India’s Demonetization will encourage more FDI from Asia-Pacific

The Narendra Modi government in India recently banned the use of 500- and 1000-rupee notes. This unprecedented move resulted in the withdrawal of 86 per cent of currency in circulation. The ostensible objectives behind the government’s move was to tackle black money, reduce counterfeiting, and check terrorist financing. A further objective was to facilitate India’s transition to a cashless economy by adopting more digital transactions. While the objectives behind the move have been generally appreciated by most, it has drawn criticism for the hardship it has inflicted on the economy. India’s large informal sector, which is heavily dependent on cash transactions, has been hit by the move. The cash crunch also has constrained consumption expenditures leading to a decline in demand in several industries such as real estate, construction, and tourism. Some are concerned reductions in economic activity may lead to a slowdown in India’s GDP growth, which currently is growing at 7.3 per cent, which could adversely impact FDI inflows into the country. Even so, in the long-term, FDI inflows into India should respond positively to the demonetization because foreign investors likely are to view positively efforts to move to more transparent digital transactions and the reduced accumulation of black money. American and Chinese government agencies have appreciated the move. Moreover, as part of a series of measures to curb black money and improve regulations, the withdrawal of currency notes and their replacement by new ones along with the impending Goods and Services (GST) tax from April 1 2017 and steady efforts to improve ‘doing business’ conditions make India one of the most attractive investment options in the region. This should encourage more FDI from East Asian economies into India, particularly in transport, electricity, and urban infrastructure, where FDI from China, Japan and Singapore have been showing steady increases.