The Issue:India’s FDI Paradox
India is currently a fast growing large economy, a major military power, and the second most populous country in the world, but FDI inflows are at a 15 year low. This paradox, and indeed the market mood even before the earthquake is a product of a complex cocktail of global risk aversion, overvalued Indian equity markets and a picture of tighter monetary policies around the world.
FDI Slowdown – Trends to Watch Out For
Net FDI in FY24: About $17 billion, least since 2008-09.
Equity inflows: Down as global investors are playing safe until the geopolitical waters calm down.
Impact by Sector: Technology, Startups, and Manufacturing witnessed lower flows than the previous years.
Portfolio flows vs FDI: While FPI inflows are volatile, FDI is stickier but also weaker on account of valuation and policy issues.
Factors Behind Low FDI Even As Growth Picks Up
Global Risk Aversion:
Geopolitical instability and wars are behind the investors’ search for safe-haven assets like the US treasuries.
There are outflows from emerging markets, like India.
High Equity Valuations in India:
India’s stock market is so damn expensive (P/E ratios are high).
Deters fresh long-term capital inflows.
Global Monetary Tightening:
US Federal Reserve and EU rates are still high.
Strong US dollar → less flows into EMs.
Domestic Bottlenecks:
There are still land, labour and regulatory hurdles to overcome.
Large-ticket investors are also being discouraged by some policy unpredictability.
Competition from Neighbours:
The emphasis of merchandise FDI reflects cost and trade related considerations, the latter linked to the existence of domestic supply chains in recipient economies: in countries such as Vietnam, Indonesia and Mexico, cheaper costs bring in FDI focusing on manufacturing.
Implications for India
Challenge: Funding for Growth — Less FDI, less money for infrastructure and startups.
Onus on Rupee: Lower flows can push up current account deficit.
Technology and Know-How Loss: FDI is not only money but global knowledge and supply chains.
Risk of “Hot Money” Dependence: India could depend more on fickle FPI in place of stable FDI.
Way Forward
Ease of Doing Business: Lower cost of compliance, rationalise taxation.
Key Sectors: Encourage FDI in sectors such as manufacturing,semiconductors, renewables and defence.
Trade Accords: Push through fast-track FTAs with EU, UK, GCC to beat investors.
Long term stable policy environment: Make tax and regulatory regime predictable.
5-Deepen Domestic Capital Markets: Reinforce bonds and REITs to complement FDI.
UPSC Relevance
Prelims (GS I – Economy):
FDI vs FPI difference, trends in India’s foreign inflows.
Policy moves: Make in India, PLI schemes, FDI caps.
Mains (GS III – Indian Economy):
The reasons for the FDI slowdown even as GDP grows.
Policy reforms to leverage growth with FDI promotion.
How global economy is playing a significant role in shaping India’s capital flows.
Previous Year UPSC Questions (PYQs)
PYQ 1: Unified Payments Interface (UPI) – UPSC Prelims 2017
Question:
Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?
a) Mobile wallets will not be necessary for online payments.
b) Digital currency will totally replace the physical currency in about two decades.
c) FDI inflows will drastically increase.
d) Direct transfer of subsidies to poor people will become very effective.
Correct Answer: a) Mobile wallets will not be necessary for online payments.
Explanation:
UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI).
It allows users to transfer funds instantly between bank accounts using a mobile device.
With UPI, payments can be made directly from bank accounts without the need for mobile wallets (like Paytm/Freecharge) as intermediaries.
Option (b) is incorrect because UPI doesn’t eliminate physical currency.
Option (c) is unrelated—UPI affects domestic digital payments, not FDI inflows.
Option (d) is partly true (UPI can help DBT), but its primary impact is reducing dependence on wallets, making (a) the correct choice.
PYQ 2: Balance of Payments – UPSC Prelims 2013
Question:
The balance of payments of a country is a systematic record of?
a) All import and export transactions of a country during a given period of time, normally a year
b) Goods exported from a country during a year
c) Economic transaction between the governments of one country to another
d) Capital movements from one country to another
Correct Answer: a) All import and export transactions of a country during a given period of time, normally a year
Explanation:
Balance of Payments (BoP) is a comprehensive record of all economic transactions (trade in goods & services, income, transfers, and capital flows) between residents of a country and the rest of the world over a specific period (usually a year).
Option (b) is incorrect: that’s just Balance of Trade (exports only).
Option (c) is too narrow: BoP covers all transactions, not just government-to-government.
Option (d) refers to capital account transactions only, not the entire BoP.
Hence, (a) is correct because BoP includes both current account + capital account + errors & omissions.
Mains
FDI Trends (2020, GS-3 ) :
“ There is a clear recognition that FDI is an important driver, of economic growth , but the global environment is challenging. Discuss India’s performance and policy response.”Global M onetary Policy (2015, GS-3):
“ Examine the impact of tightening monetary ,policy in developed economies on capital flows into India .
Conclusion
India’s FDI paradox highlights that high GDP growth alone is not sufficient to attract long -term foreign capital. Structural reforms, policy stability , and global competitiveness are crucial to bridge this gap. Unless addressed , India risks missing the opportu nity to fully leverage its, demographic dividend and strategic position in the global economy.
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