Reserve Bank of India data showed that foreign direct investment (FDI) in India grew by 2% to $84 billion in 2021-22, however, the latest World Investment Report (WIR -2022) published by the United Nations Conference on Trade and Development (UNCTAD) presented a different perspective.
The UNCTAD report revealed that FDI inflows into India fell by 30% to $45 billion in 2021-22.
However, the difference between the RBI statistics and those reported by UNCTAD is due to the fact that the RBI data includes equity inflows and reinvested earnings, which are largely responsible for the record numbers and other capital.
If the comparisons are limited to equity inflows alone, RBI statistics show a drop of 1.4% to $58.8 billion in the last financial year. After all, gross FDI inflows are also one of the main reasons for the record number of divestments by foreign investors, which reached USD 27 billion in 2020-21 and USD 28.6 billion in 2021-22.
In 2020-21, for example, cross-border mergers and acquisitions (M&A) jumped 83% to $27 billion in ICT, infrastructure, health and energy, bringing overall FDI to $64 billion. . In 2021-2022, cross-border M&As fell 70% to $8 billion, which affected overall flows into the country. However, India still remains among the world’s top 10 recipients of FDI, according to the WIR report.
The table above shows that FDI increased every year from FY 2017-18 to FY 2020-21. FDI recorded a massive growth in the 2020-21 financial year of 19.2% to reach $59.6 billion, compared to $50 billion the previous year. But the following year, FDI fell by 1.4%.
Why have FDI inflows decreased?
Experts say the immediate reason is that the major mergers and acquisitions (M&As) that have attracted FDI flows in recent years have not been repeated. One of the main reasons for the decline in FDI around the world was the Covid-19 pandemic which had halted many projects and investments.
Entries by country in India:
According to the recent RBI annual report, Singapore topped the list of top investors with $15.9 billion in fiscal year 2021-22, followed by the United States with $10.5 billion, and then of Mauritius with 9.4 billion dollars, Netherlands-4.6 USD. billion and Switzerland with $4.3 billion.
These were the top 5 investors in India in the financial year 2021-22. In contrast, Denmark and France are at the lowest with $0.3 billion each. And then Thailand, Luxembourg and Canada with 0.5 billion dollars of investments each.
Compared to the previous year, investment from Singapore increased from $17.4 billion to $15.9 billion and that from the United States to $10.5 billion from $13.8 billion.
However, investments from Mauritius increased from $5.6 billion to $9.4 billion. Additionally, investments from the Netherlands and Switzerland increased to $4.6 billion from $2.8 billion and $4.3 billion to $0.2 billion respectively.
Sector investment in India
The manufacturing sector attracted the largest inflows to India in the fiscal year 2021-22, which rose to USD 16.3 billion from USD 9.3 billion the previous year. Computer services came next with $9.0 billion, but fell significantly from $23.8 billion to $9.0 billion. Communication services increased $6.4 billion from $2.9 billion. Similarly, retail and wholesale trade was in fourth place with $5.1 billion. In addition, financial services increased from $3.5 billion to $4.7 billion.
While the commerce sector recorded no investment in the financial year 2021-22. Real estate activities attracted only $0.1 billion as in the last financial year, followed by the mining sector with $0.4 billion.
Factors Affecting FDI Inflows to India
Anitha Rangan, Economist at Equirus, says: “FDI investors are therefore long-term, unlike FII investors who may or may not be long-term. Therefore, the factors that influence FDI investors are more than pure investment considerations. investment in the sense that return on investment is paramount, ease of doing business, corporate governance and transparency play an important role.”
Rangan adds that a primary factor will be political and economic stability. “In the Indian context, although the latter is very positive, we are certainly improving the metrics of ease of doing business and governance and there is still a long way to go,” Rangan said.
However, according to Madan Sabnavis, Chief Economist, Bank of Baroda, “FDI is driven by two sets of factors. The first is the amount of available funds that investors need to place in various countries. Here, besides government policies, what matters is space in different sectors, as FDI is concentrated in specific sectors.
Experts note that India is a consumer-driven economy with a population of 1.4 billion and it is also relatively young and presents multiple opportunity in almost every sector. Investments are therefore necessary.
“Compared to the world, India is perhaps the fastest growing nation and on the front line to move from the fifth largest economy to the third. So FDI investment is a need of the hour and present a win-win opportunity for any investor to participate in India’s growth cycle,” says Rangan.
Will FDI increase in the coming quarters?
Rangan asserts that “the coming quarters will only see an increase in FDI”. She added that the world, especially the developed world, is likely to experience a recession or a flattening of growth.
“India is perhaps the only country with a strong growth trajectory and among Asian economies, India exhibits a stable political and economic framework,” Rangan said.
She further states that India’s consumption has led to growth while being the nation that has great potential to replace China as an exporting nation.
On the other side, Sabnavis says: “In my opinion, it will remain broadly in line with last year and be stable.”
What steps should the Indian government take to increase FDI?
Sabnavis suggests the government will need to work more on the ease of doing business to support FDI. At present, the permitted limits are not a problem, as almost the entire economy is open to FDI.
“The issues are more operational and some areas that can be looked at are bankruptcy, investment facilitation in terms of permits, etc. which vary by state and stable policy framework,” says Sabnavis.
Rangan shares a different view, saying that India lacks its R&D capabilities and its low R&D spending compared to developed and even developing countries is not a new premise.
Meanwhile, experts suggest that to attract investment, stakeholders will need to polish their ideas. The government encourages production in India through Make in India, One District One Product and PLI schemes. However, a similar enthusiasm, if shown towards R&D, can go a long way in eliciting and attracting FDI.