Slump in New Investment Plans

Slump in New Investment Plans

Context:

New investment plans in the country dropped to a 20-year low in the April-to-June quarter, with only ₹44,300 crore of fresh outlays announced by corporates.

Relevance:

GS-03 (Economy)

Key highlights:

  • Comparison with Previous Quarters: The first quarter of 2023-24 recorded new investment announcements of nearly ₹7.9 lakh crore, while the previous quarter (January-to-March) saw outlays worth ₹12.35 lakh crore. The last year had total investment announcements worth ₹27.1 lakh crore, the second highest in 10 years.
  • Wait-and-Watch Mode: The slow start is attributed to a “wait-and-watch” mode among industries, despite steady economic growth, according to Bank of Baroda chief economist Madan Sabnavis.
  • Historical Low for April-June Quarter: This April-June quarter’s investment announcements are exceptionally low compared to the usual trend for this period.
  • Election Year Impact: Although the first quarter tends to have lower investment due to the Lok Sabha elections, the current tally is significantly lower than corresponding quarters during the election years of 2014 and 2019.
  • Pending High Investment Announcements: The slowdown is also linked to high investment announcements in the last two years that have not yet been fully executed.
  • Sector-wise Investment: Within the ₹44,300 crore announced, manufacturing dominated with a 46.4% share, followed almost evenly by electricity and services sectors.
  • Corporate Bond Issuances and Bank Credit Flows: There is a corroborated trend of slowing investment plans, with corporate bond issues falling sharply from ₹2.86 lakh crore in the first quarter of 2023-24 to ₹1.73 lakh crore in Q1 this year. Incremental bank credit between April 1 and June 14 was ₹2.78 lakh crore, down from ₹3.78 lakh crore last year, with growth slipping to 1.7% from 2.5%.
  • Significant Dip in Transport Services Sector: The major dip in investment announcements over the period between June 2023 and June 2024 was in the transport services sector, accounting for 61% of the fall, linked to the airline industry’s plans to buy new aircraft announced last year.

FDI in India:

  • Between April and August 2020, India witnessed a historic FDI inflow of USD 35.73 billion, the highest ever for the initial five months of a financial year. This surge occurred despite a 23.9% contraction in Gross Domestic Product (GDP) during the first quarter (April-June 2020). Comparatively, FDI inflows for this period in 2020-21 were 13% higher than the same period in 2019-20.
  • However, Foreign direct investment (FDI) inflows in India fell 13% to $32.03 billion in April–December 2023, due to lower infusion in computer hardware and software, telecom, auto, and pharma sectors.
  • The net FDI in India (inflows minus the outflows) also declined to $13.54 billion in April–November 2023 from $19.76 billion in the same period in 2022. The reasons for this fall include global inflows falling and an increase in repatriation of equity capital.
  • The total FDI inflows in the country in the FY 2023–24 is $17.96 billion, and total FDI equity inflows stands at $11.54 billion.
  • The top 5 countries for FDI equity inflows into India FY 2023–24 are Mauritius (26%), Singapore (23%), USA (9%), Netherland (7%), and Japan (6%).

FDI Routes and New Policies:

  • FDI in India operates through three routes: the Automatic Route, the Government Route, and a combination of both.
  • While the Automatic Route allows for FDI up to 100% without prior government approval, the Government Route mandates approval.
  • The government has introduced new policies, such as allowing 100% FDI in insurance intermediaries and imposing restrictions on investments from countries sharing a border with India, aiming to streamline and regulate foreign investment inflows.