In mid-October, the Ruia Group sold its flagship company, Essar Oil, to a Russian consortium for $12.9 billion. The rationale for the deal was clear. The group was reeling under heavy debt, and the sale was meant to reduce its burden by half.
However, the tone and tenor of the announcement of the deal, which happened during the BRICS summit in the presence of Prime Minister Narendra Modi and Russian President Vladimir Putin, suggested that it was a development that India should be proud of. It was showcased as India's largest foreign direct investment (FDI) deal, ever.
Technically, it is okay to make such claims. India considers both the inflow of foreign funds for acquisition of existing assets (brownfield investments) and investments made to create new assets (greenfield investments), as FDI. In fact, India's FDI is the sum total of all types of foreign fund flows - investments in equities, reinvested earnings of foreign companies operating in India, and remittances of non-resident Indians, among others. Essar Oil's acquisition will definitely result in large FDI inflow. And, it would have been a remarkable feat if the sole objective of India's FDI policy was to attract foreign investments.
However, the Narendra Modi government has made it amply clear that foreign currency inflow is not the end. It is expected to augment domestic capital, promote employment generation and bring in state-of-the-art technologies and global best practices into the Indian manufacturing and services sectors.
But, will brownfield acquisitions, such as that of Essar, result in any of these? Will it have an impact on economic growth or create additional jobs? Well, having opened up almost every sector for FDI over the past two years, the Modi administration's desperation to showcase the impact is understandable. But the fact remains that the Centre has no reason to be on the defensive when it comes to its FDI strategy.
India has been showing strong performance on the FDI front in the recent past. It has jumped four notches to become the tenth biggest destination in 2015. The Global Investment Report 2016 of the United Nations Conference on Trade and Development (UNCTAD) says it got $44 billion in 2015 - 20 per cent more than the $35 billion that came into the country in 2014. The report also puts India as the third most attractive destination.
The quality of the FDI that came into the country was also not that bad. Out of the $44 billion, $28 billion went into greenfield projects. Percentage wise, having 63 per cent of its total FDI inflow move into avenues that would create new assets and jobs was remarkable - the world average for the fiscal was 43 per cent, that is, only $766 billion went into greenfield investments in 2015 out of the $1,762 billion global FDI flows. India's achievement is even more special - it came at a time when the capital expenditure of the 5,000 top global multinational enterprises declined 11 per cent.
UNCTAD's annual investment report also reveals the sectors where India's greenfield FDI has shown remarkable growth in the past two years. The electrical and electronic equipment sector attracted $13.5 billion in 2015, against $1.1 billion in 2014. Metal and metal products saw $5.9 billion worth of investments, against $1.2 billion in the previous year. The machinery and equipment sector also saw a jump to $2.1 billion in 2015 from $0.8 billion the year before.
While UNCTAD looks at investment trends on a calender year basis, India's official statistics, which provides annual FDI data in the financial year format, points out that India saw the highest ever FDI inflows of $55.46 billion in 2015/16. Sectors, such as services, construction, telecommunications, computer software and hardware, drugs and pharmaceuticals, automobile industry, chemicals and power, were the most attractive FDI destinations.
In fact, trends in India's FDI inflows are very clear. It endorses the country's status as a preferred investment destination among global investors. With newer areas, such as defence and railways, likely to find more investment opportunities, India's FDI story seems to be on track.
What we must understand is that foreign fund flows is an outcome of private business priorities. The government can milk it by creating a liberal and investor-friendly policy environment. Therefore, the focus should also be on how other sectors can become more productive investment destinations.
Brownfield investments like Essar will definitely add to the size of India's FDI inflows, but it is not always about quantity. Quality is paramount.