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Thursday, 26 June 2014 00:00
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Santosh's edit

Slowing FDI to EMEs and rising protectionism likely


Two reports, one this week and one last week, indicate a future that could be more problematic for India than even the US taper that, in the initial period, caused an upheaval in all global markets. While FDI flows are likely to continue to rise over the next couple of years, the share going to developing countries like India are likely to fall/stagnate as investors choose to take advantage of the rising growth in the developed world. In 2014, for instance, UNCTAD economists expect FDI flows to developed countries to increase by 35% as compared to a near flat, possibly a small fall, in FDI to developing countries. FDI flows to the developed world had fallen from 52% in 2011 to a mere 39% in 2013—by 2016, UNCTAD expects this to go back to around 52%. Within this, the share of the US is likely to rise further, something that has been visible for the past few years—while the UNCTAD report uses the term ‘reshoring’, others have talked about the re-industrialisation of the US, driven by the dramatic fall in energy prices following the shale revolution and the near stagnation of wages following the great financial crisis.

Equally worrying, a WTO report out last week points to a continuing increase in protectionism in the form of more anti-dumping investigations and special licensing requirements in developed economies. While a total of 116 protectionist measures were put in place in the June to November period last year, another 112 were put in place from November last year to mid-May. A Financial Times report points out that, as compared to the WTO projection that trade in developed countries such as the US and EU would grow at 4.7% in 2014, the highest since 2010, the actual growth in the first quarter of the year saw trade volumes rise just 2.2%, and 1.5% in dollar terms. That’s worrying for a country like India where, after a long period of time, exports are just about showing signs of picking up.

In a business as usual scenario, that spells trouble for India, both in terms of its export markets as well as FDI inflows. A lot, however, depends on the policies the new government puts in place. The UNCTAD report talks of how, developed country MNCs are looking to take over pharma firms in developing markets—the first quarter of 2014 saw more cross-border M&As than all of 2013. So, if India liberalises pharma takeovers, this could stimulate FDI flows. Raising prices of natural gas and rationalising of policy distortions could stimulate flows from global players like BP; freeing up more spectrum as well as better M&A rules could see international telecom majors putting in more funds. It is a bad market, but good policies could mitigate the risks.




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