Digital India sectors attracting flow of foreign funds in big way

While FDI inflows into ‘Make in India’ industries have increased, the export focus of the campaign seems to have been diluted in favour of the Digital India sectors, suggests a report by brokerage firm Emkay Global.

The report, published on Wednesday, also adds that while recent media reports have said that India has outstripped China in terms of FDI, this is a limited view. In fact, China’s gross FDI inflows are far higher than India’s.

While $5.3 billion flowed into the computer software and hardware sectors between December 2013 and June 2015, only $1.1 billion entered the construction sector in the same period, the report finds, based on data from the Department of Industrial Policy & Promotion (DIPP) and the United Nations Conference on Trade and Development (UNCTAD).

In addition, the report states that although FDI inflows into the automobile sector — a pillar of the Make in India mission — have been growing, the trends suggest that they have been focussing more on domestic demand rather than on export growth.

“While the automobile industry has been considered as an important driver of the ‘Make in India’ campaign, evidence suggests that most of the FDI flows, both historically and recent, have been aided to capture domestic demand rather than exports, diluting the essence of the campaign,” the report said. The argument made by the report is that although FDI in the automobile sector has been growing reasonably healthily, the effect of this increased investment has been felt more in boosting domestic sales rather than in bolstering exports.

The report says the same trend can be seen in the computer hardware and software sectors. While these sectors have seen a substantial rise in recent FDI, this has not translated into a commensurate increase in exports. “The profile of recent FDI flows… is indicative of investments done to tap the domestic household consumption rather than catalyse exports,” the report said.

This does not take into account the gloomy demand scenario in the global economy, which has led to Indian exports dipping across sectors. The report added that sectors that have historically generated employment such as construction, have simultaneously seen a sharp decline in their percentage contribution to FDI inflows.

Regarding the recent media reports saying India has surpassed China in terms of FDI, the Emkay Global report says that such an assertion may have been made on the basis of “truncated data”.

“Net FDI flows into China (inflows less outflows) averaged around $1 billion for the 12 months ending August 2015, much lower than $2.9 billion for India. While truncated data like these may have prompted some to conclude that India trumped China, if we consider only the inflows (gross inflows), China has consistently maintained a monthly average of around $10.5 billion, nearly 3.6 times of India’s $2.9 billion,” the report said.

The reason behind the confusion, the report says, is that China’s FDI outflows far outstrip India’s, and so a metric measuring inflows minus outflows and comparing countries on the basis of that difference is an incomplete indicator of investment activity.

Source: The Hindu
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