDI proposals were pending with 17 government departments for over 12 weeks, despite the security clearance from the Union home ministry.

Gross FDI inflows fell by 16% to $71 billion in 2022-23, the first decline in nine years.

During April-February 2023-24, gross FDI decreased by 2.7% to $65 billion.

Repatriation and disinvestment accounted for 41% of gross FDI in 2022-23 and 59% during April-February 2023-24.

What’s the Issue with Repatriation and Disinvestment?

Rising Rates: From 2001-02 to 2008-09, repatriation and disinvestment rates were minimal, between 0.08% and 1.15% of gross FDI. However, these rates sharply increased, reaching 12% in 2009-10, 29% in 2011-12 and 41% in 2022-23. This share surged to 59% in the first 11 months of 2023-24

Negative Impact: This trend negates the positive impact of FDI inflows, leading to a net reduction in the capital retained in India.

Potential Causes: Structural changes like demonetization in 2016, GST rollout in 2017, and the removal of the FIPB may have contributed to investors pulling out. Global factors like economic uncertainty and rising interest rates also play a role.

What should be done?

Re-establish Institutional Oversight: Consider reviving an empowered board like the Foreign Investment Promotion Board (FIPB) to streamline approvals and reduce delays, as the existing decentralized system caused 46 FDI proposals to be delayed.

Address Repatriation: Investigate why the share of repatriation and disinvestment reached 41% in 2022-23 and 59% during April-February 2023-24, to better understand investors’ concerns.

Simplify Procedures: Create a system that eliminates procedural and policy challenges, encouraging existing foreign investors to stay and expand their operations, as FDI helps stabilize the balance of payments.

Question for practice:

Examine the impact of rising repatriation and disinvestment rates on India’s foreign direct investment (FDI) landscape.