RAISINA HILL

The story of rising foreign direct investments (FDI) in India in the last few years is quite well-known. FDI flows into India were estimated at $24 billion in the last year of the Manmohan Singh government, that is 2013-14. But the first year of the Modi government saw a jump of 27 per cent in FDI inflows to over $30 billion, reflecting perhaps the foreign investors’ fresh enthusiasm about the new regime. The following year saw an even higher increase of almost 30 per cent to $40 billion. And in 2016-17, data for which are available only till December, the increase was 22 per cent — a marginal slowdown, but still showing a healthy rise and indeed one of the highest growth rates globally.

But this article is not about FDI inflows into India. It is about FDI outflows. And when the focus shifts to Indian investments abroad, the numbers on actual FDI outflows show an interesting trend that needs to be studied closely. The last year of the Manmohan Singh government, that is 201314, saw a substantial amount of FDI outflows, estimated at $13.4 billion, which was more than half of the total FDI inflows that year. Political pundits had explained this as a reflection of the Indian industry’s eroding confidence in the Singh government.

Not surprisingly, therefore, India’s actual FDI outflows declined significantly in 2014-15 to $6.73 billion, even as FDI inflows surged. The exchange rate may have played some role in that dip, but the 50 per cent decline in actual FDI outflows in the first year of the Modi government was hailed as the return of the Indian industry’s confidence in the new regime at home.

But that narrative could not be sustained beyond 2014-15. Actual FDI outflows rose sharply to $10.4 billion in 201516. And during April-January of 2016-17, the latest period for which such data are available from the finance ministry, FDI outflows are estimated at $9.7 billion. This represents a 17 per cent increase over $8.3 billion of outflows recorded in the same period of 2015-16.

Clearly, Indian industry continues to invest abroad and the growth rate remains healthy. While this in itself may not be a cause for concern, what needs to be understood is that this does question the logic of the earlier narrative that Indian industry was dying to invest abroad in 2013-14 because of its low confidence in the Manmohan Singh government. The facts show that the Indian industry continues to invest abroad putting at stake larger capital in different countries. Indeed, after seeing a dip in the first year of the Modi government, the FDI outflows have been rising steadily. What does that indicate?

Secondly, the destination of these investments abroad raises a few questions. It is a matter of remarkable coincidence that both the top two sources of FDI and the top two destinations of Indian FDI abroad are the same — Mauritius and Singapore. The FDI flows from Mauritius have been rising and they continue to do so even after the amendment to the double-tax avoidance treaty between the two countries. From $5 billion in 2013-14 to $9 billion in 2014-15 and $8.3 billion in the following year, the FDI flows from Mauritius have maintained their momentum. And in the first nine months of 2016-17, these flows rose to about $13 billion. Singapore too has seen a broadly similar trajectory. Indeed, their combined share in India’s total FDI inflows has ranged between 44 and 55 per cent in the last four years.

The trend for actual FDI outflows to Mauritius and Singapore has been no different. Outflows to these two countries gained momentum particularly last year. From a share of 20 per cent in total outflows in 2013-14, the share of these two countries in India’s total FDI outflows rose to around 29-31 per cent in the first two years of the Modi government and last year it shot up to 58 per cent. Surely, this trend needs to be examined to understand the nature of these outward investments, their genuineness and their sustainability.

Finally, apart from Mauritius and Singapore, three other countries figure in the list of top 10 destinations for India’s overseas investment. These are British Virgin Islands, Jersey and Switzerland. The remaining five countries in that list are the United States, the Netherlands, United Arab Emirates, the United Kingdom and Russia. It is an interesting mix. The temptation to draw easy conclusions from this list of investment destinations should be avoided. But the government can’t sit idle and not examine the nature of at least some of these investments.