The medium-term outlook for foreign direct investments (FDI) inflows for India is positive despite its share in the global FDI, after peaking at 6.5 per cent in 2020, declining gradually to 2.1 per cent in 2023, according India Ratings and Research’s (Ind-Ra).
India slipped to the 16th position in attracting FDIs in 2023 from the eighth position in 2022, per World Investment Report 2024 by UN Trade and Development.
Ind-Ra’s analysis shows, despite a significant surge in the FDI inflow over the years (1995: $2.1 billion, 2023: $28.2 billion), the nature of FDI inflows in terms of states/sectors where they are flowing to have remained skewed.
However, with the increased infrastructure spending by the union and state governments post FY22, the medium-term outlook is positive for FDI inflows, opines Ind-Ra.
The FDI inflow in India suggests three key corridors – Maharashtra-Gujarat in the West (49.5 per cent of FDI inflow during October 2019 – March 2024, 22.1 per cent proportion to all states GSDP in FY23), Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the South (30.3 per cent, 26.0 per cent) and NCR region (Delhi and Haryana) in the North (17.8 per cent, 7.4 per cent).
The proportion of FDI inflows to the three corridors during October 2019 – March 2024 was 94.6 per cent of the total FDI inflows and proportion of these eight states in the total GSDP of states in FY23 was 55.5 per cent, per the agency’s assessment.
The eastern India despite having more mineral wealth has been lagging in attracting FDI so far. Only Jharkhand (1.1%) and West Bengal (0.7%) were able to attract some FDI in the Eastern region.
Services sector
The highest FDI continues to flow in the services sector, followed by manufacturing (excluding computer hardware). Ind-Ra said the proportion of FDI inflows to the services sector in fact increased to 40.9 per cent during FY15-FY24 from 37.0 per cent during FY01-FY14.
Within services, FDI has majorly flowed in sectors such as trading, telecommunications, banking/insurance, IT/business outsourcing and hotels/tourism.
Within manufacturing, it has remained concentrated in segments such as automobiles, chemicals, drugs and pharmaceuticals, metallurgical, electrical equipment, and food processing.
FDI concentrated in few states
“Concentration of FDI in few states suggests that better infrastructure (physical and human) and growth potential are key preconditions to attract higher FDI. The states which have evolved their economic policies around the broader national-level economic policies are able to take advantage and attract higher FDI inflows and thus there are better growth prospects for these state economies”, said Devendra Kumar Pant, Chief Economist, Ind-Ra.
The agency noted that the government introduced the National Manufacturing Policy, 2011 (NMP) to increase the share of manufacturing in GDP to 25 per cent within a decade and create 10 crore jobs.
The NMP inter alia focused on attracting foreign investments and technologies by leveraging India’s expanding market for manufactured goods to encourage the building of more manufacturing capabilities and technologies within India.
Ind-Ra said the realignment of global supply chain has helped in India being one of the alternative supply sources due to the advantages of raw material and low labour cost.
While India had set an ambitious target of increasing the share of manufacturing in GDP at 25 per cent, it had limited success in attracting higher FDI in the sector, Ind-Ra said.
“India aspires to be a developed economy by the turn of century of India’s Independence; hence, a buoyant manufacturing sector is important both form the point of view of stable growth and to generate employment in the country”, says Paras Jasrai, Senior Analyst, Ind-Ra.
The agency said higher inflow in FDI over the past two decades did show up significantly in the FDI/GDP and FDI/GFCF (Gross fixed capital formation) ratios. However, they have remained range-bound.
FDI as a percentage of GDP and GFCF averaged 0.9% and 3.3%, respectively during FY01-FY05 and increased thereafter, per the agency’s analysis.
“While FDI as a percentage of GDP oscillated between 1.1% to 3.5%, as a percentage of GFCF it oscillated between 3.3% to 10.0% during FY06-FY20. Both these ratios peaked in the COVID-19 impacted year (FY21). Thereafter, it is on a declining trend,” it added.