Net FDI slump not just about investment treaty: CEA Nageswaran counters Surjit Bhalla

Chief Economic Advisor (CEA) V Anantha Nageswaran has dismissed economist Surjit Bhalla's claim that India's weak foreign direct investment (FDI) inflows stem primarily from changes to the country's Bilateral Investment Treaties (BITs).

The CEA said that global factors have played a much larger role in shaping investment flows. "He (Bhalla) has talked about the fact that the modifications that India made to the bilateral investment treaties contributed to declining interest in India. These phenomena have multiple causes, and to reduce them to a single factor that the bilateral investment treaty alone played a part in causing the foreign investor interest in India to wane. I'm not entirely sure. I'm not persuaded by that argument," he said in an interview with India Today TV.

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Nageswaran pointed to strong gross FDI inflows as evidence that foreign investors continue to see opportunities in India. 

"Because if that is the case, as soon as all the existing investments leave, no new investment should be coming in. But that is not the case. At the gross level in the year ending March 26, including retained earnings, India attracted close to $95 billion," he said.

According to the CEA, global monetary conditions have significantly influenced investment decisions. He noted that India's surge in foreign investment after 2014 coincided with near-zero interest rates across developed economies, which encouraged capital flows into emerging markets.

"And that is why post 2023 emerging economies in general have seen a contraction in FDI inflows. not just India," he said.

He also cited the capital demands of the artificial intelligence boom in the United States, saying investments linked to AI were drawing funds back to developed markets. Rising returns on government bonds in countries such as the US and Japan have also increased the opportunity cost of investing overseas, he added. "All these factors play a role in determining the FDI flows not only to India but to emerging markets in general."

Nageswaran said he did not dismiss concerns around India's investment treaties and acknowledged that the government itself has committed to reviewing them. 

"I do not disagree with the point that the bilateral investment treaties have to be reviewed, which the government itself has promised. So I don't deny the importance of it. But I have a difficulty in attributing the FDI phenomena solely to the bilateral investment treaty argument, and that is my only note of disagreement," he said.

Responding to Bhalla’s warning that India was facing a deeper investment crisis marked by collapsing net FDI inflows, Nageswaran argued that a genuine structural weakness would have shown up in gross investment figures as well.

"If there is a structural weakness, then it will be reflected in the gross numbers as well. Investors are not striking vis-à-vis India," he said. "If investors are striking, then after being stuck in a range between 70 and 80 billion dollars between 2021 and 2025, suddenly we wouldn't have seen a surge towards $95 billion in FI26."

The CEA acknowledged that net FDI numbers had remained weak over the past two years but attributed the decline to a combination of factors rather than a single policy issue.

"So net FDI numbers were weak in the last two years. And I believe strongly that it is a combination of several unique factors that contributed to net FDI coming down so dramatically in FY24-25 and 25-26 on a net basis," he said.

Looking ahead, Nageswaran expressed confidence that investors would reassess India’s long-term prospects as the economy continues to withstand external shocks while maintaining macroeconomic stability.

"I do believe strongly that as investors see the resilience with which Indian economy absorbs the current ongoing shock on the oil rice, gas, fertiliser and still manage to give a economic performance which is moderate growth with moderate inflation and with macro stability maintained then I think and hopefully with the AI mania eventually sort of giving away then the reappraisal of the long-term attractiveness of the Indian economy will assert itself."