No strong role of FDI in India's capital formation, GDP: Deloitte

Over the last five years, net capital inflows contributed about 4 per cent to the total gross capital formation (GCF), suggesting that domestic investments, funded by domestic savings, accounted for the remaining 96 per cent, said Deloitte’s ‘India’s FDI opportunity: Through an investor's lens—a survey report’.

Even during the pandemic, foreign direct investment (FDI) has poured into India at record levels. In fiscal 2020-21, FDI inflows, including equity, re-invested earnings and capital, amounted to a record $81.72 billion, 10 per cent higher than the previous fiscal.

According to the United Nations Conference on Trade and Development (UNCTAD), the Indian information and communication technology (ICT) and construction sectors were large recipients of FDI, making the country the fifth largest recipient in the world in the past year.

Multinational corporations (MNCs) have targeted strategic partnerships with leading domestic business groups, driving a surge in cross-border mergers and acquisitions (M&As), up by 83 per cent to $27 billion, with major deals in the technology and health sectors.

Deloitte created three scenarios with different assumptions for growth and inflation under which India can reach the target of $5 trillion. It defined two likely scenarios of high growth with high to moderate inflation expectations, and a third scenario of low growth and low inflation.

In addition, it estimated the level of gross fixed investment that India requires, and the scale of foreign capital required to meet the investment gap.

In scenario 1 with high growth-high inflation, after robust growth in the first two years, real GDP growth declines. The annual average growth rate is assumed to be 7 per cent with the annual average inflation rate at the upper end of the 4-6 per cent target range. Strong growth results in a gradual currency depreciation.

In scenario 2 with high growth-moderate inflation, which is highly likely, real GDP growth moderates after the first year but remains stable. The annual average growth rate is assumed to be at 6 per cent with the annual average inflation rate hovering around the mid-point of the Reserve Bank of India’s target range (close to 4 per cent). Healthy growth results in modest currency depreciation.

Scenario 3 with low growth-low inflation (which has a low probability) foresees sluggish real growth over the next decade. The annual average growth rate is assumed to be 4.5 per cent with the annual average inflation rate hovering slightly below the mid-point of the target range. Poor growth results in sharper currency depreciation.

India’s capital-output ratio has significantly declined over the past decade, suggesting higher capital productivity. Assuming the capital-output ratio remains range-bound at around its decadal average of 0.33 under all three scenarios, India will require total GCF averaging $1.3 trillion each year to achieve the target of $5 trillion in each of the three scenarios.

Cumulatively, India will need at least $7.8-10.9 trillion of GCF over the next six to eight years under scenario 1 and 2, and more than $13 trillion in the next decade under Scenario 3 to reach the scale of $5 trillion, the Deloitte report said.

The past decade of strong growth has resulted in a savingsinvestment ratio of around 0.96, owing to high investments and declining savings. Deloitte expects a similar trend in the years ahead.

The savings rate has declined since the onset of the pandemic. Once the economy revives, pent-up demand will accelerate consumer spending and draining savings further. At the same time, investment will accelerate to meet the demand recovery after a prolonged period of stagnant growth.

As a result of these dynamics, Deloitte expects domestic savings to fall short of meeting investment requirements.

To reach the target sooner, India will have to direct a larger proportion of foreign investment into capital formation, such as green-field projects. Under the first of the two scenarios, India will need to cumulatively attract foreign investment of $395-435 billion towards capital formation over the next six to eight years.

This translates into an annual average of at least $55–65 billion of foreign capital required for capital formation at a sustainable pace, the report added.

Fibre2Fashion News Desk (DS)