Keeping India’s promise intact

• Stable foreign investment growth acts as a respite, cushioning the economy from the current headwinds, since there is a very high correlation between FDI and economic development.
• From April 2000 to June 2019, India received a cumulative of US$ 628.7 billion of FDI inflows.
• India is ranked 10th in the list of top FDI recipients in the world, but is also ranked second on the list of investment terminations.
• Stability in tax laws, transparent dispute settlement & improvement in contract enforcement will boost India’s attractiveness to investors, who remain confident of its growth story.

While India grapples with the current NPA crisis and the economy faces an acute liquidity crunch, stable foreign investment growth acts as a respite. It may cushion the economy from the current headwinds, since there is a very high correlation between FDI and economic development.

FDI was introduced in 1991 under Foreign Exchange Management Act (FEMA) with a baseline of US$ 1 billion in 1990. Even before 1990s, foreign investment was allowed, but in a very restricted manner. For example, the industrial policy of 1965 allowed MNCs to venture through technical collaboration.

India has emerged as the top destination of FDI inflows over the past 3 decades. According to DPIIT, from April 2000 to June 2019, India received a cumulative of US$ 628.7 billion of inflows. The highest FDI inflow that India received in an annual year was in 2014-15 amounting to US$ 73. 5 billion. Post 2012-13, FDI inflow has been increasing over the years, but no such trend exists in FPI inflows.

The UNCTAD World Investment Report (2019) states that there has been a decline in global FDI by 18%, i.e. US$ 1.3 trillion. Flows to developing countries remained stable, rising by 2%. Also, the share of developing countries in global FDI increased to 54%, which is a record.

India is ranked 10th in the list of top FDI recipients in the world. However, all is not hunky dory, the World Investment Report mentions that the number of international investment agreement terminations continued to be on rise. In 2018 alone, at least 24 terminations entered into effect.  India is ranked second in this list.

India crossed China in cross-border M&As for the first time in 2 decades in 2018, led by the US$ 16 billion acquisition of 77% stake in Flipkart by Walmart. But ironically, the e-commerce policy restrictions introduced in late 2018 caught both Walmart and Amazon by surprise. The perception on the long-term impact of some new foreign investment policies (even as investors remain confident on India’s growth trajectory) led to a drop of 5 positions in India’s rank to 16 on the AT Kearney FDI Confidence Index 2019. India’s performance on the index has dropped generally after consistently ranking among the top five during 2004-13. Stabilisation of the GST regime, Insolvency & Bankruptcy Code and the progress towards digitisation, on the other hand, can boost investor confidence in the coming years.

The record on litigation vis-a-vis foreign investment remains mixed. The Vodafone case continues to haunt the investment story of India. The Tata Sons-Docomo case, in which Delhi High Court enforced the arbitral award by foreign court has boosted the confidence of investors that the Indian judicial system is in cognisance with the foreign arbitral award without any intervention/ alteration. However the fate of Cairn Energy is yet uncertain.

As per the Ease of Doing Business Index 2020, India showed a tremendous progress to rank 63, but continues to rank poorly in ‘enforcing contracts’. Hence the preference of foreign investors for the international dispute settlement body is concomitant, especially when pendency remains the biggest concern for India’s judicial system.

In 2017, India terminated 58 bilateral investment treaties (BIT) with different nations. BIT is an agreement, which primarily intends to protect the interest of investor, investing in a foreign territory/ asset, hence plays a key role in building investor confidence and conducive environment for investment.

In 2015, the Model BIT was promulgated by the government, after facing series of investment claims by various companies. The revised Model BIT imposes a mandatory requirement of ‘exhaustion of local remedies’ for five years before resorting to an international forum hence is facing condemnation from all quarters.

The hiccups primarily centre on dispute settlement mechanism and policy uncertainty in general. Steady and continuous policy changes from 2017 to 2019 such as abolition of foreign investment portfolio board, permitting 100% FDI under the automatic route in coal mining for open sale, allowing 100% FDI for insurance intermediaries and Real Estate Broking Services show that the government views FDI as an indispensable growth driver. The recently released National Digital Communications Policy and E-commerce policy reiterate focus on FDI in boosting growth in respective sectors.

Over the years, India has been a major destination of foreign investment primarily because of its rapid economic growth and the thrust of the government towards attracting FDI through the liberalisation of more sectors, policy streamlining and ease of doing business climate improvement. However, ensuring the stability of taxation laws, fast-track dispute settlement and speed of contract enforcement will go a long way in boosting investor confidence.

Measures such as advance pricing agreements, India investment grid etc, which will bring in more policy stability and transparent tracking mechanism respectively are the most plausible ways to move forward in this direction. The next big step that the government should consider to boost investment attractiveness is to resolve the investors’ dispute settlement juggernaut.