India’s is one of the fastest growing economies in the world, reporting a blistering rate of 7.5% in the fiscal year ended March 2015. Such a performance is commendable at a time of such global uncertainties, and when the economies of fellow BRIC countries are either slowing – as is the case in China – or entering recession, as has happened in Brazil and Russia.

Indian finance minister Arun Jaitley is confident that between 9% and 10% economic growth will soon be the new normal in the country. Hitting such a rate will not be easy, although the year-old National Democratic Alliance government has upped the permitted foreign ownership limits in defence and insurance, eased conditions for doing business and launched flagship schemes such as the Make in India programme to boost manufacturing.

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However, there is widespread scepticism regarding the Central Statistical Organisation’s official growth numbers, which reflect a new base period and improved methodology. Critics include the chief economic advisor to the government, Arvind Subramanian, and Reserve Bank of India (RBI) governor Raghuram Rajan, both of whom question the source of this faster growth, saying it is far from obvious. India’s economic fundamentals, such as industrial production, are weak, investors are hesitant, and the stock market is experiencing turbulence as foreign institutional investors pull out money. Big-ticket infrastructure projects are also languishing, awaiting clearance. 

A 'recovering economy' is the preferred description of these doubters. “I would say the economy is picking up,” Mr Rajan told the media after an RBI board meeting in Chennai. “We see some signs of capital investment picking up. There is a continuing need, which the government is trying to address, to put some of the stalled projects back on track. But we have to work on bottlenecks and areas where we need reforms to ensure that growth is strong and sustainable.”

Ratings agency Moody’s recently conducted a poll in which its respondents considered “sluggish reform momentum” as the greatest obstacle to India’s macroeconomic growth.

Manufacture over import

There are signs of recovery in FDI in India. The country was among the fastest growing destinations for greenfield FDI in 2014, according to greenfield investment monitor fDi Markets. The country received inward capital investments of $23bn in 2014, accounting for 3.9% of gross fixed capital formation, according to the Indian Ministry of Statistics and Programme Implementation. FDI project numbers rose by 47% to 641, a reversal of a recent downtrend in inward FDI in the country.

Interestingly, this uptick in inward FDI is largely in manufacturing. About 830 foreign companies set up greenfield facilities in the country between 2009 and 2014, accounting for 1097 projects and investment of $49bn. This ought to dispel the popular perception that manufacturing activity in India has been languishing as a share of GDP, and that the country can no longer be considered a manufacturing hub in the making. The fact that a similar number of sales, marketing and support offices were launched suggests that foreign investors are being drawn to India’s huge domestic market, and that they prefer to manufacture as opposed to importing from abroad.

fDi Markets data reveals that most greenfield investment was undertaken by global automakers and first-tier suppliers. According to official data from India’s Department of Industrial Policy and Promotion (DIPP), FDI equity inflows to the automotive industry from April 2000 to April 2015 totalled $13bn. The sector has reached critical mass as global OEMs and strong domestic players set up shop in India. This has, in turn, spawned a thriving auto component industry.

Wheels on fire

One such example of India's thriving auto scene comes with Hyundai considering a third plant in the country after prime minister Narendra Modi’s visit to South Korea, pitching for FDI to boost local production. Meanwhile, Mercedes Benz is doubling its assembly capacity in the country to 20,000 units, and Ford is planning to ship its India-made EcoSport to the US in October 2017. Sector leader Maruti Suzuki India is building its third factory, in the state of Gujarat, while Honda is expanding one of its plants. Most of the other global auto giants are scaling up their presence in the country, and India has already become a base for the global plans of Japanese motorcycle manufacturers.

On the face of it, this narrative of rising FDI tallies with an economy that is fast recovering. Investments appear to have gathered further momentum since the business-friendly Modi government came to power in May 2014. The prime minister has extensively travelled abroad to attract big-ticket FDI to help build the bullet trains slated to connect major metropolises in the country. He has also talked about dedicated freight and industrial corridors and developing 100 smart cities.

Renewable energy

Since the Make in India programme launched last year, FDI inflows have risen by 43% to $28.1bn during the seven months to April 2015, compared with $19.6bn in the same period the previous year, according to the DIPP. Investments in the automobile industry were up by 164% to $2.2bn between October 2014 and April 2015, compared with $831m the previous year. In pharmaceuticals, foreign investment rose by 118% over the same period. FDI was also higher in industrial machinery and miscellaneous mechanical and engineering industries.

There is also movement in the solar power space with Japan’s Softbank, India’s Bharti Enterprises and Taiwan-based Foxconn announcing a joint venture to invest $20bn in renewable energy projects. Foxconn, the world’s largest contract manufacturer, is also scouting locations to set up 10 to 12 facilities in India by 2020, according to chairman Terry Gou.