Chief Economic Adviser K V Subramanian on Tuesday said a number of reforms undertaken by the government in the last one year especially focused on removing supply side frictions are expected to spur investment, including foreign investment.
Speaking at a virtual discussion on World Investment Report 2021 organised by Institute for Studies in Industrial Development (ISID), Subramanian said the fact that India recorded the highest growth amidst pandemic when FDI has shrunk by about 50 per cent for the emerging economies, indicates that foreign firms put their money where their mouth is.
Observing that FDI in merger & acquisition (M&A) versus greenfield that distinction is pertinent, he said, "the fact that the same M&A did not happen as much in other countries but happened in India actually thereby recording significant growth ... is indicative of the India story." As per the report by the UN Conference on Trade and Development (UNCTAD) released earlier this month, India received USD 64 billion in foreign direct investment (FDI) in 2020, the fifth largest recipient of inflows in the world, pushed up by acquisitions in the information and communication technology (ICT) industry.
Major project announcements in the ICT industry included a USD 2.8 billion investment by online retail giant Amazon in ICT infrastructure in India, the report said. Stressing that India is the only country among large economies that has done a slew of reforms in the last one-and-a-half years, Subramanian said these are especially focused on removing a lot of supply side frictions paving way for investment to flow in.
Citing Say's law, he said, supply eventually creates its own demand. "The labour reform, the agricultural reform, the change in definition of MSME to avoid the phenomenon of dwarfism and most importantly, the enterprise policy focused on the private sector...this is where path of future FDI must be understood in the context of the enterprise policy focused on the private sector," he said. Unveiling the PSE policy in Budget 2021-22, Finance Minister Nirmala Sitharaman had said barring four strategic areas, public sector enterprises (PSEs) in other sectors will be divested.
The policy would give a clear roadmap for disinvestment in strategic and non-strategic sectors. The four sectors are atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services in non-strategic sectors. Talking about role of investment in economy, Subramanian said the gross fixed capital formation in the March 2021 quarter increased by almost 30 per cent year on year.
As a result the ratio of gross fixed capital formation to GDP hit 34.3 per cent, he said, adding, this 26 quarters high primarily led by government's capex programme. The spillover effect of this was consumption after declining for last three quarter witnessed a growth of 2.7 per cent and it was able to arrest the decline in contact sensitive sector during the last quarter and this illustrates the linkages at the macroeconomic level from investment to consumption and service sector activity as well, he added.