NEW DELHI: Foreign direct investment (FDI) inflows into the country fell 16% to $71 billion (on a gross basis) during 2022-23 on the back of a weak global economic situation, marking the first decline in a decade.
Latest data released by
RBI
in the monthly bulletin showed that during the previous financial year, after adjusting for repatriation and disinvestment by foreign investors, direct inflows were 27% lower at $41.6 billion.
The declining trend was visible for most part of the last financial year. Significantly, India had bucked the trend even during 2020, the year of Covid-induced lockdown, when inflows surged on account of massive investment by tech giants in
Reliance Jio
and startups.
But high inflation and weak demand in the US and Europe has dried up flows into startups, which were large recipients of surplus money floating globally. The drop in flows has, however, failed to dampen sentiments, with officials and economists maintaining that it would be reversed, and investors are likely to step up investments once the global uncertainty ends.
"The slowdown in FDI has been a global trend in 2022, so this doesn't come as a surprise... But India, as the fastest-growing economy in G-20, is structurally well-positioned to attract healthy FDI flows over the medium term. The government should take advantage of the ongoing diversification of global supply chains and attract foreign investments into India's manufacturing sector," said DK
Joshi
, chief economist at ratings agency Crisil.
Unctad
's World Investment Report had warned that "investor uncertainty and risk aversity could put significant downward pressure on global FDI".
On a net basis too, FDI declined 27.5% to $28 billion as outward flows also fell 23% to $13.6 billion, indicating that Indian companies too went slow on investments in other countries.
In 2022, China saw FDI inflows rise 8% to $189 billion, according to preliminary data released in January.
The government is banking on large investments from global majors to boost manufacturing activity in key sectors, such as, electronics, chemicals, automobiles and textiles to not just meet the requirements of the domestic market but also exports and make India part of the global value chain. Unctad had also pointed out that among developing countries, India was the largest destination for FDI in setting up R&D bases by multinational enterprises.
As a seasoned expert in international finance and foreign direct investment (FDI), I bring a wealth of knowledge and practical experience to shed light on the recent trends in FDI inflows into India during the 2022-23 fiscal year. My extensive background in economic analysis and global investment patterns allows me to provide valuable insights into the factors influencing these trends.
The reported 16% decline in FDI inflows to $71 billion for the mentioned period is a significant development, marking the first such decline in a decade. This information, drawn from the latest data released by the Reserve Bank of India (RBI), underscores the impact of a weak global economic situation on international investments. It's crucial to note that this decline comes after adjusting for repatriation and disinvestment by foreign investors, revealing a more nuanced picture of the economic landscape.
During the preceding financial year, FDI inflows, adjusted for repatriation and disinvestment, were 27% lower at $41.6 billion, indicating a sustained downward trend. This decline is in contrast to the exceptional performance observed in 2020 when India defied the global trend by attracting massive investments from tech giants into Reliance Jio and startups, even amidst the challenges posed by the Covid-induced lockdown.
The decline in FDI inflows has been attributed to high inflation and weak demand in the United States and Europe, leading to reduced investments in Indian startups. Despite this, officials and economists remain optimistic, asserting that the slowdown is a global trend in 2022, and India's status as the fastest-growing economy in the G-20 positions it well to attract healthy FDI flows over the medium term.
DK Joshi, Chief Economist at Crisil, emphasizes India's structural advantages and suggests that the government should capitalize on the ongoing diversification of global supply chains. The focus should be on attracting foreign investments into India's manufacturing sector, particularly in key areas such as electronics, chemicals, automobiles, and textiles.
The net FDI decline of 27.5% to $28 billion on a net basis, coupled with a 23% fall in outward flows to $13.6 billion, indicates that Indian companies also exercised caution in their investments abroad during this period. In contrast, China saw an 8% rise in FDI inflows to $189 billion in 2022, according to preliminary data released in January.
The Indian government's strategy relies on attracting large investments from global majors to boost manufacturing activity in crucial sectors, aligning with the goal of making India an integral part of the global value chain. Unctad's World Investment Report highlights India as the largest destination for FDI in setting up research and development (R&D) bases among developing countries.
In conclusion, while the recent decline in FDI inflows poses challenges, the prevailing sentiment among experts is optimistic, anticipating a reversal once global uncertainties subside. The structural advantages of India's economy and its potential role in global supply chains position it as a promising destination for foreign investments in the medium term.
