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Informist, Thursday, Feb. 27, 2025

MUMBAI – Strengthening credit market, policy framework as well as reducing trade restriction are key priorities that the government must undertake to attract private investments into India, according to a report by the International Monetary Fund on Thursday. "While the expected rebound in net FDI inflows is projected to cover more than half of the current account deficit over the medium term, the compression of net FDI inflows in 2024/25 warrants further structural reforms and improvement of the investment regime to promote FDI," the report said. 

The report also said that structural improvements — such as judicial, business regulation, and credit market reforms — can play an important role in boosting private investment. Additionally, reducing trade restrictions is important in particular to incentivise foreign direct investment.

"Economic policy uncertainty can be a drag on investment through fewer new project announcements and more abandoned projects. At the state level, business climate reforms lead to higher manufacturing investment, while higher labor force participation, more trade openness, and better education attainment also predict investment growth in this sector," the report said. 
 

The report pointed out that private placement in India is above 20% of its GDP, which is above the 16.7% median across emerging market economies and 18.2% median of G20 emerging markets. India alignes with the 75th percentile in these groups. However, the report said that per capita private capital stock of India remained only around one-third of the median among these groups. 

The report said that private corporate investment post the COVID-19 pandemic has been lower compared to historical averages, as the recovery was driven by household consumption and public sector investments. Corporate investments in machinery and equipment necessary to expand production in the economy has been weak, dropping to 4.3% of GDP in 2022-23 (Apr-Mar) compared with an average of 5.9% between FY12 and FY16 and 3.9% in FY21. Additionally, nominal corporate investment growth has decelerated to 13% in FY24 from 21% the previous year. The report said, the Reserve Bank of India in 2024 "documents a more favorable dynamic based on investment projects sanctioned by banks and financial institutions, but excludes self-financed investments."

The fall in net foreign direct investment in India has been more profound compared to other economies, dropping to 2% in 2023 from nearly 6.5% in 2020, the report said. "Net FDI diminished considerably over recent years (and turned negative in Jul-Sept 2024), in part reflecting repatriation and profit-taking by firms taking advantage of favorable valuations, as well as increasing outward FDI by Indian entities," the report said.

The report further said that financial health of most Indian corporates has not been firm with only 52% firms reporting higher profitability in FY23 compared to 57% in FY19 and 59% of them showing higher interest coverage. However, despite moderation in capacity utilisation in manufacturing, investment apetitite in services and infrastructure sectors is expected to increase, the report said. 

The model of the bilateral investment protection treaties envisaged in the draft 2025/26 Budget should accelerate renegotiation of the treatis with economic partners. This could help attract FDI, the report said. The treaties, coupled with reinforcing the network of double taxation avoidance agreements, and simplification of approval procedures for investments from landbordering countries should help attract FDIs. The recent lifting of FDI limits for the space industry and their elimination for the insurance sector proposed in the draft budget can help promote FDI as well. "External sector reforms, particularly lowering non-tariff restrictions, can boost inward FDI by almost 10% in the medium term."  End

Reported by Srijita Bose

Edited by Deepshikha Bhardwaj

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