Sunday, May 27, 2018

Foreign Direct Investment in India

The potential impact of foreign direct investment (FDI) on a national economy is perhaps best measured as FDI as a fraction of Gross Domestic Product (GDP).

The nation as an FDI magnet is perhaps best measured as FDI as a fraction of World FDI.

Here are a pair of charts, for India and for China of FDI as a percentage of GDP from  Note that the two charts are not to the same scale.
India - FDI as a percentage of GDP 1991-2016
China - FDI as a percentage of GDP 1991-2016

However, global flows of investment are quite volatile.  Using the UNCTAD World Investment Reports and its country profiles (India, China) as a source, one can construct the table below. Note that UNCTAD numbers are not consistent across years, e.g., the 2008 FDI figures are a little different when noted in the 2009 report vs the 2010 report, etc.

For 2017, UNCTAD estimates (January 2018) world FDI was $1520 billion, with China at $144 billion and India at $44 billion.  That would put China at 9.5% of world FDI, and India at 2.9%.  The "official" numbers should be published in a few weeks.

Year World ($ billion) India ($ billion) China ($billion) India % of world China % of world
2016 1746.423 44.486 133.700 2.55 7.66
2015 1774.001 44.064 135.610 2.48 7.64
2014 1323.863 34.582 125.500 2.61 9.48
2013 1443.230 28.199 123.911 1.95 8.59
2012 1592.598 24.196 121.080 1.52 7.60
2011 1591.146 36.190 123.985 2.27 7.79
2010 1388.821 27.417 114.734 1.97 8.26
2009 1221.840 35.657 95.000 2.92 7.78
2008 1818.834 47.139 108.312 2.59 5.96
2007 2002.695 25.350 83.521 1.27 4.17
2006 1463.351 20.328 72.715 1.39 4.97
2005 982.593 7.622 72.406 0.78 7.37
2004 742.143 5.771 60.630 0.78 8.17

China attracts increasing amount of FDI in absolute terms, and a generally increasing share of world FDI, and yet the significance of the FDI for its economy, in terms of FDI as a fraction of GDP is declining.    In India, the UPA government choked the golden goose, and the NDA government is reviving it; but the relevance of FDI to the Indian growth story is still much less than it was for China at an equivalent stage of development.


While obvious, it bears pointing out that e.g., a national economy that is 0.5% of the world economy cannot be expected to get 5% of the world's FDI.  So the best estimate (and probably the most difficult to accurately measure because of the cumulative issues, e.g., that lead to PPP estimates of GDP)  of FDI attractiveness would be the ratio of the world's FDI to the size of the nation's economy relative to that of the world.   A country with 0.5% of the world economy that attracted 0.5% of the world's FDI could be said to be holding its own, and underperforming if it attracted only 0.4% of the world's FDI.

This World Bank document gives for 2016, world GDP as $75871.742 billion, India as $2,263.792 billion and China as $11,199.145 billion.  India is thus nominally 2.98% of the world economy and China is 14.76% of the world economy.  So while both countries were growing faster than the world average in 2016, they were underperforming relative to FDI in the above sense.   One has to ask, which are the countries that are overperforming relative to FDI; my guess, only a guess, would be Singapore is one.