FDI Flows Decline in First Half of 2023

By: Damini Mehta

Total FDI inflows in India from April 2000 to March 2023 stood at $919 bn.

Since the opening up of the Indian economy in the 1990s, the country has witnessed a significant inflow of investment, both foreign direct investment (FDI) and foreign portfolio investment (FPI). The last few years have given a further boost to foreign investment inflows in the country as the government has liberalized the policy and a majority of the sectors now fall under direct route of FDI entry in India with no prior government approval needed. Total FDI inflows in India from April  2000 to March 2023 stood at $919 bn. From $45.15 bn annual FDI flows in India in FY 2014-15, the investment value through the direct route jumped to $60.22 bn in 2016-17 and further to $83.57 bn in FY 2021-22. While the pandemic years of 2020, 2021 and 2022 slowed down investment and economic activity across the globe, India witnessed its highest ever FDI inflows in 2021-22.

A sectoral analysis of FDI inflows in India in 2022-23 reveals that services sector (financial, banking, insurance, Non Fin/ Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (16%), Computer Software & Hardware (15%), Trading (6%), Telecommunications (6%) and Automobile Industry (5%) were the top five sectors receiving highest FDI Equity Inflow in FY 2022-23. Of this, Maharashtra clocked the largest share at 29% followed by Karnataka (24%), Gujarat (17%), Delhi (13%), and Tamil Nadu (5%).

In spite of the uptick in FDI flows in the last year, the period between April and September 2023 has recorded a decline in FDI compared to the same months in the previous year.

According to the data released by the Department for Promotion of Industry and Internal Trade (DPIIT), overall FDI equity flows in the first six months of this year (April-September) stood at $20.48 bn. This marks a 24% decline from $26.9 bn over the same period last year. FDI equity inflows in the July-September quarter of FY24 shrank 7.7% to $9.5 bn. FDI inflows in the same period last year stood at $10.3 bn. While the months from April to August marked a decline in foreign investment, September brought in some relief as the FDI flows jumped to $4.08 bn from $2.97 bn in the same month last year.

Services ($3.8 bn) remained at the top in receiving foreign investment through the direct route just as in 2022-23 followed by construction (infrastructure) activities, and the computer software and hardware sectors at $2.4 bn each. Sectors that witnessed the steepest decline in FDI flows between 2021-22 and 2022-23 are computer software and hardware (fell from $14.4 bn in 2021-22 to $9.3 bn in 2022-23), the automobile industry (from $6.9 bn to $1.9 bn) and construction ($3.2 bn to $1.7 bn). 

According to a United Nations Conference on Trade and Development report, a 12% decline in global foreign direct investment flows in 2022 was driven largely by lower volumes of financial flows and transactions in developed countries. In comparison, developing countries recorded a marginal increase in FDI in flows.

A range of factors dictate capital flows such as domestic FDI policies, geopolitical developments, macroeconomic developments and political instability in the home country. While the current government has been focusing on improving financial relations with other countries including signing FTAs, providing adequate support to the industrial sector in India through favorable policies and budget support will be a further addition to boosting foreign investment flows in the country.