Saturday, 05 Oct, 2024
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Over the past decade, India has seen a steady influx of FDI across various sectors including pharma, auto, textiles, and railways. This continuous investment has driven infrastructure growth, created jobs, improved export performance, and strengthened the formal sector.
From a macroeconomic management standpoint, given India’s persistent current account deficit and reliance on imported foreign savings, foreign direct investment (FDI) remains the most stable source of foreign funding. More significantly, the Budget 2024 initiatives, such as easing FDI and overseas investment rules and cutting corporate tax rates, are set to deliver a substantial boost to capital inflows.
India needs steady capital to fuel investments, and FDI could drive private spending in greenfield and brownfield projects. Yet, global FDI flows have been shrinking, with India facing the fallout from tighter global liquidity and rising uncertainties.
India’s FDI surged 48 per cent to $16.2 billion in the first fiscal quarter, driven by robust inflows in services, telecom, and pharma, government data reveals. That’s up from $10.9 billion a year earlier. FDI for May and June saw sharp gains, hitting $5.85 billion and $5.41 billion, respectively, compared to $2.67 billion and $3.16 billion last year. April saw a slight dip, with inflows at $4.91 billion, marginally down from $5.1 billion in 2023. Total FDI, including equity inflows and reinvested earnings, jumped 28 per cent to $22.5 billion for the quarter, the Department for Promotion of Industry and Internal Trade (DPIIT) reported.
(Source: DPIIT)
This is promising news for policymakers aiming to solidify India’s status as a top destination for foreign investors seeking to diversify beyond China. With $635 billion in cross-border investment announced globally in the first half of 2024—the fourth highest in two decades—sectors like renewables, semiconductors, and communications dominated, accounting for half of the activity. India has also seen substantial investment in electronics, particularly in mobile phones and components, further aligning with global trends and investor interest in diversification.
It is worth noting that the Economic Survey 2024 painted a grim picture of FDI inflows, citing weak performance due to geopolitical tensions, rising borrowing costs, and global economic fragmentation. Finance Minister Nirmala Sitharaman, presenting the report in Parliament in July, pointed to investor caution driven by global monetary shifts and political uncertainties, which dampened FDI growth. Global FDI flows also dropped in 2023 compared to the previous year, underscoring the broader challenges facing international investment.
Global FDI downturns have hit India's net inflows, which dropped from $42 billion in FY23 to $26.5 billion in FY24. However, gross FDI inflows remained stable, slipping just 0.6 per cent to $71 billion. The Survey asserted that investor interest in India remains unchanged, with the decline in net inflows largely attributed to repatriation and profitable exits, rather than a lack of confidence in the market.
In May, DPIIT Secretary Rajesh Kumar Singh noted that rising global interest rates and escalating geopolitical tensions weighed heavily on FDI inflows into India during 2022-23. These external challenges dampened investor sentiment, contributing to the slowdown in foreign investment during the period.
Also, Moody’s Analytics reported that FDI inflows into emerging markets like India and China declined in 2023, driven by shrinking global investment flows. The fall was attributed to supply-chain disruptions, surging inflation, and tighter funding conditions in the post-Covid-19 environment, which collectively hindered investor confidence and capital movement.
The report, Why FDI Is Shrinking, emphasised that global investment flows are being redefined by economic fragmentation, trade and geopolitical tensions, supply-chain diversification, and tighter regulations aimed at curbing tax haven use. It noted that despite the Indian government's manufacturing push and high-profile investments from companies like Apple, FDI into India has declined in recent years. These challenges have overshadowed India's attempts to attract more foreign investment, hindering growth in capital inflows.
Experts are of the view that a decline in FDI inflows carries broad implications. It directly impacts investment levels, which in turn affects economic growth and job creation. Beyond capital, foreign multinationals bring advanced technology, boosting overall efficiency in the economy. FDI’s long-term nature also lends stability to external accounts, making it a crucial component for maintaining economic resilience. A slowdown could, therefore, undermine both technological progress and financial stability.
