WHY IS INDIA ATTRACTING A FLOOD OF FOREIGN INVESTMENT?

At a time when the economy is contracting, record foreign investment creates the groundwork for a growth boom, higher employment, and stronger domestic demand.

Over the years, India has suffered from so-called “Hindu growth rates” due to  the political decisions of Jawaharlal Nehru. India's first prime minister was fascinated by the Soviet Union and a supporter of socialism. In India, this socialist economic model was  implemented absurdly by the colonial bureaucracy with a bureaucratic bias. 

As a result, an oasis of licenses, quotas and permits, a system in which bureaucrats commanded and controlled the Indian economy through Byzantine regulations, stifled growth for decades. As the Soviet model began to unravel in 1989, the Indian economy came under increasing pressure.The balance of payments crisis led to  economic reforms in 1991. After that, India experienced a steady growth of more than 5% per year until 2019. 

During the COVID-19 pandemic, this growth stagnated. In the first quarter of India's fiscal year, which begins  April 1, the economy shrank by a record 24%. Forecasts predict it will continue to shrink, although the pace of that decline will slow significantly over the next two quarters.That contraction has left little  room for a government focused on redistributive policies and fiscal austerity. This fixation is a thing of the past. 

Historically, the Bharatiya Janata Party (BJP) has been more pro-market than other political parties. In fact, the BJP broke new ground in the early 2000s, targeting and achieving a growth rate  of more than 8% when Atal Bihari Vajpayee was prime minister. Despite this strong growth, the BJP lost the 2004 elections.

Foreign Investment  Record  

BJP has not forgotten the defeat of Vajpayee. Prime Minister Narendra Modi, in particular, learned an important lesson and focused on serving the masses. As a result, the government  focused on redistribution and taxation. This led to growth inhibition. In 2018, the Modi government launched so-called Sanatien socialism, policies that woo the poor through financial transfers and private  services.This strategy was confirmed in 2019 by a spectacular election victory. 

Today, COVID-19 poses new challenges to the economy and politics of socialism Sanata. The growth slowdown in India is stronger than in other emerging markets. The opposition is raising the bar and  blaming the government. Some business leaders are questioning the government's containment strategy.This puts the BJP on the defensive economically. 

But even during such a growth shock, foreign direct investment (FDI) and foreign portfolio investment (FPI) flow to India. Surprisingly, foreign direct investment has reached record levels. In the first five months of this fiscal year, $35.7 billion was disbursed to India.The REIT's numbers are also the highest on record. In November, foreign investors poured $6 billion into Indian stock markets, beating  Taiwan and South Korea.

Three main facts explain this influx. First,  US and  Gulf companies bought large stakes in Reliance Industries, India's largest conglomerate. They  also buy shares in Indian companies. Therefore, they focus on future growth. 

Second, the Production  Incentive Program (PLI) is growing in popularity.PLI's goal is to boost electronics manufacturing in the country. So far, India has been too dependent on China. Current tensions along the border have prompted India to change course and offer financial incentives to companies producing domestically. Players like Samsung, Pegatron, Foxconn, Wistron and AT&S have responded positively to the PLI. 

Third, global companies can diversify their supply chains to reduce the risk of producing exclusively or mainly in China.This strategy of using alternative supply chains to China is commonly referred to as China Plus One and India can benefit from it. 

Modi  doubled its lead. More than $6 trillion in sovereign wealth funds, pension funds and wealth management organizations  attended a summit hosted by the Prime Minister in the first week of November. In addition to Modi, Indian business leaders such as  Reliance Industries Limited's Mukesh Ambani, Tata Group's Ratan Tata  and  Housing Development Finance Corporation's Deepak Parekh have targeted these investors. Further foreign investments could soon follow.

What awaits us? 

When investment flows, what is the impact on the Indian economy? First, India will see explosive growth in three to four quarters. Private investment has been weak in recent years due to the banking crisis. Indian banks lent large sums to large borrowers who had neither the intention nor the ability to repay their debts.That meant  they had neither the money nor the inclination to lend to honest companies. There was a credit crunch, investment suffered, and so did growth. Rising foreign direct investment will reverse this trend and boost growth as investment resumes. 

Second, India will see an increase in employment due to the increase in foreign direct investment. The entry of new players and the revitalization of older players will lead to an increase in employment.The government has already introduced sweeping labor market reforms to encourage manufacturing and other labour-intensive activities. 

Third, increased employment can stimulate domestic demand and increase growth rates. These could materialize by fiscal year 2022/23, just in time for the next general election. The influx of FDI now could increase the BJP's chances of re-election in 2024. 

Finally,  record FDI frees the Modi government to pursue geopolitical goals.With cash flow coming  from friendly economies, the government limits economic involvement with nations hostile to India, particularly in key sectors such as energy, telecoms and roads. The move is primarily aimed at Chinese and possibly Turkish companies and could benefit European, American and East Asian companies headquartered in Japan, South Korea and Taiwan.

The radical change in the state of the world economy is reflected in India's new economic strategy. The period after 1991 is over. Countries are combining politics and business once more, much as they did during the Cold War.