The need of the hour is to revive the economy, which is currently in the nascent stage of its growth. India was one of the worst-hit economies that had contracted by an unprecedented 24.4 percent in the first quarter of 2020 and by 7 percent for fiscal 2020. Various economic experts and the economic theory effectively have pointed towards various ways by which the economy can be revived.
The mantra for growth is robust foreign direct investment (FDI). It is no news that foreign direct investment is a key driver of economic growth. However, for India, the FDI flows have taken a huge dip. This is true not only for India but also other nations because of a simple fact: the COVID-19 pandemic.
How the developing economies faced the brunt?
It is to be noted that FDI flows reduced to $1 trillion in 2020, according to the UNCTAD World Investment Report 2021. It is worth mentioning here that the fall in FDI flow in the global economy was down by 35 percent compared to the pre-pandemic level. Moreover, according to the data, the greenfield investment announcements also effectively plummeted by 44 percent in value. On the other hand, international finance too plummeted by a significant 53 percent for developing economies. Comparing the stats of the developing and the developed economies, international finance plummeted by only 16 percent and 28 percent for the developed economies.
Thus, it can be rightfully stated that the developing economies faced a huge brunt of the pandemic. this was mainly due to the fall in the greenfield FDI in these economies as such investments are mainly aimed at productive assets and infrastructure development in the developing economy.
To state that India’s story was any different than the developing economies would be a shortsighted assessment. According to reports, the greenfield FDI shriveled to $24 billion for the financial year 2020, which was effectively 19 percent lower compared to the FDI inflow in the financial year 2019.
Further, according to the reports, Greenfield FDI is effectively and quite detestably expected to contract in the financial year 2021. This will be due to the odious COVID-19 second wave and high predictions of the third wave. Thus, given all the data, the severity of the pandemic in terms of FDI should make governments’ focus more on reviving the FDI flows. This economic step should be coupled with the rising levels of vaccination in the economy.
It is to be noted that the pandemic has severely affected not only the economy but also multinational firms. This is because several multinational firms have extensive involvement in global value chains around the world. Thus, building resilient supply chains should effectively remain a top priority for the firms and policymakers.
Building resilience across the economy
Given the nature of the recurring pandemic, it is symbolic for firms to develop resilience for the same. Thus, for a firm, building resilience requires key three components. This includes risk management, rebuilding the firm’s decision on production-network restructuring, and paying attention to adopting sustainable business practices.
The first includes rebuilding the firm’s decision on production- network restructuring which is an effective trade-off between reducing excessive dependence on a single supplier and reshoring.
The second strategy involves risk management solutions. The risk management technique asks for a focus on strengthening supply chain networks globally to positively absorb shocks through better monitoring. The third involves providing attention towards adopting sustainable business practices. This will effectively mitigate supply chains from social, environmental, and governmental risks.
Thus, for the economy to recover, it is quite crucial for the economies to priorities investment in a sustainable recovery. This will effectively mitigate the usage of the strategy where the investment is effectively directed towards improving production capacity. Such a claim has been corroborated by the UNCTAD report. The report highlights significantly and positively a positive correlation between FDI and the Productive Capacities Index.
On the other hand, it has become quite important for governments to invest in productive assets and projects. This will lead to a greater push in the productive industries that will help recuperate the losses that had been inflicted by the pandemic on the economy.
On the other hand, it is no news that governments around the world have been unveiling economic stimulus packages to infuse liquidity in the economy so that the demand can pick up. Much of the stimulus is being directed towards infrastructure projects, which is a productive asset. Thus, this scenario provides a perfect opportunity for incorporating sustainable development goals in such recovery measures.
It is to be noted that the importance of achieving the SDGs is immensely crucial for the overall development that the economies are aiming at. This will, lead to robust growth as SDG investment leads to investment in productive assets like education, energy, health, governance, infrastructure among others. thus, this will effectively lead to improvement in the ease of doing business. Consequently, a conducive business environment will lead to an uptick in FDI.
Ease of doing business: Indian context
According to reports, for India, an emphatic one percent increase in the ease of doing business parameter leads to a 6.32 percent increase in FDI. Further, there have been pieces of evidence that suggest that FDI flows are larger and fatter in states that perform much better on the aforementioned SDG index. Thus, ease of doing business and investment in SDG are key drivers of investments and FDI flow into the economy.
Moreover, according to reports, Sustainability-themed funds have actually effectively managed to recover quickly within the first half of the financial year 2020. This can be corroborated by the fact that the inflow of funds had amounted to $164 billion and is positively estimated to reach over $300 billion. Thus, it can be stated that the robust surge of these funds has highlighted their popularity.in addition to the rise in their popularity, it has also effectively highlighted the popularity of viable investment options. Thus, in this regard, India can leverage capital markets for sustainable development.
This makes sustainable bonds’ popularity for a developing economy such as India crucial. This should lead to the adoption of sustainable financing for the growth of the overall market.