Recent numbers released by the Reserve Bank of India on foreign direct investments for FY24 raises concerns over weak gross inflows. But the alarm being raised over the decline in net FDI to $10.6 billion is overdone. Fall in net FDI flows is led by repatriation and divestment touching a decadal high of $44.4 billion. While it is being inferred that the high repatriation figure implies that foreign promoters and investors are exiting India or withdrawing large sums out of the country, that may not be the case.
The repatriation numbers have jumped due to foreign investors booking partial profits on their holdings in Indian companies due to the strong rally in the stock market, last fiscal year. These outflows will moderate as the bull-run in small and mid-cap stocks abates. An analysis by this newspaper shows that foreign promoters of 66 listed companies pared their stakes in FY24. While the stake sales staked between 1 and 30 per cent, most of the promoters sold less than 5 per cent stake. It is noteworthy that almost all promoters continue to hold significant stakes in their companies, negating the perception that they are stampeding out of India. The companies have also announced to the public that they wish to continue doing business in India for the long-term. They have termed their share sales last fiscal year as unlocking of some value and reallocation of capital to other regions. Besides this, many PE and VC investors have also used the improving valuation in start-ups to pare or exit their stake. Sales by these investors amounted to $12 billion in 2023, across 109 deals.
These sales seem to be driven by the pressure on these funds to distribute returns to their investors. MNCs have paid large amounts of dividends to their shareholders given the improvement in their profitability due to falling commodity prices. As demand conditions become more challenging and affect profitability, dividend repatriation can also moderate going ahead. A reversal in interest rate cycle in the US and the UK could also help stem the reallocation of capital out of India. But there is certainly a marked slowdown in gross FDI inflows. It was stagnant at $71.4 billion in FY24 when compared to the previous fiscal, but it is down 15 per cent when compared to FY22. That was the year when FDI inflows spiked sharply due to deals done by the Reliance Industries group across their verticals. This should be kept in mind while reading the data. Tightening global liquidity and increasing cost of funds as global central banks tightened their monetary policies to fight inflation may also have affected inflows in the last two years. The uncertainty around the general elections could also be holding the foreign investors back.
But as the RBI notes, India is among the top ten economies which are expected to receive large FDI flows in 2024. The next government should make sure that this potential is realised, for FDI inflows are required to help buttress government capital expenditure, in the absence of a revival in private capex. To enable this, ease of doing business in the country needs to be improved significantly by simplifying compliance and expediting approvals.