With an impressive growth figure of 7.3%, India was the ninth fastest growing economy in the world in 2015, according to the IMF. And as China’s economic growth slows down, India is looking like a bright spot in a gloomy global scenario. The country also became the world’s leading recipient of FDI last year, according to greenfield investment monitor fDi Markets. The big question is whether India can hold on to pole position.

India’s finance minister, Arun Jaitley, is upbeat in media interviews that as one of the world's fastest growing economies, India is a prime location for foreign investment. Not so long ago, he was confident that 9% to 10% economic growth would soon be the new normal in India. Now he is more realistic that “reaching 9% to 10% is extremely difficult”, especially when the global economy is failing to expand at a reasonable rate. In this landscape, can India continue to attract the record greenfield FDI that it did in 2015, when inward capital investments trebled to $63bn? 


The Modi effect

There are several factors responsible for India’s remarkable performance. The most important is that the business-friendly Narendra Modi-led government took power in May 2014. As prime minister, Mr Modi has visited many countries and aggressively sought overseas investment. FDI project numbers rose by 8% to 697 in 2015, reversing a decline in inward investment. Foreign investors have also decided to take a long-term bet on India as options dwindle in emerging economies. There have also been big-ticket project announcements in solar power, automobiles, smart cities and industrial parks in the country. 

India’s attraction is that its domestic market is huge and has reached sufficient mass to warrant local manufacturing in a range of industries from smartphones to automobiles. Labour-intensive manufacturing is shifting global focus from earlier leaders such as Japan and China to low-wage destinations in the rest of Asia, hence electronics company Foxconn’s plan to invest $5bn in India,while the likes of Lenovo and Xiaomi have also shown interest in the country. Apple CEO Tim Cook discussed “possibilities of manufacturing” with Mr Modi during his recent visit to India. 

Schemes such as Make in India – a project launched by Mr Modi to encourage companies to manufacture products in India – have also played a role in attracting FDI, especially in the automotive sector. Total FDI equity inflows rose 35% to $45.9bn during the 13 months to December 2015, from $34bn in the comparable period a year earlier, according to India’s Department for Industrial Policy and Promotion (DIPP). Of that, investments in the automobile industry were up by 45% to $3.5bn, compared with $2.4bn a year earlier. 

States of success

The trebling of greenfield FDI is particularly evident in states politically affiliated to the ruling Modi government such as Gujarat, Maharashtra, Rajasthan, Haryana and Madhya Pradesh. Mumbai, the capital of Maharashtra, is the country's financial powerhouse. Haryana is a prosperous agrarian region that has made rapid strides towards industrialisation. The ruling BJP party has been in power for long in Gujarat and Madhya Pradesh, a vast geographically contiguous region that includes the keystones of finance, commerce and industrialisation. 

While inaugurating the Global Investor Summit in Madhya Pradesh in 2014, Mr Modi said: “$100bn of foreign investments from Japan, China and the US have applied for visas. Now, it is the turn of the [Indian] states to capitalise on this opportunity. The roads are wide open. The states which are ready can walk away with a major share.” Between April 2000 to December 2015, Maharashtra attracted 29% of Indian FDI inflows, according to the DIPP. 

According to fDi Markets, Gujarat attracted massive greenfield FDI of $12.36bn in 2015, and Chinese companies are proposing investments of as much as $4.6bn in the state’s smart cities and industrial parks, while solar power generation continues to boom. These business-friendly states also are in the forefront of implementing more flexible labour laws and improvements in conditions for doing business.

This narrative of rising FDI thus tallies with an Indian economy that is expanding fast. More greenfield investments are expected in bullet trains, dedicated freight rail and industrial corridors.