This chip change called FDI

The five-month number for foreign direct investment (FDI) appear to be promising: a whopping 78 percent growth over the same period last year. But that doesn’t mean one should go gaga over it. This growth is largely because of the same reasons that were discussed in BR Research’s coverage of FDI numbers last month.

On standalone basis, November 2019 saw a 30 percent fall in net FDI flows to a chip change of $200 million, as gross inflows fell 37 percent (or $143 million) over November 2018, offsetting the fall in gross outflows.

Aggregate five-month numbers on the other hand show that the 78 percent increase comes on the back of a one-off base affect stemming from a Chinese FDI outflow in October 2018 that wasn’t reported by the central bank until April 2019. (For details, read: Don’t be fooled by Oct FDI’s Chinese exception Nov 20, 2019)

Turns out that financial and telecom businesses saw biggest year-on-year increase in November 2019. But these were offset by a fall in inflows in construction, hydel & coal power, and electrical machinery.

Also turns out that Chinese FDI is slowing. Gross FDI inflow from China has substantially fallen in the five months to date, with net increase in Chinese FDI mainly a result of the same one-off base effect in gross outflow in power sector. Non-Chinese FDI has more than doubled to $690 million in 5MFY20, as against $331 million in the same period last year. This is largely due to a large inflow of $330 million from Norway, most of it came in the telecom sector.

But here is the most important nugget that ought to be kept in mind. By the end of November last year, net FDI inflow stood at $477 million. Profit repatriation for that period was $562 million, meaning more money went out than went under the broader head of foreign investments.

In 5MFY20, net FDI stands at $850 million whereas profit repatriation for 4MFY20 is already at $500 million. Repatriation data for November 2019 has not been released yet but if it lands around $125 million (last four-month average), then net flows under investments would be more than $250 million. That may be better than 5MFY19 but that’s still chip change.