Assessing India’s Economic Landscape: Opportunities and Challenges for Foreign Investors

Ankita Tiwari

28 Apr, 2023

India’s economic landscape of a country depends upon several internal as well as external factors. No country can is immune from the events taking place across the globe. In one way or the other, the events impact the economic landscape of the country. Historical events such as the two world wars, the great depression, the cold war, the global pandemic, Russia-Ukraine War have had their effect on the Indian economy. However, the Indian government is taking appropriate measures to minimize the effects of any such events.

Currently, the world is on the verge of a global recession. Amid this unprecedented situation in the global economic and geopolitical landscape unfolding across the advanced market economies, India is emerging as one of the hot spots for foreign investments. India bags itself a position as one of the fastest growing economies across the globe. Even in this situation, India is outperforming its peers and ranked as the best-performing equity market across the globe in 2022. India also emerged steadily from the pandemic as compared to other major economies in the world. Due to this, India’s Economic Landscape becomes favourable for foreign investors. Let’s have a look at the Opportunities and Challenges arising for foreign investors from India’s economic landscape.

What is India’s Economic Landscape at present?

1. As per the Economic Survey for the year 2022-23, India is expected to witness a rise in GDP of up to 6.0% to 6.8%.
2. The credit growth of the MSME sector has been as high as 30.5% and above on average during Jan-Nov, 2022.
3. The capital expenditure of the Central Government recorded a 63.4% increase in the initial 8 months of the financial year 2022-23, which is also one of the growth drivers for the Indian economy.
4. An increase in the growth of exports in the Financial Year (FY)2021-22 and the initial half of 2022-23 accelerated the production process in India.
5. Private Consumption stood at 58.4% in the second quarter of FY 2022-23 viz; the highest among all the second quarter since the FY 2013-14.
6. In the survey, the World Trade Organization (WTO) stated that global trade is expected to decline from 3.5% in FY 2022-23 to 1.0% in 2023.
7. To boost economic growth, the Indian government will take measures to expand the public digital platforms and measures which will in turn, promote the manufacturing output.
8. The service sector has become a source of strength. E-commerce is expected to make an estimated growth of 18% annually by 2050. Exports have risen. Credit facilities to the service sector have increased by 16% from July 2022.
9. The Finance sector has shown resilient performance in reviving the economy post-pandemic. 

India’s Economic Landscape: Elasticity and Growth Drivers

1. Several reasons such as the widening of the CAD and flattening of the exports graph have been due to the geopolitical strife in Europe, and have led to monetary tightening by RBI. They have served as a downside risk to the growth of the Indian economy. However, even after the downside effect, the estimated growth of India is higher than most of the major countries.
2. India’s expected growth during the prevailing impeding situation and tighter domestic monetary policy reflects that the Indian economy is inelastic to the external stimuli. It means that India has the ability to recoup, renew and re-energize the growth drivers of the economy irrespective of the external environment.
3. After the pandemic, manufacturing and investment activities quickly gained momentum. By the time exports revived, domestic consumption had already reached the maturity to take forward India’s growth. Private consumption increased followed by contact-intensive services like hotels, transport, etc. This marked an impressive domestic consumption leading to a rise in domestic capacity utilization.

What are the opportunities for foreign investors in India, considering India’s economic landscape?

The Indian government has taken several steps to ease doing business in India and to attract foreign investments in India. Let’s look at some of the favourable policies which serve as an opportunity for foreign investors in India.

• Government Initiative to Boost Foreign Direct Investments (FDI)

The Indian Government has relaxed several FDI norms across sectors like the defence, PSUs, oil refineries, stock exchanges, telecom, etc. Furthermore, the Indian government is continuously involved in boosting investments, streamlining the tax regime, liberalizing the FDI policies, and encouraging technological innovations.

• Revision of the existing FDI Policies to secure investment from neighboring countries

In the year 2020, India amended its FDI Policy and introduced a mandate to obtain prior approval from the government in all activities originating from neighboring countries such as Pakistan, Afghanistan, China, Bangladesh, Bhutan, Nepal and Myanmar. This mandate aims to protect opportunistic and hostile takeovers or acquisitions of Indian companies.

• Amending FDI Policies in various sectors

In the year 2020, the Indian government made the following amendment to its FDI Policy:

• Growth forecast The forecast detects growth from several sectors such as the increase in private consumption giving a boost to the production activity, higher capital expenditure (capex), return of migrant workers to cities for carrying out work in construction sites, strengthening the balance sheet of the corporates and a capitalized public sector bank willing to increase the credit supply and the credit growth to MSME sector. Economic growth is also expected from public digital platforms and various government measures such as PM GatiShakti, National Logistics Policy and production-linked incentive schemes to boost manufacturing in India.

• Declining urban unemployment

Private consumption and capital formation has led to the generation of employment resulting in a decline in the urban unemployment rate. Moreover, registration to the Employee Provident Fund has become faster. In addition, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)^[1] is continuously involved in providing jobs in rural areas and creating opportunities for rural households to diversify their source of income.

• Continuity in the supply chain

During the surge of Covid-19, India witnessed limited health and economic fallout as compared to the rest of the world. This implies that there was no break in the supply chain. Furthermore, at present Indian economy appears to have moved on from the effect of Covid-19 as manufacturing sector has been functioning effectively.

• Curbing Inflation

Due to European strife, India faced the challenge of reining inflation. The Indian government along with the RBI took measures and also eased global community prices which resulted in successfully bringing down the retail inflation below the RBI’s upper tolerance target.

What are the challenges for foreign investors in India considering India’s economic landscape?

1. Increase in Current Account Deficits (CAD) and depreciating value of the rupee

To curb inflation, the rates have been hiked by the Central Banks, which has appreciated the value of the US dollar against the Indian rupee. This has resulted in the widening of CAD in importing economies. Even though the Indian rupee is performing better than most of the other currencies, there persists a likelihood of an increase in policy rates by the US Federal bank. So it is expected that the CAD may continue to widen as global commodity prices are expected to remain elevated.

• Inflation

Inflation across the globe, including in India, rose due to the pandemic and the European strife. In January 2022, India’s inflation rate had risen above the RBI’s tolerance range. Post that, the commodity prices were eased, which are still comparatively higher. This has contributed to the widening of the CAD, which was already enlarged by India’s growth momentum.

Conclusion

India was quicker in recovering from the pandemic as compared to other countries. Thereafter, the global geopolitical environment slowed down the growth rate. The global recession is further going to slow down the economy. However, the government has taken sufficient measures to maintain stability in India’s Economic Landscape. Now when the world is moving towards recession, India is expected to be least affected by the recession. This raises the confidence of foreign investors to invest in India. The positive measures taken by the Indian government make it favorable for foreign investors to invest event in such a critical situation.

Read our Article: Foreign Investments from Neighbouring Countries in India