Is India's FDI revival over?

After two back-to-back years as the world’s leading recipient of greenfield FDI, India experienced a sharp reversal of fortune in 2017. From $62.3bn in 2016, greenfield investments fell by 60% to $25.1bn in 2017, according to greenfield investment monitor fDi Markets. India’s experience in some way reflects the weakening of greenfield FDI globally in 2017, but the much sharper decline suggests a significantly diminished preference among foreign investors for setting up operations in the country.

Why has this happened? The first years of the reform-friendly Narendra Modi-led NDA government, with schemes such as Make in India, helped draw led foreign investors to the country, who announced big-ticket greenfield projects, especially in 2015 and 2016. India also attracted such investments because it was one of the world’s fastest growing economies, at 8.2% and 7.1% in 2015/16 and 2016/17, respectively. But growth slipped to 6.7% the following financial year, due to a short-term disruption from demonetisation and the introduction of a nationwide goods and services tax.

Slow going

The uncertainties clouding India’s growth outlook may have affected greenfield announcements in 2017. Although the economy has shown signs of recovery since then, private sector investments, both domestic and foreign, remain sluggish.

With the Modi government’s five-year term ending in early 2019, investors are concerned that policy-making is increasingly in election mode. The emphasis is more on loosening the budgetary purse strings for welfarist measures to bolster the ruling party’s chances at the hustings rather than undertaking structural reform to strengthen growth.

The reduction of greenfield FDI announcements in 2017 could also be due to difficulties in doing business on the ground (especially in the various states’s differing regimes), regulatory uncertainty and land acquisition problems. Against this backdrop, many investment plans did not bear fruit or have been deferred indefinitely. Some investors chose to cut their losses and even left the country. Repatriation and disinvestments by foreign investors, in fact, reached a high of $21.5bn in financial year 2017/18, according to figures from the Reserve Bank of India.

Chinese difficulties

The experience of Chinese investors exemplifies the ups and downs of India’s greenfield project cycle. Since 2015, big-ticket greenfield investments have been announced in industrial parks, real estate development, renewable energy, automotives and telecoms. The flurry of announcements for industrial parks, for example, followed an umbrella memorandum of understanding (MoU) signed between India’s Ministry of Commerce and Industry and its Chinese counterpart on June 30, 2014. Subsequently, MoUs were signed with government agencies in the states of Gujarat, Maharashtra and Haryana.

However, most of these parks – involving investments of $20bn – have not been built. Chinese property billionaire Wang Jianlin’s Dalian Wanda made a $10bn commitment to build an industrial park in Haryana in an MoU signed with the state government in January 2016. However, this project has been shelved for reasons that include a dispute over the equity share that Mr Jianlin is prepared to give Haryana. China Fortune Land Development’s MoU with Maharashtra’s City Industrial Development Corporation in September 2016 to build townships with investments of $5bn met a similar fate.

Automotive greenfield projects by Beiqi Foton and Changan Automotive have not materialised either. Beiqi has been contemplating a manufacturing presence in India but has experienced serious delays and frequent change in product plans from commercial to passenger vehicles. It renamed its subsidiary Borgward Automotive India, intending to use it as a base for exporting SUVs to emerging market economies. However, its plans have been deferred for two to three years due to regulatory uncertainty over electrification and changes in fuel standards, according to India’s Economic Times.

Brownfield boom

However, Chinese investors have had greater success in renewable energy projects and assembling smartphones. Along with other foreign investors, they have made big-ticket mergers and acquisitions (M&As) and have funded start-ups to penetrate India’s rapidly growing market. Between 2015 and 2017, the biggest investment deals included the $1.1bn takeover of Gland Pharma by Fosun, while Alibaba invested $1.4bn in One 97 Communications, Snapdeal and Paytm Mall. Tencent also invested $1.1bn in Flipkart and Ola, according to the US-based Heritage Foundation’s China global investment tracker.

More than greenfield, it is brownfield investments that brought the biggest FDI numbers in India in 2017. The biggest deal was Russian company Rosneft’s $12.9bn takeover of Essar Oil, which strengthened ties between the world’s largest oil producer and the world’s fastest growing oil consumer. After abandoning plans for greenfield steel factories in Odisha, Jharkhand and Karnataka, the world’s largest steel manufacturer, Arcelor Mittal, alongside Nippon Steel, is making a $6bn bid to acquire the debt-laden Essar Steel. Crossborder M&As, in fact, amounted to a massive $22.8bn in India in 2017, rising sharply from $8bn in 2016, according to Unctad. This uptick in M&A is likely to continue if the recent $16bn takeover of e-commerce company Flipkart by global retail giant Wal-Mart is any indication.

The disinclination of foreign investors to build greenfield factories, industrial parks and other infrastructure is not good news for the India growth story. Tesla’s Elon Musk, for example, has tweeted about the “challenging government regulation” regarding setting up shop in India. Auto giants such as GM and Volkswagen Group’s MAN trucks choosing to leave the country is another blow, although this has presented an opportunity for China’s SAIC Motor Corp, which acquired a 50% stake in GM India in December 2009. Its subsidiary MG Motors India is in the final stages of acquiring GM’s car facility in Gujarat and is planning to launch two SUV models by 2020.

The sharp fall in greenfield investments, together with record levels of repatriations and disinvestments by foreign investors, explain the 6.6% decline in direct investments to $39.4bn in 2017/18 from $44.5bn in 2016/17.