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FDI / ECB / FPI To touch USD 200 bn in 2022-23

"If you want to soar like an eagle in life, you can't be flocking with the turkeys. Eagles don't need turkeys to tell them how the top of the clouds looks like. Are you flocking with eagles or with turkeys ?"
  • British took from India was close to $45 trillion in today’s monetary value. And India shall become a 45 Trillion USD economy by 2040. 
  • How are you contributing to this Indian Growth story ? 
  • India is expected to attract a USD 200 billion FDI / ECB / FPI inflow in 2022-23.
  • Are you preparing your firm to ride this growth story with the required internal structures, organization and capability to raise cheap capital from abroad ? 
  • Einstein once said nothing happens until something moves. 
  • Are you moving your organization towards future glory or stuck in inertia ?
  • At SFO we put our heart and soul to make you FDI / ECB / FPI ready. 
  • Our loans come at a cheap cost of 3.15 % which includes hedging cost. 
  • We are the wind beneath your wings. Grow fast and fly fast with us. 

  • India needs at least $100 billion of foreign direct investment (FDI) and 50 Bn of ECB and 50 Bn of FPI every year to reach its target of a $5 trillion economy from the current $2.7 trillion.
  • The major chunk of this FDI / ECB / FPI is going to come from the United States. India needs to grow its economy from the current $3.1 trillion to $5 trillion. It will need a lot of FDI / ECB / FPI coming in — at least $100 billion dollars a year to fuel that growth.
  • India, needs to look at what it needs to do to get that FDI / ECB / FPI coming in and have the technology coming in, to fuel this growth.
  • India is one of the fastest growing economies and is currently ranked as the world’s seventh largest economy with GDP of $ 3.1 trillion and world’s third largest when the GDP is compared on the basis of Purchasing Power Parity (PPP) at $ 10.51 trillion.
  • Indian economy has been on a fast growth trajectory since 2014. India was $ 1.7 trillion economy in 2014 and over the five years in 2019 India has become $ 2.7 trillion economy, having added $ 1 trillion in just last five years has inspired the country to become $ 5 trillion economy by 2024-25.The International Monetary Fund’s (IMF) recent projection suggests India’s GDP will touch about $ 4.7 trillion in 2024.
  • To achieve the above said objective India needs to grow at 8 percent per annum and increase its exports by $ 1 trillion. 

India will be a $42 trillion economy by 2050?

  • In January 2015, when Prime Minister Narendra Modi laid out his plans to transform India into a $20-trillion economy from a $2-trillion one currently, the idea was perceived by many as a bit too ambitious. While Modi promised reforms in areas such as taxes and subsidies in addition to transparency and efficiency in governance and said that setting up of the National Institution for Transforming India (NITI) Aayog is just one of institutional reforms that will unfold. On the other hand, critics cited the country’s huge reliance on agriculture, which in turn depends on the vagaries of the monsoon, inadequate infrastructure that continues to be in shambles. Besides these reasons, high level of corruption is another factor that will thwart the very purpose of painstaking reform measures.
  • However, just a month later in February, PwC in its ‘ World in 2050’ report said that India, along with China, will be the world’s leading economy by 2050, while Japan, South Korea and Australia will slip in terms of rankings among top global economies. According to the report, Indian economy will surge to $17 trillion in 2030 and $42 trillion by 2050, claiming second place ahead of the US (which will touch $41 trillion) and will comfortably overtake the EU and the US in share of world GDP (in PPP terms) by 2044 and 2049, respectively. PwC also stated that Indian economy will expand by an average annual rate of 6.4% from 2014 to 2020, remaining faster than China after 2020 owing to its younger population and a greater scope for catch-up growth.
  • This perspective was echoed by Subhash Chandra Garg, World Bank’s executive director for India, Bangladesh, Bhutan and Sri Lanka. According to Garg, India has the potential to become a multi-trillion dollar economy with a per capita income of about $40,000 by 2050.
  • India, currently, enjoys three major economic attributes that are also seen as factors that will provide a leg-up in the country’s journey to a global economic powerhouse-favourable demographics, its status as one among the world’s largest democracies and a preponderance of English speakers, which helps ease business dealings with the West.
  • Among these, demographics is especially seen by many as a significant factor-the country will soon dwarf the rest of the world when it comes to its working age population, that is people between 18 and 65 who are contributing members of society. Compared to North America, Japan and even China, India is an exceptionally young country. The majority of its population is less than 30years old and by 2020 the average age will be 29, compared to 45 in Western Europe and 48 in Japan.
  • But, is transforming India to a $42-trillion economy is going to be a cakewalk? Even the most euphoric sympathisers of Modi wouldn’t agree with this.
  • For one, to reach a size of $20 trillion by 2030 and $42 trillion by 2050, India will have to grow at 7% annually for the next 30–35 years, which seems likely. Besides, the country’s growth would require sustained economic reforms and increased investment in infrastructure, institutions and mass education. The country will also have to transform its agriculture completely, grow its services and manufacturing sectors and give a boost to tourism.
  • A key challenge will be to get people out of agriculture and use them in the manufacturing and services sectors, while also ensuring that agricultural production in the country increases. Improved prospects of infrastructure will especially remain crucial to ensure the success of ‘ Make in India ‘ initiative-which is aimed at attracting businesses and investors from around the globe to transform the country into a key global manufacturing hub.
  • Also the services sector need to be further strengthened-the percentage of the population working in the services sector needs to be enhanced significantly from 55% currently.
  • No growth prediction can skip the role of Indian Railways, the largest employer in the country. Railways can boost the country’s GDP by 3% if the government manages to expand the rail network by 40,000 kilometres.
  • Along with eradicating corruption, which has emerged as one of the largest crippling factors that damage any reform measure, efforts are also needed to eliminate bureaucratic red-tapism and slow decision making. To achieve this, PM Modi’s idea of ‘more governance; less government’ should be implemented religiously.
  • Attracting foreign capital will continue to remain one of Modi’s key challenges in leapfrogging India as a top global economy. Besides enhancing reform initiatives, cleansing the country’s image as an increasingly intolerant regime when it comes to ensuring religious plurality. Apart from this, even freedom of expression will be crucial.
  • Committed and sustained policy as well as economic reform initiatives to enhance IT, telecom, education and healthcare will also be important factors to transform India first to a $20 trillion economy by 2030 and eventually to a $42-trillion economy by 2050.

How can foreign investors and OCIs play a pivotal role in achieving India’s USD 5 trillion economy target?

  • Currently, the sixth-largest economy globally, India, is now a USD 3.1 trillion country. It is forecasted to become the third-largest in 2031, according to the Centre for Economics and Business Research (CEBR). This significant increase is the result of steady growth primarily helmed by the sheer size of the country and the quantum of its population that has been driving local consumption as the nation continues to urbanise at a faster pace.
  • Prime Minister Narendra Modi is spearheading the country towards his highly-ambitious target to become a $5 trillion economy by 2025. Current growth levels may still be enough for the country to sustain the world’s fastest-growing economy tag, to reach USD 5 trillion? 

Are the current revival methods enough to reach India’s ardent economic target?

  • With a cumulative value of INR 34.5 lakh crore and growing, the fiscal stimulus is the Indian government’s CPR to resuscitate a pandemic affected economy. This amount, which has been up by 19% since last year, is a direct contributor to India’s mounting fiscal deficit, which has reached a record high of INR 18.49 trillion, nearing one-tenth of the nation’s GDP.
  • Additionally, India’s social welfare spending has exponentially increased. This year’s budget saw a 35% increase in capital outlay bringing the government’s spending to INR 7.5 lakh crore.
  • While this is necessary, much more is required to finance Smart Cities, Urban, Physical and Digital infrastructure projects. This does beg the question, is the Indian entrepreneur doing enough to raise their game to add value to the economy? Are we optimally utilising our private sector? Can we get more foreign investors? Can India’s OCI community be somehow leveraged to bolster development?

How can India strengthen its development strategies?

  • The most apparent source of external income is Foreign Direct Investment. Since the advent of the Narendra Modi government, FDI has grown at a progressive rate to reach USD 81.72 billion – currently, one of the largest inflows in the world. However, India continues to lag behind China, the USA and even Singapore, which receive more FDI than India despite being relatively mature economies with a slower pace of growth.
  • Unlike these nations (except China), India has an invaluable resource that is perhaps not optimised enough. India has 32 million overseas Indians, out of which there are 6 million OCI cardholders. This group, considered one of the richest globally, continues to have strong ties to the homeland. Key incentives and policy changes aimed to create a mutually beneficial association can hit the right trigger point for the group to invest more in India and leverage their international connections to induce foreign investors to invest in India.
  • In the FY 2022-23 budget, Finance Minister Nirmala Sitharaman sought to create a holistic environment that promotes ‘ease of business’ as well as ‘ease of living’. This welcoming narrative, coupled with positive policy changes, can excite more OCIs and foreign investors to invest in India. Investing in a new market requires capital, international expertise and time – and while foreign investors have no dearth of the former, the Indian administrative and taxation ecosystem leaves them with a paucity of the latter.
  • To further boost FDI, the government needs to bring reforms in personal taxation. Foreign investors/OCIs are sensitive to personal taxation norms regarding their global income being taxed if they stay for extended periods to tend to their investments. Currently, they get taxed on their global income if they exceed their stay in India beyond a specified limit. Since this limit is not enough for anyone to set up and nurture a new venture, it acts as a significant deterrent to any incremental increase in investment.
  • This policy change is a proven remedy to increase FDI. Its merits are most apparent in the economic growth of Singapore and China, both of which have seen an exponential increase in their FDI since they adopted these policies. This has also led to cities in these nations becoming the preferred choice for regional headquarters of global conglomerates – a feat that most Indian cities have not achieved despite the country being one of the largest open markets in the world.

Moving Forward

  • The Indian administration has been very progressive and responsive to those who support their vision to make India a Global Economic Leader. Liberalisation of residency norms, personal taxation norms, ease of doing business and ease of living, with policy checks & balances built-in, together can help create a holistic ecosystem. This would help grow the economy and augment the Indian exchequer through boosted investment and an increase in direct and indirect tax collection, while also creating job opportunities on a large scale, thereby bringing the country closer to achieving its economic target.

India just made it easier for companies to borrow money from overseas

  • All companies that are eligible for foreign direct investment can now raise funds from overseas creditors under the automatic route.
  • More importantly, all sector-wise limits have been scrapped, with a blanket overseas borrowing cap of $750 million on an annual basis for all companies.
  • The move is expected to alleviate a domestic liquidity crisis, and prop up the rupee by attracting more foreign funds to Indian markets.
  • Following pressure from the central government, the Reserve Bank of India ( RBI) has further eased norms that govern the borrowing of overseas funds by domestic entities.
  • This, in turn, will allow companies to support their expansion plans and also sustain GDP growth.
  • In addition to banks and financial institutions, all companies that are eligible for foreign direct investment can now raise funds from overseas creditors under the automatic route. Even NGOs, port trusts and cooperatives have been allowed to take advantage of this fundraising mechanism.
  • The RBI has also done away with the original four-tiered system of borrowing, which categorises bonds based on maturity time, and divided the scheme into two segments- one for rupee-denominated bonds and one for bonds in all other currencies.
  • More importantly, all sector-wise limits have been scrapped, with a blanket overseas borrowing cap of $750 million on an annual basis for all companies. In addition, the minimum term limit for all instruments has been set at three years.
  • India would have to record a credit growth of at least 15% to sustain economic growth. Credit growth came in at a 12.5% on a year-on-year basis.
  • India’s shadow banks, which have stepped in to fill the funding gap in the last few years, are also raising capital abroad.
  • Not only will the easier overseas borrowing norms allow India’s commercial banks to raise funds from abroad to support their domestic lending operations, but it will also enable companies to raise their own debt from overseas investors without having to turn to domestic banks.
  • The RBI has, however, decided to retain some curbs on the overseas borrowing programme. Companies cannot raise debt from overseas through this route for the purpose of real estate purchases, investment in domestic equity markets and the repayment of rupee-loans. In addition, the cap on all external commercial borrowing will continue to be 6.5% of GDP .

 

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