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ORBIS ECONOMICS

Special Report
Indias foreign direct investments set to cross US$50bn in 2015-16
October 3, 2015

Introduction
A recent Financial Times reports puts India at the top of the league table on Foreign Direct Investment
(FDI) receipts of US$ 31bn for the first half of calendar year 2015 among all countries. In focus is the
fact India has beaten its economically formidable northern neighbour China to it, which clocked US$
28bn.
But even without any comparisons to China, India is on a good way as far as FDI is concerned.
Orbis Economics analysis suggests that if Indias FDI inflows could well touch US$50bn in 201516, the highest levels ever.
FDI trends in Q1 2015-16 and Projections
Indias FDI inflows for Q1 2015-16 (the latest available so far) are over US$ 12bn, with a year on year
growth of 11.3%. Even though growth has actually slowed down from cumulative inflows up to June
2014, when it was at 21.5%, total FDI inflows are still on a good way.

Rising cumulative FDI inflows

14
11.1

12

2014

10

9.5

8.0

8
6
4

2015

12.4

4.7
2.6

2
0
April

May

June

Sources: Department of Industrial Policy and Promotion

If inflows maintain the current growth rate for the remainder of the year, India will reach a new annual
high for FDI inflows in one financial year, which is just shy of US$50bn. And going by potential for
better economic outcomes in 2015-16 compared to the previous year, the number is quite likely to be
higher than US$ 50bn. This compares to the highest levels of US$ 46.5bn seen thus far in 2011-12.
Economic factors driving FDI
Even though the global economic scenario still remains quite uncertain the IMF actually reduced its
global GDP growth forecast in July 2015 by 0.1 percentage points to 3.3% - there are a number of

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India driven (or related) factors that encourage us to think optimistically about the direction of FDI
inflows in not just the present financial year, but in the next few years as well.
These factors are:
1.

Policy certainty: Besides the policy paralysis that plagued the UPA-2 government, which
turned out to be a relatively weak coalition, resulting in deadlocks on important FDI changes
like those proposed in retail, uncertainty around policies like retrospective taxation also
spooked investors. Moreover, a spate of scams from telecom to coal, eroded confidence in
the functioning of the Indian government. So far, the NDA government by comparison has
had a relatively smooth run, and it has made it a point to reassure investors of policy certainty,
even though the reforms process has not been as speedy as many stakeholders in the
economy would have liked. Also, a number of related steps like easing doing business in India
have been stressed. The NDA government does not have majority in the upper house of the
parliament, which blocks some key policy steps, but a number of sectoral actions have been
undertaken to bring in more investments (see Box).
Box: Major FDI policy changes by the NDA government

Railways: Rail infrastructure opened to 100% FDI under automatic route

Defence: Sectoral cap raised to 49%

Construction Development: Easy exit norms, rationalized area restrictions, emphasis

to affordable housing

Medical Devices: Carve out was in FDI policy on pharmaceuticals and now 100% FDI
under automatic route permitted

Insurance: To expand insurance cover to iarge population and required capital to

insurance companies, raised FDI limit in the sector to 49%

Pension: Pension sector opened to FDI up to 49%

NRI investments: Investment by NRIs deemed to be domestic investment at par with

the investment made by residents

Overall changes: To bring uniformity and simplicity in the FDI policy, composite caps
on foreign investments introduced

2.

Deeper foreign economic ties: Though largely in the realm of diplomacy, some of the
bilateral economic visits, either by the PM to other countries or visits by key policy makers
from other countries to India has resulted in some concrete developments, which could pay
dividends down the road. For instance, Japan has assured US$ 3bn in investments in India,
particularly in support of the Make in India programme. Further, an India-UAE infrastructure
investment fund is underway, which has a target of US$ 75bn and is aimed at supporting India
in developing next generation infrastructure. Most recently, the PM has made a pitch to
financial sector CEOs in the US encouraging them to invest in sectors ranging from insurance
to agriculture. Specifically, collaborations with technology majors like Google and Apple have

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been explore in a bid to realise the Digital India goal, which, among other things aims to
connect Indias 600,000 villages with broadband internet connectivity.
3. Domestic turnaround: The Indian economy has seen a downturn in the recent years as is
evident from the drought year last year, tepid industrial production, poor corporate results
and still muted business confidence, even if the latest GDP data series so far give a less clear
picture, due to the limited historical data availability so far. However, the first signs of a
cyclical turnaround are now visible, driven by some recovery in consumption demand. While it
is unlikely that the economy will go back to an economic boom anytime soon, the return of
moderate economic health is to be expected, which will encourage more investments in the
economy.
4. Relative performance: With the Chinese economy slowing down significantly, it is
anticipated that India will grow faster than China in 2015, with the latter expected to grow at
6.8% as per IMF estimates while Indias growth is expected to by 7.5%. Here too, a change in
base and calculation methodology for Indias economic numbers has no doubt lent statistical
assistance to India outpacing China, but the point we are driving here is that it makes India a
relatively attractive emerging economy. The FDI report could well be a reflection of exactly
this trend. India is in any case far ahead of other major emerging economies like Brazil and
China in terms of economic performance. As a result, India could well look far more appealing
to the long term investor in emerging economies.
Risks to Outlook
Needless to say, there are some risks to the positive outlook. These stem from longer than anticipated
lags in domestic recovery, slow speed of policy initiatives, shocks to the global economy ranging from
the contagion effect of economic crisis in one region or country on the rest of the world or
commodity price shocks.
However, on the whole, if the scenario remains largely stable we would expect strong FDI inflows in
the economy to continue through the year.
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