It is good to note that the International Monetary Fund (IMF) has revised upward India’s economic growth projection for 2023 from 5.9 percent to 6.1 percent. The projection is still well below the Reserve Bank of India’s economic growth forecast of 6.5 percent. The revised IMF estimate will help India retain the ‘fastest growing major economy’ tag for the current fiscal. The IMF forecast for China is unchanged at 5.2 percent for 2023.
However, India’s economic growth story seems to have failed to attract large inflow of foreign direct investments (FDI), especially as equity participation, to boost a faster economic growth. Foreign equity investors prefer countries such as China, including Hong Kong, the US, Brazil, the Netherlands, Luxembourg, the UK, Singapore, Ireland, Switzerland and Germany. The annual FDI inflow into India is still a pittance compared to those smaller economies outside the US, China and Germany.
Foreign direct investors don’t seem to be impressed with the growth of India’s GDP, estimated at $3.75 trillion, and its rank as the world’s fifth largest economy. Thanks to its massive population, stated to be the largest in the world, India’s per capita GDP is estimated only at $2,601. In comparison, per capita GDP of China is $12,150, which is projected to go up to $12,697 in 2024 and $13,357 in 2025, according to Trading Economics global macro models and analysts expectations.
The per capita wealth calculation could be extremely faulty to measure the size and the quality of a country’s consumer market such as India where more than 60 percent of the nation’s wealth is owned by only five percent of its population as recorded in the latest Oxfam India report. The Oxfam report says the bottom 50 percent of India’s population possess only three percent of its wealth. This makes the size of India’s middle and high-end consumption market rather small. This could be a reason behind the lack of high level enthusiasm among foreign direct investors to substantially raise equity investment in the country at this stage.
In contrast, a McKinsey Global Institute study last year reported that among the two billion people in micro-regions that newly achieved high living standards over the past 20 years, 1.1 billion lived in China—and almost a billion more lived in micro-regions spread across 75 countries. According to Vienna-based World Data Lab (WDL), China is the largest middle-class market globally, with over 900 million consumers. Together, they spend over $22 billion per day. China’s middle-class population is expected to reach over 1.2 billion by 2030.
Consumers in the upper-middle class bracket are likely to drive the lion’s share of China’s growth over the next decade. By 2030, 60 percent of urban consumption is projected to be driven by China’s upper and middle-income consumers, compared with 35 percent today. The share of China’s ‘affluent’ household consumption with annual household incomes of 345,000 renminbi (US$48,263.22) or more is also expected to double from the current 10 percent to 20 percent.
India’s middle-class population is also growing. WDL estimates that India’s middle class population is almost 400 million. Compared to China, India’s middle class is more dynamic, growing at the rate 8.5 percent. By 2030, the country’s middle class population is expected to reach 800 million. This should be good news for foreign equity investors who are interested in India’s growing market in the coming years. The middle-class is defined by persons spending between $10 and $50 per day. This class of consumers is the fastest-growing major segment of India’s population in both percentage and absolute terms, rising at 6.3 percent per year between 1995 and 2021. Presently, it represents 31 percent of India’s population and is expected to be 38 percent by 2031 and 60 percent in 2047. This should vastly expand both the middle and high-end market consumption in the coming years, providing local as well as foreign direct investors opportunity to invest in FMCG and other sectors offering big volume push. A large middle class will obviously give colossal purchasing power to India and its discretionary spending capacity. This is bound to bring in large FDIs in multiple sectors as it has been noticed in China since the1990s.
As a percentage of GDP, net FDI inflow in India was reported at only 1.4746 percent in 2022 as against the world average of 1.9406 percent, according to the World Bank collection of development indicators. This is hardly encouraging data. The net FDI inflows in India at this stage should be at least three to four percent of GDP. Official reports show that the FDI inflows in India during 2022 amounted to only $52.34 billion, substantially short of the 2020 inflow of $64.68 billion. A rarely talked about part of the FDI inflow figure concerns the reinvestment of domestic earnings by a multinational company in its host country.
Thus, direct equity inflows could be a better measure of FDI. During the financial year 2022-23, the FDI equity inflows to India dipped 22 percent to $46 billion. Incidentally, the value of FDI inflows to China in 2022 were estimated at $189 billion, an increase of around 4.5 percent over the previous year. The FDI inflows represented 1.003 percent of China’s $18.1-trillion GDP in 2022, the world’s second largest after the US. India’s GDP averaged $741.43 billion from 1960 until 2022, reaching an all time high of $3,385 billion, last year.
While democratic India has always been suspicious about FDI inflows and the role of MNCs, Communist China realised the importance of high FDI inflows way back in the 1980s and offered highly attractive incentives to foreign investors to rapidly grow its economy, push up exports and employment. Ironically, India enacted a foreign exchange regulation act (FERA) in 1973 to drive away MNCs from soft areas of operation. A comparison between India and China, despite the latter’s different political system, is important and relevant as the two countries are running neck and neck in high population numbers.
Lack of FDI inflows over the years made India permanently import dependent. In contrast, China, including Hong Kong, the world’s top recipient of FDIs, has become the world’s largest exporter. Incentives to attract inward FDIs have always upset India’s political interest groups speaking for domestic industry. For instance, even after failing to attract an investor in manufacturing semiconductors in the last 30 years, the country’s political parties and pro-import groups are critical about the government’s latest bumper incentive drive to find investors in micro-chip production. India’s domestic semiconductor market worth $55 billion is captured by countries such as China, Hong Kong, Singapore, Japan and Malaysia. It’s time that India changes its rigid FDI mindset to bring in large foreign equity investments in a wide number of areas to rapidly expand its economy and market. (IPA Service)