NEW DELHI : India’s foreign direct investment (FDI) equity inflows fell for the first time in six years in the year ended 31 March, underscoring the economic policy challenges faced by the government when Narendra Modi starts his second innings as prime minister on Thursday.

Data released by the department for promotion of industry and internal trade on Tuesday showed FDI equity inflows into India declined 1% to $44.4 billion in the year to 31 March, signalling a squeeze in long-term foreign investment into the country.

The decline in FDI inflows comes at a time when domestic indicators already point towards a slowdown in consumption and investment activity. India’s economy grew at the slowest pace in five quarters at 6.6% in the three months ended December, prompting the statistics department to trim its 2018-19 forecast from the 7.2% previously forecast to 7% in February. The first set of macro data the new government will have to deal with is the fourth-quarter GDP data (to be announced on 31 May) that may further decelerate to 6.4%.

The two sectors where FDI inflows dropped the most in 2018-19 are telecommunications (fell 56% to $2.7 billion) and pharmaceuticals (dropped 74% to $266 million).

However, FDI in the services sector, including financial, banking, insurance and outsourcing businesses, rose 37.3% in 2018-19, arresting the extent of the decline in FDI inflows.

The telecom sector is going through tumultuous times after Reliance Jio Infocomm Ltd’s entry in September 2016 brought data tariffs to rock bottom and made voice calls free, making the sector less attractive for foreign investors. In the case of pharmaceuticals, the price control mechanism introduced by the government on several essential medicines might have discouraged foreign investment.

While Mauritius remained India’s top source for FDI, its share declined by 2 percentage points to 32% in 2018-19, while the share of Singapore rose by 2 percentage points to 20% during the same year.

Capital gains on investments made in India through companies in Mauritius and Singapore have become fully taxable from 1 April, as concessions cease to exist on the routes after India signed new double tax avoidance treaties with both countries. This may further impact FDI inflows into India from these two countries.

Macro indicators such as vehicle sales and air passenger growth also point to a slowdown in the economy.

Sales of automobiles across segments in India fell 16% in April to touch the lowest in eight years, while domestic air travel in April contracted 4.5% for the first time in nearly five years. The government in its full budget, which is likely to be presented in July, will be tempted to breach fiscal discipline and go for a demand stimulus.

Ashima Goyal, member of the prime minister’s Economic Advisory Council, in an interview with Business Standard said: “Although the government is on a path towards fiscal consolidation, there is limited space for a fiscal stimulus. The pre-election slowdown in government spending can be reversed and expenditure planned for the year frontloaded."

However, chief economic adviser Krishnamurthy Subramanian, in an interview last week, said the core of consumption in the economy is pretty okay and one should not oscillate between the extremes.

“If you look at what has happened in the last five years, for the reforms that have been enacted, there is a lot of emphasis that has been placed on ensuring that the necessary conditions for economic growth are created. The effect of this will start showing with some lag," he said.

*Navadha Pandey contributed to this story.

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