Q1.

In India, during 2020-21 the economic growth faced contraction, but there is a surge in foreign
investments. Explain the reasons for such contradictions.
Approach

Introduction: Brief about Indian economy during 2020-21

Body
- Reasons for contraction in economic growth
- Reasons for surge in foreign investments

Conclusion: Accelerating and reviving Indian economy

Introduction: The Indian economy saw its worst contraction in decades, with Gross Domestic
product(GDP) shrinking by a record -7.3% of year 2020-21 with GDP growth at 1.6% in Q4 whereas
India has attracted highest ever total FDI inflow of US$81.72 billion during financial year 2020-21.
Reasons behind India’s GDP growth Contraction:
 Global COVID 19 pandemic and Lockdown: year 2020 has seen blow of global pandemic, in
Lives vs. Livelihoods struggle, governments decided to put lockdowns in order to control social
transmission of virus.
 Different sectors affected: except agriculture which grew with 3.4% other major sectors affected
heavily during 2020-21 pandemic.
o Eg. Construction (-50%); trade and services (-47%); manufacturing (-23%)
 Total demand for goods and services from Private individuals fallen: the biggest engine in
Indian economy that is Private consumption accounts for 56.4% of all GDP, it has fallen by 27%,
 Private sector disruption: the second biggest engine is demand generated by private sector
business accounted for 32% of all GDP, it has fallen by half.
 Lives vs. livelihoods: Governments major focus was on health sector and health infrastructure
which got more government investments.

In spite of contraction in economic growth, India bags highest ever FDI at $67.5 billion in FY 2020-
21; following are the reasons for surge in FDI:
 Indian market Resilience
 Adaptation of Indian market: India remains complex and challenging place to do
business, frequent shifts in policies make it resilient.
 Emerging Indian market is an opportunity: Leading corporate investors recognises that
doing business in emerging market comes with inherent risks but that adaptation approach
of economy is critical to success.
 National resilience: despite facing scourge of the novel coronavirus head on, India has
managed pandemic better than many of its western peers and restored economic activity
 Driving points for Foreign investments in India
 Demographics: India offers through its nearly 1.4 billion people and their growing
purchasing power is uniquely valuable for multinationals with global ambitions.
  Shifting Geopolitics: Rising US-China competition is redefining the global landscape for
investments and manufacturing and forcing multinationals to rethink their production hubs.
 Innovation and Service quality: Domestic Indian companies have also demonstrated their
ability to innovate and deliver high quality services at scale.
o Eg. 13% rise in FDI to Digital Service sector
 Value creation and Unlocking lockdowns: In spite of spreading COVID virus, central
and state governments taken sufficient measures to step by step unlock the lockdown and
revive economy, this forged investment in Indian market with ambition of shared Value
creation and value addition.
 Demand For Digital Infrastructure and Services
 Pandemic boosted demand for Digital Services: this led to higher values of Greenfield
FDI project announcement targeting ICT industry rising by more than 22%.
 Investments by Online Retail giants: Due to lockdowns, demand for online retail
shopping has sharply increased, which attracted online retail giants to invest.
o Eg. US$ 2.8 Billion investment by Amazon in ICT infrastructure.
 Investments in Telecom: India recorded positive growth (13%) boosted by investments in
digital sectors.
o Eg. 10% acquisition of JIO platforms by Jaadhu owned by Facebook valued at $5.7
Billion.
 FDI flow in Pharmaceutical sector
 Investment Routes: currently, 100% FDI is permitted in Pharma sector, in Greenfield
Pharma projects under Automatic Routeand 74% in brownfield Projects.
o Eg. During COVID 19, NITI aayog chief said that automated route accounted for nearly
90% inflows.
 Pharma market share and exports: Pharma industry accounts for 2.4% of global industry
by value and its exports stood at $24.44 Billion in FY 20-21.
 Government policies and Reforms
 FDI Reforms: India has liberalised its foreign investments policies and allowed 100 FDI
by Automatic route in various sectors. Also, Foreign Direct Equity investments inflows
grew by 19% year on year in FY 20-21.
 Production Linkage Incentive Scheme (PLI): it is designed to attract manufacturing and
export oriented investments in priority industries including automotive and electronics can
drive rebound of investments.
 Domestic Policies: Government of India has taken various steps to revive economy and
restart the contracted economy with V shape recovery by announcing various packages,
this elevated confidence of investors in Indian market.
o Eg. Aatmanirbhar Bharat package
 Round Tripping FDI
 Round Tripping FDI: it refers to capital belonging to a country, which leaves the country
and then is reinvested in form of FDI.
o Eg. Money travels from India to Mauritius and then again back to India as FDI.

Conclusion: India ranked 63rd out of 190 countries in the 2020 ‘Ease of Doing Business report” published
by the World bank, global investors typically focus on India mainly because of its demographics, but also
for its demographics, but also for its stable barometers, whether it be inflation, Fiscal deficit or growth.