India needs to identify sectors wherein foreign direct investment (FDI) from China could work as a better strategy to boost exports, Chief Economic Adviser V Anantha Nageswaran said in an interview to Moneycontrol.
“I am not saying prefer one over another. What I am saying is if there are areas where FDI can lead to better outcome than higher imports, we are anyway importing from China, and we have a large trade deficit with them, so we need to understand which strategy could work better for which sectors,” Nageswaran said on July 22.
On whether India would require to ease FDI norms in a bid to implement this idea, Nageswaran said that is the government’s call.
In order to curb opportunistic takeovers or acquisitions of Indian companies, the Centre amended the FDI policy, specifically Press Note 3, April 2020.
Under the new rule, an entity of a country, sharing land border with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country, can invest only under the government route.
These amended rules under Press Note 3 came into force from April 22, 2020, increased scrutiny over FDI from China as well.
Nageswaran added that "India needs to see whether in certain sectors rather than importing goods from China, it will help us if we go the capital route."
The Economic Survey for 2023-24 said that India needs to strike the right balance between goods and capital imports from China, highlighting how the country can take advantage of the China-plus-one strategy.
As the US and Europe are shifting their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them, the survey added.
Nageswaran added that this may be a strategy worth exploring given India’s widening trade deficit with China.
India’s trade gap with Beijing widened to $85 billion in the previous fiscal from $83.2 billion in 2022-23.
Weighing in on falling FDI flows into the country, the chief economic adviser said that this decline is not a sign of decreasing interests among investors.
Most of the fall in FDI inflows is due to repatriation, which basically means many private equity investors took advantage of buoyant equity markets in India and exited profitably, he added.
Net FDI inflows to India declined from $42.0 billion during FY23 to $26.5 billion in FY24. However, in gross terms the moderation was by only 0.6 per cent in the previous fiscal year.
Commenting on the Survey's growth outlook for FY25 which is in the range of 6.5-7 percent, Nageswaran said given that growth is an outcome of policies, the focus now needs to shift to the grunt work required to maintain economic buoyancy, from attracting higher investments to streamlining duties.
On the suggestion in the survey pitching for a relook at India’s inflation targeting framework, Nageswaran said "it is an idea that has been thrown up."
“We have to react to changes in food prices instantly, be it in export bans or other measures," he said, adding that given such a scenario it is a discussion that the Survey intends to open up on the the monetary policy committee’s mandate to target consumer price index-based inflation.
The Reserve Bank of India targets a consumer price index (CPI)-based inflation with a mandate of keeping the rate at 4 percent along with a tolerance band of 2 percentage points on either side.
The Survey goes a step further and talks about how social media, screen time, sedentary habits, and unhealthy food are a lethal mix that can undermine public health and productivity and diminish India’s economic potential.
Responding to a question on what prompted the chief economic adviser to highlight these issues, Nageswaran said, that the time was right to flag them given that it poses significant challenges for the health and employability of India's youth.
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