About a fortnight ago, Business Standard reported that as many as 46 proposals for foreign direct investment were pending with about 17 departments of the Union government for more than 12 weeks, which was the time limit set for clearing such applications. The Department for Promotion of Industry and Internal Trade, or DPIIT, was understandably concerned and wrote to all the departments, asking them to expedite the clearance of these applications. Significantly, these delays took place in many cases despite the Union home ministry having accorded them the mandatory security clearance.
Could this have been one of the reasons for a slowdown in India’s gross FDI inflows in the last few months? While it is true that global FDI has been slowing in general, the fall in India’s gross FDI inflows was quite sharp—at 16 per cent to $71 billion in 2022-23. Remember that this was the first time in nine years that a decline had taken place in India’s gross FDI flows. Worryingly, the declining trend continued during the first 11 months of 2023-24, even though the pace of decline had slowed considerably. Gross FDI flows in the April-February period of 2023-24 fell by 2.7 per cent to $65 billion. The data for the full year is not yet available.
A larger problem
How serious is this decline? The Narendra Modi government would argue that of the 10 years of its regime, each of the first eight years saw gross FDI flows rise, and a decline in the remaining two years should be attributed to hardening interest rates in developed markets and global economic problems affecting FDI flows in most countries.
But that explanation appears to be missing a larger problem afflicting India’s FDI flows. What is happening to repatriation or disinvestment by existing foreign direct investors in the country could point to a more serious problem.
From 2001-02 to 2008-09, repatriation and disinvestment by existing foreign investors were a tiny proportion of gross FDI inflows into India — a share that ranged between 0.08 per cent and 1.15 per cent. However, this share surged to 12 per cent in 2009-10 ($4.6 billion of repatriation against gross FDI of $38 billion) and skyrocketed to 29 per cent in 2011-12 ($13.6 billion of repatriation against gross FDI of $46.55 billion).
It was remarkable that even as gross FDI flows between 2009 and 2012 were healthy at 2.1-2.8 per cent of gross domestic product (GDP), a good number of existing foreign investors were either repatriating their capital back to their home countries or other destinations and exiting from their ventures in India or diluting their stake through disinvestment. Such repatriation during these three years rose from 0.3 per cent of GDP to 0.7 per cent. This was a period of global economic turmoil and hardening interest rates. But such exits also reflected poorly on the country’s ability to retain the foreign investment that it had already attracted.
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When the trend changed
The situation improved somewhat in the following four years. Even as gross FDI flows improved from 2012-13, and more remarkably after the formation of the Modi government in 2014, the share of repatriation and disinvestment by existing foreign investors in gross FDI flows saw a sharp decline from 29 per cent in 2011-12 to 19 per cent in 2015-16. While more foreign investment was flowing in, the rate at which existing investors were pulling their capital out of India had slowed.
However, the trend changed from 2016-17 for about three years. India’s gross FDI flows kept rising, although at a lower annual rate of between 1 and 8 per cent. But the share of repatriation and disinvestment in gross FDI flows rose during this period to about 30-35 per cent. Did the demonetisation of November 2016 and the disruption caused by the launch of the goods and services tax (GST) in July 2017 play any role in the increased withdrawal of existing FDI through the repatriation and disinvestment route?
Covid years
The situation in 2019-20, the year before the outbreak of Covid-19, saw not only a 20 per cent increase in gross FDI inflows for India but also a slowing pace of repatriation and disinvestment. As a result, against gross FDI flows of $74 billion in 2019-20, the amount of repatriation and disinvestment was about $18 billion, with the share falling to 25 per cent.
The following two Covid years saw gross FDI inflows rising, but the pace of increase had slowed, and then they fell by 16 per cent in 2022-23 to $71 billion. But all these years, repatriation and disinvestment rose to account for a 33-34 per cent share in gross FDI inflows during 2020-21 and 2021-22, and then 41 per cent in 2022-23. The first 11 months of 2023-24 saw a further deterioration in this worrying trend. Repatriation and disinvestment during April-February 2023-24 spurted by 41 per cent and accounted for 59 per cent of gross FDI flows during this period.
Therefore, it is only natural that DPIIT, the department responsible for promoting FDI, will be examining why there are delays in clearance of applications from foreign investors. Its task has become more challenging because of an institutional restructuring brought about by the Modi government in 2017. The Foreign Investment Promotion Board (FIPB), which used to be located in the Union finance ministry, was abolished through an order in June 2017 and individual departments of the government were empowered to clear FDI proposals in consultation with the department of industrial policy and promotion, which was later renamed as DPIIT.
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Go for revamp
Given the nature of the decline in India’s FDI flows, it will make sense for DPIIT to explore an institutional revamp. A decentralised system of clearance of foreign investment applications needs more checks and balances. Indeed, the government could look at reviving an institution similar to the FIPB that is adequately empowered and tasked with facilitating the clearance of foreign investment proposals. This institution should not just have a streamlined approvals process but also be empowered to remove any procedural and policy irritants that come in the way of India becoming a preferred destination among foreign investors. At present, individual departments and ministries may not be sufficiently enthused or empowered to play such a role.
More importantly, a new inter-ministerial institution could examine the more worrying trend of how existing investors are repatriating their capital through disinvestment or other means. It is true that even as the cumulative value of FDI flows increases, some of those investments would flow out through repatriation and disinvestment. But in India, the rate of such exits has been rising at a rapid pace, neutralising the positive impact of FDI flows on the country’s balance of payments.
Therefore, as important as attracting foreign investors and expeditiously approving their applications is the need to ensure that existing investors stay invested and expand their operations to help the Indian economy reap the dividends of higher investment. The first step, under these circumstances, will be to initiate a process to understand why the share of repatriation and disinvestment in India’s gross FDI flows has been rising in the last few years.
Ashok Bhattacharya @AshokAkaybee is the Editorial Director, Business Standard. Views are personal.