FDI: India remains top destination
16, Aug 2018
Prelims level : Mains level : Paper- III Indian Economy
Why in news?
- India remains a preferred destination for foreign direct investment (FDI) as domestic consumption remains strong, according to the RBI Annual Report.
- India received $37.3 billion capital inflow in 2017-18 as compared with $36.3 billion in the previous fiscal. During the 2015-16, the country received $36.06 billion.
- With manufacturing sector gathering momentum, helped by both services and agriculture sectors, consumption demand remains robust in the country making it an attractive investment destination.
- Manufacturing activity is gathering momentum on the back of new business, both domestic and export orders, rising capacity utilisation and drawdown of inventories.
- In the services sector, the impulses of growth are broadening and expansion in employment conditions is generating anticipations of improvement in demand conditions.
- The increase in foreign capital flow was mainly due to higher flows into the communication services, retail and wholesale trade, financial services and computer services.
- In terms of sources, FDI inflows were concentrated mostly in Mauritius and Singapore that accounted for about 61 per cent of total equity investments. This was despite the phased implementation of an amended double taxation avoidance agreement with these countries effective from April 2017 to prevent evasion of taxes on income and capital gains.
- With the ongoing policy reforms in sectors ranging from single brand retail trading, civil aviation, real estate broking service and simplification of legal and regulatory system, India moved into the top 100 countries in the World Bank’s Ease of Doing Business global rankings.
- According to the UNCTAD’s Investment Trends Monitor (2018), India was the 10th largest recipient of global FDI in 2017 and remained the topmost destination for greenfield capital investment — even ahead of China and the US.
Highlights of RBI’s Annual Report:
- The counting of demonetised notes is complete. RBI said that Rs 15.31 lakh crore has been returned. That is 99.3 percent of the 15.41 lakh crore of old Rs 500 and Rs 1,000 notes that were in circulation as on 8 November 2016.
- The new currency notes are susceptible to counterfeiting, just as the old ones were. There was a jump in the number of fake notes detected for the new Rs 500 and Rs 2,000 notes, as also for the Rs 50 denomination. However, the overall number of fake currency notes detected fell to 522,783 pieces in 2017-18 compared to 762,072 pieces a year ago. That amounted to Rs 23 crore of counterfeit notes in 2017-18, half the value of what was detected a year earlier.
- Demonetisation hasn’t succeeded in pushing people away from cash. RBI data shows that in 2017-18, households added currency worth 2.8 percent of gross national disposable income (GNDI). That was because there was dis-saving of cash to the extent of 2 percent the previous year. Overall, household savings in financial instruments also rose to 11.1 percent of GNDI.
- Despite the increased cash holding and currency in circulation, demonetisation has boosted digital payments. In 2017-18, non-cash transactions rose 45 percent by volume and 29 percent by value.
- After the Punjab National Bank fiasco, the value of frauds in the Indian banking system has expectedly risen to Rs 41,000 crore in 2017-18. However, the number of cases has also jumped to 5,835 in FY18 from an average of 4,500 over the past 10 years. State-owned banks accounted for 93 percent of the frauds.
- At the end of March 2018, twelve out of every Rs 100 lent by Indian banks had turned sour. The annual report said that this number is only expected to increase by the end of the current financial year. It is not entirely unexpected. The power sector is in a mess and estimates from external agencies suggest it could add as much as Rs 1.7 lakh crore (or about 1.7 percent of bank credit) to banking sector bad loans.
- The annual report projects GDP growth of 7.4 percent for fiscal 2019-20. That is unchanged from the August monetary policy statement. This growth will be driven by three engines of the economy – consumption (both rural and urban), investment and exports, the report said.
- There was an increase in the flow of financial resources from banking to the commercial sector in fiscal 2017-18. Banks accounted for 43 percent of all fund flows to the commercial sector in 2017-18 compared to 26.7 percent a year earlier. Credit growth follows economic growth and there is scope for credit absorption. But for that, the bad loan problem has to be tackled and (public sector) banks sufficiently recapitalised.
- RBI’s inflation outlook, too, is unchanged from the 1 August monetary policy statement. It projects retail inflation at 4.6 percent in July to September 2018; 4.8 per cent in October to March and 5 percent in the first quarter of the next financial year.