India’s FDI Flow: What’s Slowing Down and What Lies Ahead?

Foreign Direct Investment (FDI) is crucial for India’s economic growth, bringing in capital, boosting job creation, and supporting the nation’s industries. However, recent data indicates that FDI flows into India have slowed significantly, raising concerns about the country’s ability to attract and sustain foreign investments. In this blog, we’ll break down what’s happening with FDI in India, why it’s losing momentum, and what this could mean for the future.

The FDI Landscape: What’s Changed?

Between April and August 2024, net foreign portfolio flows into India totalled $10.3 billion. Although this sounds like a substantial sum, it is less than half of what came in during the same period last year ($22.9 billion). The trend reflects a broader decline in foreign investments, raising questions about the health of India’s investment climate.

Despite this drop, FDI flows—considered more stable and focused on long-term growth—have shown some resilience. Net FDI during the same five-month period reached $15.4 billion, up from $8.4 billion last year. However, even this increase doesn’t paint a rosy picture. The total FDI in 2023 was $28.1 billion, the lowest since 2012; as a percentage of GDP, it has dropped to just 0.8%. In comparison, it was as high as 2.4% in 2020.

Why is FDI Slowing Down?

Several factors are contributing to the slowdown:

1. Capital Repatriation: One key reason for the FDI slump is capital repatriation by foreign investors. Between April and August 2024, foreign investors brought in $36 billion but pulled out $20.7 billion. This withdrawal pattern intensified compared to the pre-pandemic years when only about 20-50% of inflows were repatriated versus the current 50-80% range.
2. Rising US Interest Rates: The U.S. Federal Reserve’s aggressive interest rate hikes since 2022 have had a global impact. Higher interest rates in the U.S. make it more attractive for investors to keep their money there, leading to a reverse flow of capital away from emerging markets like India.
3. Global FDI Trends: The slowdown in FDI is not unique to India. Globally, FDI flows fell sharply from $1.8 trillion in 2022 to $847 billion in 2023. This decline is reminiscent of the 2009 financial crisis, highlighting a broader shift in global capital flows.

The Rise of Outward Investment

Interestingly, while inflows have decreased, Indian companies have ramped up their investments abroad. Outward FDI reached $8.7 billion between April and August 2024, up from $5.2 billion in the same period last year. Popular destinations for these investments include Singapore, the U.S., and the U.K. Indian conglomerates are increasingly expanding their footprints in foreign markets, as seen in the Aditya Birla Group’s investment in Texas and Infosys’s acquisition of a German R&D firm.

Challenges and Opportunities

The manufacturing sector, a key focus area for FDI, has seen a decline in inflows, attracting only $9 billion in 2023-24. In contrast, sectors like IT have been volatile, with significant fluctuations in investment levels over the past few years.

However, there’s hope on the horizon. India’s production-linked incentive (PLI) scheme attracts investments in critical industries like semiconductors and mobile phone manufacturing. The government’s efforts to create a more investment-friendly environment aim to reverse this downward trend in FDI.

What’s Next for India’s FDI?

While the current FDI trends seem discouraging, they reflect a global capital shift and heightened economic uncertainties. For India to regain momentum, it must create a stable and predictable policy framework that encourages long-term investments. The PLI scheme and reforms aimed at easing business operations could play a significant role in reviving foreign investor interest.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.