Opinion Why India needs to pay closer attention to FDI trends

In 2021-22, total foreign direct investment flows into India had touched a high of $84.8 billion. However, in the subsequent year, overall flows — equity, reinvested earnings and other capital — fell 16 per cent to $71 billion. The disaggregated data shows that while equity flows (through the government/automatic/acquisition route) fell from $58.7 billion to $46 billion, reinvested earnings seemed to have held steady over this period. The recently released data shows that even though there has been an uptick in September this year, overall FDI equity flows in the first six months of the year (April-September) stood at $20.48 billion, down 24 per cent from $26.9 billion over the same period last year. This warrants closer examination.

As per the disaggregated data, some of the sectors which have witnessed the steepest declines in FDI flows between 2021-22 and 2022-23 have been computer software and hardware, where inflows fell from $14.4 billion in 2021-22 to $9.3 billion in 2022-23, the automobile industry (from $6.9 billion to $1.9 billion), construction which involves infrastructure activities ($3.2 billion to $1.7 billion) and metallurgical industries ($2.2 billion to $219 million). On the other hand, FDI flows remained healthy in the services sectors — this includes financial, banking, and insurance services, outsourcing, research and development, courier, tech, testing and analysis (flows rose from $7.1 billion in 2021-22 to $8.7 billion in 2022-23), chemicals other than fertilisers ($966 million to $1.8 billion) and drugs and pharmaceuticals (from $1.4 billion to $2.05 billion). In the first six months of this year, flows have fallen in the services sector, computer hardware and software, chemicals (other than fertilisers), but have risen in construction (infrastructure activities), among others. Alongside, data on the investing country shows that between 2021-22 and 2022-23, FDI flows fell from countries such as Mauritius, US, Netherlands, Cayman Islands and Germany, but rose from Singapore, UAE and Cyprus. And among the major states attracting investments, FDI flows have fallen most between 2021-22 and 2022-23, and in the first six months of the ongoing year.

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In 2022, global foreign direct investment had declined by 12 per cent to $1.3 trillion as per a report by the United Nations Conference on Trade and Development. However, this was largely a consequence of lower volumes of financial flows and transactions in developed countries. In comparison, FDI in developing economies rose marginally as per the report. While several factors influence capital flows into countries — these range from the prevailing global and domestic macroeconomic environment, the domestic policy and regulatory environment and political stability, among others — considering that India is widely expected to be a big beneficiary of the China plus one strategy, policymakers must pay closer attention to these trends in FDI.