FDI slump: A temporary blip or a new normal for India?

India's FDI inflows dip, but strong fundamentals and strategic trade deals offer hope for long-term growth.

India has experienced a decline in net Foreign Direct Investment (FDI) over the past year, contrary to expectations of a pickup in 2024. Net inflows in India fell by 38.4% year-on-year to $15.41 billion in the first 10 months of this fiscal year, calculated as inflows minus outflows. This downturn reflects foreign investors increasingly withdrawing their funds and profits, with nearly $34 billion being repatriated in this period, a significant increase from $24.99 billion the previous year, according to the Reserve Bank of India (RBI).

RBI data from the March 2024 bulletin shows that India’s FDI stood at $25.53 billion with outflows of $10.11 billion between April 2023 and January 2024, compared to $36.75 billion in inflows and $11.75 billion in outflows in the same period last year. Despite the decline, India outperformed other Asian nations as global FDI flows weakened in 2023. The manufacturing, computer services, energy, financial services, and transport sectors attracted the majority of FDI inflows, representing about two-thirds of the equity inflows during the financial year.

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Significant inflows to India came from Singapore, Mauritius, the US, the Netherlands, Japan, and the UAE, comprising 80% of the equity flows. Challenges such as decreasing real GDP growth rates in these countries, particularly in Singapore and the US, the threat of a global recession, economic crises from geopolitical tensions, and protectionist measures are impacting inflows.

Slump in FDI inflows

Several factors are contributing to the inflows slump in India. A major reason is the cautious approach adopted by foreign investors due to a slowdown in real GDP growth rates in major source countries such as Singapore and the US. Additionally, the global economic uncertainties, geopolitical tensions and rising protectionism have dampened investor sentiment.

Despite these challenges, India holds a strategic advantage. The recent trade agreements offer a glimmer of hope. These agreements aim to attract a significant amount of FDI over the next decade and a half, potentially creating new jobs and boosting the economy. Analysts remain optimistic, pointing towards India’s strong economic fundamentals like a healthy industrial output and attractive PLI schemes that incentivise specific sectors.

The current slowdown is likely a temporary blip caused by global headwinds. India’s long-term prospects for FDI remain promising, especially considering its strong economic fundamentals. As the country aspires to become a global economic powerhouse, substantial FDI inflows will be instrumental in developing its infrastructure, fueling growth, maintaining a healthy balance of payments, and stabilising the rupee’s value.

The trade agreement with the European Free Trade Association are expected to boost FDI significantly, aiming to attract $100 billion over the next 15 years and create one million jobs. Analysts had predicted robust inflows based on strong macroeconomic indicators, industrial output, and attractive Production Linked Incentive (PLI) schemes, despite global challenges. India permits FDI via the automatic route in most sectors, with government approval required for others. Currently, 14 sectors benefit from PLI schemes with a total outlay of Rs 1.97 lakh crore.

The Department for Promotion of Industry and Internal Trade (DPIIT) emphasised the need to continually reassess FDI policies to maintain India’s attractiveness to investors. Sectors like pharmaceuticals, food processing, and medical devices have thrived under the PLI schemes, drawing foreign investment. To attract more FDI, India might consider raising investment limits, easing regulatory hurdles, improving infrastructure, and enhancing the business environment. Some sectors, however, remain off-limits for foreign investment.

While the current FDI decline is a cause for concern, India’s robust fundamentals, proactive policy measures, and strategic trade deals position the country for long-term success in attracting foreign investment. By continuously improving the business environment and leveraging its strengths, India can emerge as a magnet for global FDI, fueling its economic ambitions and solidifying its position as a global economic power.