The PM is talking up India as an investment destination. But where’s the money?

FDI’s share of GDP was steadily rising under the UPA till it reached its peak and began tapering off as the economy began to sputter. It is true that FDI share of GDP has improved since the Modi government came to power but it is nowhere near the rate achieved under the UPA at its peak. Indeed, FDI’s share of GDP actually dipped in 2016-2017, the last fiscal year for which we have full year data.

As the Narendra Modi government celebrates its fourth anniversary, one of the economic achievements cited by the prime minister is the government’s success in boosting inward foreign direct investment (FDI). Modi recently said that FDI is at its highest level ever in India. While this is factually correct, it begs the question as to whether the level of FDI with no other adjustment is the right way to judge success or failure in attracting FDI.

The open question is why FDI performed so well under a government, which according to the orthodox narrative was socialist in its mindset and did not pursue economic reforms whereas it has languished somewhat under a successor government widely touted as pro-business and reform minded(Bloomberg)

As a matter of economics, to make meaningful comparisons over time and across countries, macroeconomic variables such as FDI have to be benchmarked against any given country’s gross domestic product (GDP). Other things equal, larger countries will attract more FDI, making such an adjustment necessary.

The chart presents data on inward FDI as a percentage of GDP from fiscal year 2000-01 to 2016-17. This paints an entirely different picture than the story that FDI is at its highest level under the Modi government. In fact, when adjusted as it must be by the level of GDP, the percentage of inward FDI reached a peak in 2008-2009, right at the midpoint of the Congress-led United Progressive Alliance (UPA)’s 10-year rule.

Further, FDI’s share of GDP was steadily rising under the UPA till it reached its peak and began tapering off as the economy began to sputter. It is true that FDI share of GDP has improved since the Modi government came to power but it is nowhere near the rate achieved under the UPA at its peak. Indeed, FDI’s share of GDP actually dipped in 2016-2017, the last fiscal year for which we have full year data.

Faced with these uncomfortable facts, some point to reports such as the United Nation’s Conference on Trade and Development annual investment report. The most recent edition places India in a distant third after the United States and China as the “top prospective” host economy as identified by executives of multi-national enterprises. The US scores 40%, China at 36% and India at 20%.

It sounds great, until you realise that these rankings are not based on hard economic data but on responses to a survey. As the old saying goes, talk is cheap: it’s easy for an executive to say India is their preferred destination for new investment but this is only meaningful if an investment actually takes place.

Indeed, that India does relatively well in such survey-based reports but is still way behind some other countries in actually attracting large quantities of FDI reveals the huge gaps between the intentions to invest, which may be genuine and the frustration and pitfalls of actually investing in India. Thus, inward FDI and GDP peaked at a little over 3% in 2008-09 under the UPA but still well below that of other emerging economies such as Vietnam at 6%. Today India is at a little over 2% but is still well below the world average of more than 3%.

The most charitable interpretation of the reality against the rhetoric is that the PM is doing a good job of talking up India as an investment destination but so far, this is not translating into a large increase in actual investments. But, as it turns out, India routinely places in the top three in previous editions of the UNCTAD report as preferred host destination for FDI, even as late as in 2013 when the economy was already in a downturn.

The open question is why FDI performed so well under a government, which according to the orthodox narrative was socialist in its mindset and did not pursue economic reforms whereas it has languished somewhat under a successor government widely touted as pro-business and reform minded.

Rupa Subramanya is an independent economist and researcher based in Mumbai

The views expressed are personal