India’s FDI inflows dipped from traditional sources

Foreign Direct Investment inflows into India from traditional sources, such as the United States, Mauritius, the Netherlands, and the Cayman Islands, fell significantly in FY23. However, FDI inflows from Singapore and the UAE showcased increments.

Despite the short-term decline, India’s potential as an investment destination remains strong, and the country is poised to regain momentum in attracting foreign direct investment in the coming years.

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Foreign Direct Investment inflows into India fell sharply in FY23, owing primarily to a drop in equity flows from traditional sources such as the US, Mauritius, the Netherlands, and the Cayman Islands. However, there was a significant increase in FDI inflows from Singapore and UAE. The official data indicates a shift in investment patterns and highlights the evolving landscape of FDI in India.

India’s current investment climate

Total Foreign Direct Investment (FDI) inflows in India in the last 23 years (April 2000 – March 2023) was US$ 919 billion, while the total FDI inflows received in the last 9 years (April 2014- March 2023) was US$ 595.25 billion, which amounts to nearly 65% of the total FDI inflow in the last 23 years.

According to official data from DPIIT, FDI equity inflows from Mauritius declined to US$ 6,134 million in FY23, down from US$ 9,392 million in the previous fiscal year. Similarly, FDI from the United States stood at US$ 6,044 million, showing a decrease from US$ 10,549 million in FY22. The Netherlands witnessed a decline in FDI inflows to US$ 2,498 million from US$ 4,620 million, while inflows from the Cayman Islands dropped to US$ 772 million from US$ 3,818 million.

In contrast to the decline from traditional sources, FDI inflows from Singapore rose significantly to US$ 17,203 million in FY23, up from US$ 15,878 million in the previous fiscal year. Additionally, FDI from the UAE witnessed a notable increase, reaching US$ 3,353 million, compared to US$ 1,032 million in FY22.

Source: Dpiit.gov.in

Despite the mixed performance from various sources, total FDI inflows into India declined by 22% to 46.03 billion during FY23, as compared to US$ 58.77 billion in FY22. 

Sectors and states attracting FDI inflows

In terms of sectors, FDI inflows in FY23 were prominent in computer hardware and software (US$ 9.39 billion), services (US$ 8.7 billion), trading (US$ 4.79 billion), drugs and pharma (US$ 2.05 billion), chemicals (US$ 1.85 billion), automobiles (US$ 1.90 billion), and construction and infrastructure (US$ 1.70 billion). 

The state with the highest amount of FDI attraction was Maharashtra (US$ 14.80 billion), which was followed by Karnataka (US$ 10.42 billion), Gujarat (US$ 4.71 billion), Delhi (US$ 7.53 billion), Tamil Nadu (US$ 2.16 billion), Haryana (US$ 2.6 billion), Telangana (US$ 4.74 billion), Jharkhand (US$ 2.65 billion), Rajasthan (US$ 2.07 billion) and West Bengal (US$ 1.42 billion).

Factors contributing to this decline

There are a number of reasons why FDI inflows from traditional sources have declined in recent years. Some of the most common reasons include:

• Global FDI slowdown: The global economy has been growing at a slower pace in recent years. According to UNCTAD’s World Investment Report 2023, after a strong rebound in 2021, global FDI fell by 12% in 2022 to US$ 1.3 trillion. India’s decline in FDI is not an isolated phenomenon but reflects the overall global trend.
• Shifting investment patterns: The global investment landscape has been shifting in recent years, with investors increasingly looking to emerging markets in Asia and Africa. India has been losing out to these markets in terms of FDI inflows.
• Rerouting of investments: A considerable portion of FDI inflows from tax havens like Mauritius, Cyprus, the Cayman Islands, and Singapore may represent investments rerouted to other countries in Asia, such as Vietnam. These countries offer a number of advantages over India, such as a lower cost of labour and a more streamlined regulatory environment.
• Regulatory measures: The Indian government has introduced some new regulations in recent years that have made it more difficult for foreign investors to enter the Indian market. These regulations have been cited as a reason for the decline in FDI inflows.
  
• Weak demand: Foreign investors are more likely to invest in countries where there is strong demand for their products or services. So, if there is weak demand in India for their product or services this makes it more difficult for businesses to attract foreign investment.
• Shortage of infrastructure: India still faces a shortage of infrastructure, such as roads, ports, and power plants. This has made it difficult for businesses to operate in the country and discouraged some foreign investors from investing in India.

The future ahead

While global economic conditions and uncertainties may impact the timing and magnitude of FDI inflows, India’s long-term growth story remains intact. The government’s commitment to economic reforms, coupled with a young and dynamic workforce, presents significant opportunities for foreign investors. 

The government’s regulatory measures, upgraded infrastructure, and promotion of ease of doing business and an investor-friendly ecosystem are aimed at ensuring transparency and reducing investment rerouting practices. With its favourable growth outlook and attractive sectors, India remains an appealing investment destination despite the global FDI slowdown.