FDI boom in India: Hype or Reality?

The PM yesterday spoke about a turnaround in the economy and listed two statistics. To quote him, he said

there has been a smart pickup in credit growth after September. While credit off-take in the year to February increased by 11.5 per cent, overall fund flow to the corporate sector through equity and borrowings rose by over 30 per cent in the first three quarters of 2015-16.

I had covered this in my analysis four days ago. The second comment by the PM was

"Net foreign direct investment in the third quarter of the current financial year was an all-time record," he said highlighting increased overseas funds in fertiliser, sugar and agricultural machinery, sectors closely connected with rural economy.

Also, FDI in construction saw 316 per cent growth, while the same in software and hardware almost quadrupled.

Let us look at the chart below to understand FDI statistics better. This chart is only for the bigger sectors which make up for 59% of FDI. Sourced from DIPP

These numbers are astonishing. Services FDI is up more than two fold, computer software is up 5 fold, Trading is up 36% and construction (Infra) is up more than 10 fold. The reason PM mentioned that construction is up 316% is because real estate construction hasn't done as well. The fact of the matter is that these sectors matter to the Indian economy and them doing well is good news for jobs and growth in the near future.

However, is everything really going so well?

Unfortunately not, while overall FDI has been trending massively upwards, Manufacturing FDI (Top 17 sub-sectors) has been trending in the reverse direction at an equally rapid pace

FDI In manufacturing (Top 17 sub-sectors) made up for just 16% of FDI in 2015 (Apr-Dec). In China, Manufacturing made up for 43% of inward FDI in 2015. This suggests that our investment climate is still not ready for Manufacturing FDI.

In sum, the boom in FDI is real and not a hype. India's traditionally strong sector - services, continues to lead the way in attracting investment. The strong Govt focus on Infrastructure (about $ 30 B likely to be spent this year) has attracted more FDI in Construction (Infra) in 9 months than for 14 years before that.

Both of these sectors will be a huge driver of job growth and this is certainly good news. Our perennial dream of becoming a manufacturing powerhouse seems to be struggling  due to a variety of reasons whether regulatory (Land acquisition, ease of doing business, infrastructure, bureauracy, linkage with global supply chains etc) or poor internal demand. The slowing growth in FDI when overlaid with slowdown in the domestic manufacturing sector also suggests that it is unlikely that we will create large number of jobs in this sector in the near future. This could have some negative impact on job creation in the near future. 

The massive spurt in Construction FDI and significant jump in services FDI is clear evidence of the impact that Government actions can have on foreign investments. One hopes similar actions can turnaround the manufacturing sector as well in the near future.It is imperative that all political parties come together and give credit to each other to fashion this turnaround.  This is not about the elections in 2019, this is about the futures of the millions of Indians who will enter the workforce in the next 5 years.