Eye FDI, just macro tweaks won't do

Last Saturday, speaking at ET Awards for Corporate Excellence in Mumbai, Nirmala Sitharaman alluded to the role of non-macroeconomic factors determining FDI flows and GoI's readiness to address them. Well-established drivers of FDI are location, political risk, governance, regulatory burden, institutional capacity, infrastructure and communication, technological readiness, human capital, openness to trade and cultural alignment. This list is not exhaustive but indicates the scale of structural adjustment needed to improve an economy's attractiveness to FDI. External factors shaping FDI flows include globalisation, geopolitical stability, supply chain resilience, digitalisation and sustainability. The scope for host economies to tailor their policy responses to these external influences is considerable.

Globally, FDI trends are turning adverse for EMs with global growth being driven by inflows to developed economies. Sectorally, cross-border investments are converging on AI infra, with the US emerging as the largest source and recipient of FDI. Ticket size is rising with half of the total investment value concentrated in deals of over $1 bn. International project finance and overseas acquisitions are declining. Headline growth overstates recovery of global FDI, which requires revival of physical investment.

India has taken strides over non-economic determinants of FDI. But it still has a middle-of-the-road performance relative to other EMs. It is drawing strong FDI inflows, which is being netted out by rising profit repatriation. Policy has identified capital-intensive high-tech data centres as a FDI driver. Export incentives in industries like mobile handsets have plugged into supply chain readjustments. There's scope to extend its runaway success to consumer electronics. Aggressive plans to scale up alternative energy is another continuing theme. Policy improvements to make doing business easier and proactive engagement with trends shaping global FDI flows should sustain inflows. Measures to discourage outflows are needed.