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Economy

Foreign investors shun India amid Trump, Brexit and elections

Failure to relax land and labor rules also stymies foreign direct investment

A car wiring assembly line on the outskirts of New Delhi: Some analysts think FDI growth could pick up again.   © Reuters

MUMBAI -- Foreign direct investment in India is being suppressed by global economic uncertainty and the failure of Narendra Modi's government to make doing business in the country easier, new data suggests.

FDI fell to $33.49 billion in April-December 2018, from $35.94 billion a year earlier, according to the Department for Promotion of Industry and Internal Trade. After hitting a record high of $46.4 billion in 2016, FDI came to $40 billion in 2017 and $38 billion in 2018.

Analysts are blaming global factors including Brexit and U.S. President Donald Trump's protectionist policies, along with the delays in policy implementation and looming general elections at home.

Although these factors may be temporary, economists said the concentration of FDI in certain sectors such as telecommunications and services also signals weakness in manufacturing investment. In addition, some economists warned that investors are divesting at an unsustainable rate.

In the first nine months of the financial year starting in April 2018, the services, computer hardware and software, chemicals, telecommunications and trading sectors accounted for nearly 65% of total FDI equity inflows, according to CARE Ratings estimates.

Technopak Advisors Chairman and Managing Director Arvind Singhal said investors were not as optimistic generally as two to three years ago and this is reflected in the way they treat India. He also blamed tight restrictions in the country: "India is receiving investments in concentrated sectors because in many sectors there are too many conditions."

Singhal added: "For example, multibrand retail [supermarkets] could've attracted $10 billion to $15 billion a year alone if not for restrictions because the consumption story in India is so strong."

The government has been sending more unwelcome messages. In February, it banned deep discounts and blocked e-commerce platforms, such as Walmart-backed Flipkart and Amazon, from selling products through local companies they own, a move seen as trying to win over domestic retailers ahead of the elections.

In some manufacturing sectors, according to India Ratings Principal Economist Sunil Kumar Sinha, investors had expected the government to relax rules around land acquisition and labor laws but those promises have not been acted on.

"Look at how nothing has been realized from big-ticket announcements by ArcelorMittal and [South Korea's] Posco. All these make foreign investors less optimistic about bringing in money via FDI," Sinha said. "Also the World Bank reading shows that India has climbed up in the Ease of Doing Business Index but the reality on the ground is different, and these rankings are mostly based on two- or three-city samples. In smaller cities, things are different."

Both ArcelorMittal and Posco had called it quits on investments totaling around 800 billion rupees before. India moved to 77th place in the World Bank's Ease of Doing Business index in 2018, up 53 places in two years. It now aims to be in the top 50.

The Institute for Studies in Industrial Development also pointed out that the high rate of repatriation versus FDI flows, through sales of shares or goods and services to the country of origin, does not benefit domestic industry.

Divestment increased 39% in the April-December term, according to an analyst at the institute, K.S. Chalapati Rao. He said: "This is going to be a big problem as surplus is being extracted and it is draining out resources from the country." He attributed the practice mostly to private equity companies that invested in Indian companies.

However, CARE Ratings said that an improvement in the global economy could make emerging markets a favored destination for foreign investment again.

"India would also be able to reap the benefits of [the] improved business environment," it said in a note. "We are expecting that FDI equity inflows will be around $38 billion to $40 billion in fiscal 2019."

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