Sushma Ramachandran

Russia seems to be the new kid on the block in the arena of foreign investments in India. Its enthusiasm for investing in India can only be welcome when the economy is showing a slight slackening of growth. The data for the second quarter of the current fiscal - July to September - has shown a rise of only 5.4 percent, the lowest in the last seven quarters.

 This dip is attributed to the impact of the elections and the slowdown in capital expenditure over this period. Even so, Russian President Vladimir Putin’s comments are encouraging as he has declared readiness to set up manufacturing projects and that investing in India is profitable. The positivity contrasts sharply with recent comments of U.S. President-elect Donald Trump who threatened to impose punitive 100 percent tariffs on countries in the  BRICS group, like India.

The Russian interest in investing here is also timely as foreign direct investment flows have dipped in recent years. Gross FDI inflows have fallen from 84.4 billion dollars in 2021-22 to 71.4 billion dollars in 2023-24. There has been an upswing in the current fiscal, however, as these rose by 45 percent in the first six months of the year - April to September - from 20.5 billion dollars last year in the same period to 29.79 billion dollars.

One of the reasons for the renewed spurt this year could be the impact of the China Plus One policy being adopted by many multinationals in the past few years. The strategy is meant to mitigate the risks of corporates that have been dismayed by China’s erratic policies during the Covid pandemic. There has also been concern over the potential for a trade war, especially in light of Trump’s focus on the need to levy punitive tariffs on imports from China. India has thus become one of the major destinations for multinationals seeking to relocate plants or set up fresh projects.

Yet the declining trend in FDI inflows over the last three years indicates that economic reforms need to be a continuing process to improve the investment climate. The difficulties in dealing with labour issues as well as land acquisition continue to be a bottleneck in setting up new enterprises. Research studies have shown that there are still thousands of rules and regulations on the statute books at the state level that need to be complied with before setting up a new venture.

The multiplicity of clearances that existed earlier at the central level have been considerably reduced but there continues to be onerous red tape at the state and even municipal level. The number of compliances needs to be cut down drastically as this is a major hurdle for fresh investments.

At the same time, persistent weakness in domestic demand may also have played a role in slowing down new investments. Consumption in both urban and rural areas has been affected this year by continuing inflationary pressures, especially in the food segment. The festival season brought a spurt in demand but not as much as expected and there is thus little reason to expand production capacities.

Russia, on the other hand, is looking beyond these short-term constraints and considering long-term investments. These include a joint venture for manufacturing railway wagons for the Vande Bharat programme. The largest locomotive manufacturer in that country, Transmasholding (TMH), is collaborating with the Indian Railways for this project which envisages production of rolling stock for supply to both India and Russia in the coming years.

With Putin having commended the Make in India programme, domestic manufacturing projects are likely to be an area of interest. These are reported to include heavy engineering, infrastructure, and defence sectors.

Such investments are also expected to rely to some extent on Russia’s rupee holdings in this country. These were sizable last year - an estimated eight billion dollars - but have now been brought down considerably due to purchases of defense equipment and machinery. The amount in the rupee accounts had risen owing to the huge imbalance in trade between the two countries.

This is the consequence of India buying much of its oil from Russia ever since the Ukraine war began, while exports were extremely low. During 2023-24 imports - largely of crude oil - were 61.15 billion dollars while exports were only 4.26 billion dollars, leaving a trade gap of 56.89 billion dollars.

The earlier rupee-rouble payment mechanism that was established during the Soviet era has been revived so that purchases can be made under this system. Initially, this was a concern on the Russian side as rupees were accumulating here and there was no way to utilize these funds. Subsequently, however, it has been possible to use the rupee accounts for the purchase of machinery from here.

While the payment glitches can be ironed out, the fact remains that it will be a direct rupee-rouble exchange, bypassing the dollar. This could be an irritant for the new administration as Trump has already expressed concern over plans for an alternative currency being floated by the BRICS group.

Yet India has noted that it is not in favour of de-dollarisation and has no interest in the prospect of an alternative currency. Even the revival of the rupee payment system is merely an extension of an existing mechanism meant only for bilateral trade with Russia.

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New Delhi has to view the Russian offer of investments in its self-interest. Emerging economies need investment flows to push growth. Even at their peak, FDI inflows have only been around 80 billion dollars annually. This is far lower than the 163 billion dollars of FDI going to China last year. Russian investments will thus be a welcome addition to the inflows coming from the rest of the world.