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Flight of capital, capitalists and labour/citizens
Investment is critical to growth. What does the latest FDI inflows data show?
It shows a sharp fall in both total FDI (-16%) and equity FDI (-20%) inflows (in USD) in FY23. It also shows a sharp fall in equity FDI inflows (-31%) in H1 of FY24 vis-à-vis the corresponding period of FY23 (no comparative data available for total FDI inflows in H1 of FY24). This is an indication that global funds are going elsewhere since FY23 – either due to higher interest rates in the US and Europe and/or better investment environment elsewhere, like Canada, Australia, Brazil, Mexico, Vietnam etc.
The FDI outflows are falling in FY24 – by $20 billion during April-October 2023 (FY24) vis-a-vis the corresponding period of FY23. How does this matter? Since about 85% of India’s FDI inflows and outflows are through opaque tax havens and shell companies – indicating high probability of round-tripping of funds – a fall in FDI outflows may mean a further fall in FDI inflows.
Hot money (FII) or FII inflows have increased in FY24 (up to November 21, 2023) – after two years of net pullout. This money goes to stock markets, which are booming, but since stock market boom is disconnected with the real economy and FIIs may leave overnight, without warning (hence called ‘hot money’), this rise is not a good indicator of long-term investment or growth. FDI inflows, in contrast, are long-term investments.
Outward remittances (LRS) are consistently going up too – from $12.7 billion in FY21 to $19.6 billion in FY22, $27 billion in FY23 and $18 billion in H1 of FY24. This spike can’t be attributed to 20% tax on such remittances (beyond Rs 7 lakh) – which was to come into effect from October 1, 2023. Though the remittances are mainly on account of travel, education and maintenance of relatives settled abroad, a significant amount also goes into foreign deposits, gifts, equity investments and buying properties – 21.5% of the entire outward remittances in H1 of FY24.
LRS outflows should worry and could be counted as the flight of capital (along with capitalists and labour) because more and more Indians are also fleeing to foreign shores for (a) studies (25% of all students landing in the US in the 2022-23 academic year) and (b) in search of better life.
The latter category includes (i) those seeking citizenship abroad – their numbers rising from 1,22,819 in 2011 to 1,31,405 in 2015 to 2,25,620 in 2022 and 87,026 till June 2023 (halfway mark for the calendar year), as the Lok Sabha was told in July 2023. Such citizenships often involve investment in and flight of assets to those countries (“citizenship-by-investment” programmes). Besides, some of them are fugitives, like Mehul Chokshi and Sandesara brothers, who have decamped with bank loans. There is a sharp spike in banking frauds and willful defaults in and after 2018.
Those leaving India for better life also include (ii) thousands of Indians illegally migrating, despite facing death and hardships. In less than a year between November 2022 and September 2023, 97,917 Indians were arrested by the US authorities alone for illegally entry, a five-fold rise since 2019 – of which about 45,000 said this was due to the “fear in their own country” and the 730 arrested were unaccompanied minors.
The effect of this outflow of capital, capitalists and labour points to loss of faith in growth and better economic prospects in India.
Meanwhile, inward remittances grew by 24% in 2022 to reach $111 billion but as the World Bank report of June 2023 says, this growth is expected to fall to 0.2% in 2023 “due to slowing economic growth in major source countries”. This means, less funds for domestic economy in FY24.
The net effect of all the above is a pessimistic outlook for FY24.
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