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Despite a booming economy, India witnessed a significant drop in foreign direct investment (FDI) in 2023. A report by the United Nations Conference on Trade and Development (UNCTAD) said that FDI in the country plunged 47% last year. Additionally, data disclosed by the Indian government showed a 22% decrease in FDI from January to September 2023, amounting to approximately $48.98 bn.
This was due to shrinking inflows in computer, software, telecom, auto, and pharma sectors. Experts also point to the massive drop in investment from the tax havens, Cayman Islands and Cyprus.
Between April to September 2023, there was a 75% year-on-year contraction in inflows from the Cayman Islands. Also, a 95% annual plunge in investment from Cyprus was recorded during the same period.
According to experts, intensified scrutiny of investment applications from these destinations is the cause of this sharp fall. Notably, Singapore emerged as the leading source of FDI for India in the first nine months of the previous year, with Mauritius following closely.
Rajesh Kumar Singh, Secretary at India’s Department for Promotion of Industry and Internal Trade (DPIIT), told the local Indian dailies that the increased interest rates in the US, the threat of a global recession as well as geopolitical turmoil in Eastern Europe and West Asia have led to subdued foreign investment.
Difficulty in conducting business has impacted FDI inflows
Several economists believe that despite an enhancement in India’s ranking on the World Bank’s Ease of Doing Business index, conducting business in the nation remains difficult.
“Doing business in India has improved, but many challenges remain. Land acquisition can stall construction projects, and the courts are slow-moving institutions,” says the Harvard Business Review.
“Land records may be non-existing or outdated, and environmental clearances have created additional barriers. On top of this, contract enforcement remains challenging,” it adds.
Additionally, in March 2023, India asked 68 countries to renegotiate BITs. This was because the old generation of BITs, signed in the 1990s and 2000s, had become outdated and ineffective. While this move holds the potential for long-term benefits, it has currently resulted in a slowdown in the flow of foreign funds.
Vietnam and Indonesia outpace India in attracting FDI
In sharp contrast to India, Vietnam and Indonesia, the two other beneficiaries of the ‘China plus one’ policy, witnessed strong FDI inflows. Vietnam recorded a 54% surge in FDI in the period between January to October 2023, as per the nation’s local media agencies.
The manufacturing sector in the country remained the strongest driving force as it accounted for 73.1% of the total FDI inflows during the period. Vietnam even won a sovereign credit rating upgrade to BB+ from BB from Fitch Ratings on ‘robust’ FDI.
At the same time, the Ministry of Investment/Indonesia Investment Coordinating Board (BKPM) reported that FDI in Indonesia climbed 16.7% year-on-year in the first nine months of 2023. While China remained the top investor in Indonesia, other investing countries included Japan, the US, Malaysia, and Hong Kong.
Slowdown of FDI in India temporary?
“Inflows of foreign direct investment into India are likely to remain muted,” according to Goldman Sachs. The investment bank estimates the nation’s net FDI will drop below $22.1 bn in the fiscal year ended March 2024 (FY24) from a peak of $44 bn attained in FY21.
However, Goldman Sachs ascertains, “The Indian economy is well-cushioned against external vulnerabilities.” Along these lines, the DPIIT opines that the current drop in India’s FDI does not pose a long-term challenge. The Indian government also asserts that FDI will play a critical role for the South Asian nation to realise its vision of a $5 tn economy by 2025.
“.. we are broadly in line with the overall trends of FDI growth. FDI inflows from 2014-23 period are about $596 bn, which is about double what India received during 2005-14. The trend is positive, and India is still the preferred destination for foreign players,” says DPIIT Secretary Singh. He also contends that the production-linked incentive schemes for sectors like pharma, food processing, and medical appliances will continue to attract foreign investors.
