‘Record’ FDI inflows, yes, cause for celebration, no

The inflows during 2020-21 have not been in sync with the Government’s priorities for economic recovery

June 17, 2021 12:02 am | Updated December 04, 2021 10:30 pm IST

In an otherwise gloomy economic scenario, one area of cheer for the Government has been the numbers on inflows of foreign direct investment (FDI). In a recent press release, the Ministry of Commerce and Industry announced that “ India has attracted highest ever total FDI inflow of U.S.$81.72 billion during the financial year 2020-21 and it is 10 percent higher as compared to the last financial year 2019-20”. The Reserve Bank of India (RBI) reported that the equity component of inflows was over U.S.$61.4 billion, a 19% increase over the U.S.$51.7 billion received in 2019-20. The credit for this record level of inflows was given to FDI policy reforms, investment facilitation and ease of doing business.

Taken on their face value, these numbers are indeed creditable, especially given that global FDI inflows in 2020 had declined by 42% over the level in 2019, and inflows to developing countries had fallen by 12%. However, if we consider the disaggregated data on inflows into India , the reality of foreign investors’ participation in the Indian economy seems a sharp contrast to what the Ministry has presented.


RBI data as a pointer

The RBI provides a useful disaggregation of total inflows of foreign capital into India. This shows that net of repatriation/disinvestment, FDI inflows had declined by 2.4% in 2020-21, as compared to the previous year. This was due to a 47.2% increase in repatriation/disinvestment, which had reached a record level of U.S.$27.0 billion. The RBI reports yet another disquieting aspect of foreign capital inflow in 2020-21, a high increase in portfolio investment, fuelled entirely by a 69-fold increase in the participation by foreign institutional investors (FIIs), totalling U.S.$38 billion. This was the second highest level of FIIs’ involvement in India, after they invested U.S.$42 billion in 2014-15. Surely, sustained sizeable repatriation of the long-term FDI, together with a large increase in speculative capital does not bode well for an economy looking to recover from an economic slump.

Who the recipients are

Analysis of FDI inflows remains largely incomplete without referring to the largest recipients of FDI, which is possible using the Department for Promotion of Industry and Internal Trade database. Currently, data for the first three quarters of 2020-21 are available, during which 86% of the equity inflows for the financial year were received. This data shows that three Reliance Group companies, namely Jio Platforms, Reliance Retail Ventures and Reliance BP Mobility, together received U.S.$27.8 billion or, 54.1% of the total equity inflows during the three quarters. Other large recipients, though with far lower shares, were Schneider Electric India, Byju’s, ArcelorMittal India, GMR Airports and Amazon Seller Services.

More than U.S.$20 billion of promoter’s shares in Jio Platforms, currently having the largest wireless subscriber base in India, were sold to 14 foreign investors, including Facebook, Google, KKR & Co., Qualcomm and a number of financial investors and sovereign wealth funds. A major part of the funds was meant to facilitate Reliance Industries to withdraw its investments already made in the form of Optionally Convertible Preference Shares. This, therefore, amounted to indirect acquisition of shares held by Reliance Industries. While the entire investment in Reliance Retail was by financial investors, viewed in the context of Reliance Group’s expansion through acquisitions (e.g. Future Group and Urban Platter) the end use of the inflows becomes obvious. Again, bulk of the investment into Reliance BP Mobility was through the acquisition route.

Also read | FDI in India rose by 13% in 2020, as inflows declined in major economies due to pandemic: UN

Facebook’s entry in Jio Platform offered two significant benefits to the foreign partner; one, to substantially expand its social media reach by piggy-backing on Jio Platforms and, two giving Facebook a share in India’s rapidly expanding e-commerce business through Jio Mart. Following the Facebook deal, Reliance announced its partnership with Google for building an Android operating system, by selling 7.7% in Jio Platforms. Facebook’s shareholding was pegged at 9.9% possibly because the International Monetary Fund (and also the RBI) stipulates that if a foreign investor holds 10% or more of voting shares in a company, the investor “exercises a significant degree of influence on its management”. Interestingly, Jio Platforms remains “Indian controlled”, even though two major American companies now own nearly 18% of its shares.

Acquisitions lie behind other major inflows as well: Schneider Electric’s acquisition of L&T’s Electrical & Automation business, ArcelorMittal’s acquisition of Essar Steel, and Byju’s acquiring a number of companies including Akash Educational Services. GMR’s deal with Groupe ADP of France paved the way for a foreign government-controlled company to have a say in India’s aviation infrastructure. It may be pointed out that the RBI’s data on acquisition-related inflows grossly underestimate the extent to which foreign investors have taken over existing businesses.

Skewed distribution

Perhaps alluding to these large cases of inflows, the RBI commented in its Annual Report thus: “Even though FDI inflows were stronger in 2020-21, their distribution was highly skewed. The coefficient of variation of FDI flows (based on transaction size) was larger during the pandemic period, implying concentration in distribution. The lower incidence of transactions points to the underlying weakness in FDI inflows during the year. Without the top five FDI deals, FDI inflows during 2020-21 would have declined by about a third of their level a year ago”. The RBI is entirely correct in its observation that without the large inflows mentioned above, there is a serious question mark over FDI inflows. In the absence of large inflows, FDI equity inflows suffered a precipitous fall in Q4 of 2020-21, the second lowest inflows in Q4 since 2014-15 barring 2016-17.

Also read | FDI equity inflows into India cross $500 billion milestone

Although the RBI has expressed its optimism that “[G]oing forward, the pipeline of FDI for 2021-22 could be supported by the thrust given to PLI and domestic growth prospects”, the nature of the bulk of the “investments” which involved a mere transfer of shares without creating productive assets in the country perhaps belies the expectation that FDI can contribute to the revival of the economy. This view is reinforced by the fact that contrary to the Government’s expectations of a larger magnitude of inflows into the manufacturing sector, this sector received just 17.4% of the total inflows during 2020-21.

To the services sector

The services sector attracted nearly 80% of the total inflows with information technology enabled services (ITeS) being the largest component, accounting for over 47% of the inflows thanks to the RBI’s classification of Jio Platforms as “Other information technology and computer service activities”. Wholesale and retail trade were the other prominent ones. According to the RBI, non-acquisition-related inflows into the manufacturing sector were the lowest in 2020-21 even in absolute terms, over the past five years. They were U.S.$6.7 billion in 2020-21, as compared to U.S.$12 billion in 2016-17, and were lower than even the previous year’s amount of U.S.$8.2 billion by 1.3%. Quick calculations based on the RBI data (which are gross underestimates) show that 34.9% of the reported inflows into the manufacturing sector were acquisition-related.

Clearly, FDI inflows have not been in sync with the government’s priorities for the post-COVID-19 economic recovery: the AatmaNirbhar Bharat Abhiyaan, anchored on the revival of the manufacturing sector through the Performance Linked Incentive (PLI) scheme. When this is the situation, ‘record’ levels of FDI inflows during 2020-21 cannot be a cause for celebration.

Biswajit Dhar is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. K.S. Chalapati Rao is former Professor, Institute for Studies in Industrial Development, New Delhi

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