India may surpass China this year in attracting foreign direct investment (FDI), as the gap in inflows between the two has been narrowing with the reforms being implemented by India, according to Japanese financial services firm Nomura.

The trend of rising inflows to India and moderating inflows to China are likely driven by a mix of pull and push factors like divergent growth outlooks, ongoing FDI liberalisation and economic reforms in India, compared to rising labour costs in China, the report added.

American credit rating agency Moody’s Investors Service has also said earlier this month that India’s rising FDI inflows help reduce the current account deficit and also the external financing needs.

Net FDI inflows into India hit an all-time high in January 2016 at $3 billion, on a 12-month moving average basis.

Key highlights of Nomura’s research report

• FDI inflows not only provide a stable source of financing the Current Account Deficit (CAD), but also bring in technical know-how, which can boost India’s productivity growth in the near future.
• The trend of rising inflows to India and moderating inflows to China began in 2013 and FDI inflows to India can surpass those into China in 2016. It is because India already has large investment commitments from MNCs in sectors like electronics, solar energy, auto, defence and railways.
• These trends of rising inflows to India and moderating inflows to China are likely driven by a mix of pull and push factors, such as divergent growth outlooks, ongoing FDI liberalisation or economic reforms in India and rising labour costs in China.
• FDI inflows to India raised from 1.7 per cent of GDP in 2014 to 2.1 per cent in 2015. China had 2.3 per cent of GDP in 2015.

About Nomura Group

• Nomura is an Asia-based financial services group with an integrated global network spanning over 30 countries.
• In October 2008, Nomura Holdings, Inc. acquired Lehman Brothers Holdings’s investment banking and equities unit in Asia and Europe and kept on most of its employees.