By Shivaji Sarkar
These are interesting times, trying times and growth times. But these have pauses. India’s FDI in greenfield projects have risen to $49.3 billion. India cannot rest on laurels, says the Union Finance Ministry. And the end of sops has sent jitters down the foreign portfolio investors (FPI), reveals a tax authorities meeting at the sidelines of G20 meeting in Paris. Quite a scenario, indeed.
The World Investment Report of UNCTAD has come with good news that FPI in greenfield projects have increased by $5 billion investments in 2022 from a previous of $ 44 billion. Apart from a sharp increase in foreign investments in greenfield—or new—projects in India, the report also noted the country was the second-largest recipient of international project finance in the world in 2022. Looks good. But is it really so?
Greenfield projects occupy those areas of land that have minimal to no structure. So, there are no expenditures associated with the clearance of farmlands at the greenfield sites. In short, these are farmlands close to cities and have many strings attached. Farmers have reason to feel concerned as say in the Jewar area of Bulandshahr/Greater Noida in Uttar Pradesh.
The Department of Economic Affairs (DEA) of the Finance Ministry has issued a significant caution in the pre-poll year. In its Annual Review 2023, it says despite growth, resilience in urban demand conditions with higher auto sales, fuel consumption and UPI transactions and rural demand on path to recovery, the pace can be hit by increasing geo-political stress, volatility in global systems, sharp correction in global stock markets, deep impact of El Nino, modest trade activity and lower FDI inflows owing to frail global demand.
“In 2022, emerging market economies (EMEs) remained subdued and volatile as geopolitical uncertainties rose. Global slowdown in investment flows to EMEs led to India’s net FDI inflows dipping in FY 23”, the report says. Despite this it says the GDP growth continued to remain around 7.2 percent. The current account deficit, it adds, is unlikely to improve much and would be sustainable if only “it is financed by normal capital flows”.
Those investment blues have given sharp jitters to the foreign portfolio investors as the Indian and French tax authorities meet in Paris. It has set off alarm bells among FPIs based in France. During the course of the meeting on double taxation avoidance agreement between India and France has led to apprehension among foreign funds that India may soon renegotiate the treaty to eliminate capital gains tax exemption.
Currently, France and The Netherlands have major exemption on capital gains as per treaties with India for share sales. This comes ahead of Prime Minister Narendra Modi’s visit to Paris in the coming week. In 2017, India renegotiated similar tax treaties with Singapore and Mauritius, ending capital gains exemptions. Similar provisions with Cyprus were also removed.
Consequently, many foreign banks and large funds shifted their India equity trades away from Mauritius and Singapore to France, which is the tenth largest source of FPI funds to India. It holds Rs 1.2 lakh crore securities in the Indian market as on May 31. If this happens, the FPI flows would shift elsewhere and the exposure to Indian markets may get reduced.
The UNCTAD report also notes that the inflows into India in 2022 were, however, significantly lower than what was seen in 2020 during the Covid-19 pandemic, during which $64 billion of FDI entered the country.
Still Indian stock markets are zooming to new highs but on the weekend on July 7, Nifty 50 fell for the first time since it has been rising with the HDFC merger. The US rate hikes have weighed on global equities. The Nifty fell by 0.85 percent to 19331 and the BSE Sensex lost 0.77percent at 65280. This in itself may not be an exact indicator, but the US rate rise will have an impact on fund flows to India on many counts.
It has been observed whenever funds flow back to the US, the dollar becomes expensive, gold prices fall and capital flow to the US increases at the cost of the developing world. The rupee may fall again. The caution of the Finance Ministry may not be so cursory as many would like to believe. This looks strange despite the growth statistics not being so dismal. If nothing ails it calls for retrospection as to why a $3 trillion economy wavers. There is a perception strengthened by the Reserve Bank of India that the prices are not softening to the extent it is required. It remains RBI’s concern because rising prices erode the purchasing capacity and lead to a thaw in the growth process.
It is also an indicator that rising capital expenses largely on constructions and rebuilding of structures is not boosting the economy to the desired levels. It has made steel, cement and other essentials expensive, but it calls for a study whether the benefits are percolating down.
TheseFinance Ministry observations could be challenged as well if the GST collections at Rs 1.61 lakh crore are taken into account. It means financial and economic activity has grown. But why is it not seen in manufacturing and other activities? The Purchasing Managers Index also shows improvement. Still economic happiness is not a general trend. But it is said that all that GST collects may not be exact. There are reports of leakage. Or it may be that the refunds that are to be made for GST are also shown as collections. It is a flaw in the system. The monthly figures do not exactly reflect the refunds that GST makes for tax payments.
The greenfield investments that UNCTAD mentions also are not that easy. It is bound in chains of rules and takes time to get released.This requires a deeper look into the Finance Ministry assessments. Its apprehensions are grave. Its pessimism on the international scenario calls for caution. Though it has not spoken of debt burden but that too remains high.
A streak of hope larks in the project capital flows as the World Investment Report says. It is a silver lining that India has to weigh against the geo-political crisis. Despite India taking a lead in world affairs, it has to trudge cautiously to put the economy on fast track overcoming the hurdles.—INFA