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FDI in India: Inflows in 2023 and Last 10 Years

Foreign Direct Investments contribute significantly to a country’s GDP. It was in 1991 that India opened its markets and opted for the Liberalisation-Globalisation-Privatisation policy, recognizing the importance of foreign investments in improving the country’s financial health. High fiscal deficit, shrinking international trade and rising inflation led India to this step.  

Recently, the United Nations published a report that India’s FDI in 2023 dropped by a whopping 43% compared to its previous year’s FDI inflows. The rank of FDI inflows has also dropped from India, the 8th rank in the world in 2022, to the 15th rank in 2023.

Some countries, like Mexico, Brazil, Germany, Canada, etc., have seen a sharp rise in their FDI inflows rank, while some even supersede India. The article purports to find the reasons behind this and the factors affecting India’s FDI inflows by studying 10 years of India’s FDI history.

Let’s Understand about FDI

Foreign Direct Investment is an investment of a firm or an individual in business interests outside their own country. Examples of this include:

1. Tesla, which is a US company setting up its factory in China,
2. Purchase of an existing company, e.g. Walmart from the US purchased a retail chain called CIFRA from Mexico
3. China Investment Corporation invested 5 billion dollars in Morgan Stanley from the US for its 10% share. 

Know about FDI Inflow and Outflow

FDI consists of both inflow and outflow. When country A invests in country B, it is an FDI inflow for country B and an FDI outflow for country A. Another example is when Toyota builds a manufacturing unit in South Carolina, which becomes an inflow in FDI for the US but an outflow for Japan.

While the inflows mean that the country is attracting investments and growing in terms of economy, outflows mean that investment in the country is reducing, which may heavily take a toll on the country’s economy. To understand it better, let us know the factors affecting the inflow and outflow of FDI.

Factors Affecting the Inflow and Outflow of FDI

Given below are the significant factors responsible for affecting the inflow and outflow of FDI-

Wage Rates

If any country generally has low wage rates for its labour, there is a high chance that a country with high wage rates will set up a manufacturing unit with a low wage rate, thereby bringing an FDI inflow to that country. This way, it reduces production costs. For example, if the wage rate in the US is 15 USD per hour and that in India is 1 USD per hour, it shall outsource more from the Indian production units, which is why Western firms invest more in Indian clothing factories.

However, low wage rates don’t always mean an inflow of FDI, as other factors, like infrastructure, connectivity, etc., affect it. If a low-wage country has poor infrastructure, like poorly constructed roads, or reaching there becomes difficult, a country willing to invest will not choose such a country since it needs a smooth flow of supply for its products.

Labour Skills

If a country has skilled labour in a particular industry, for example, in India, there is a skilled population dealing with gems and jewellery or a high number of people who speak English. This attracts several investments in the jewellery industry or hiring call centre people, with low wage rates being a cherry on top.

Tax Rates

If a country has low corporation tax rates, it helps corporations secure a larger profit. Thus, low corporation tax rates encourage FDIs. For example, Ireland, because of its lower corporation tax rates, has been able to secure investments from Google and Microsoft.

Transport and Infrastructure

As discussed earlier, transportation and infrastructure play an essential role in FDIs. Suppose the transport cost is high in a country. In that case, the company investing will spend more on the logistics of a country’s poorly developed infrastructure, which may result in hindrances to the supply of a product. It discourages investors. Meanwhile, goods roads and low logistics costs encourage good FDI inflows.

Potential for Growth

When the manufacturing units are set up in a country, the focus is more on finding a market for products in that country itself. A large population with good disposable income encourages investors to invest in that country, thereby increasing that country’s FDI inflows.

Political Stability

If a country is undergoing any crisis, riots or politics are more often disturbed; this brings a halt to the growth of companies in such environments, with the uncertainty of laws and lack of protection. This discourages any country from investing in such a country and may lead to disinvestments as well.

Raw Materials

If any raw material is available in abundance in a country, it encourages the setting up of manufacturing units there. This is why, despite poor infrastructure, African countries attract investment from several countries like China.

Exchange Rate

Weak exchange rates mean that the value of the money being invested by a country increases in the country to be invested, which proves profitable for the investing country. Thus, FDI inflows to the country with a weak currency.

What is FDI Net inflow?

FDI Net Inflows indicates the inflow of the Foreign Direct Investments in a country. If the Gross FDI is 10 billion USD and the Gross FDI outflow is 8 billion USD. It is wrong to consider that the Gross FDI inflow is the actual FDI inflow of that country, disregarding the loss in FDI outflows. Thus, the FDI net inflow shows the actual picture and is calculated by subtracting gross FDI outflow from the Gross FDI inflow.

Statistics on India’s FDI for 10 years

Below are the statistics on India’s FDI for 10 years:

Financial year (April-March)	Net FDI inflow (US $)	% of GDP	Singapore’s contribution	Mauritius’ Contribution	US Contribution
2013	30.7B	1.52%	1.61B	8.59B	0.47B
2014	35.2B	1.70%	4.42B	3.69B	0.61B
2015	44.9B	2.09%	5.14B	5.8B	1.9B
2016	39.3B	1.94%	12.48B	7.4B	4.12B
2017	39.5B	1.51%	6.53B	13.3B	2.13B
2018	43.3B	1.56%	9.27B	15.9B	2.1B
2019	56B	1.78%	16.23B	8.1B	3.1B
2020	55B	2.41%	14.67B	8.2B	4.1B
2021	56.2B	1.42%	17.42B	5.6B	13.8B
2022	42.1B	1.47%	15.9B	9.4B	10.5B
2023	26.6B	0.71%	17.2B	6.1B	6B

Singapore, Mauritius, and the US are India’s top sources of FDI inflows. We can see a hike in the FDI inflow in India in 2015 and 2020. In 2015, global FDI hit 1.76 trillion USD, soaring the FDI inflows of many countries including India.

 In 2020-21, the hardware and software sector attracted huge numbers of FDIs as the lockdown period brought forward a new way of working through computer systems. Notably, the aggregates of the FDIs from the contribution of these countries, along with the others, are subject to the subtraction of the Gross FDI outflow. A sudden decline can be seen in the FDIs after 2021.

Financial year (April-March)	Gross FDI inflow (US $)	FDI outflow (US $)	Net FDI inflow (US $)
2013-14	36	-5.3	30.7
2014-15	45.1	-9.9	35.2
2015-16	55.6	-10.7	44.9
2016-17	56.2	-16.9	39.3
2017-18	61	-21.5	39.5
2018-19	62	-18.7	43.3
2019-20	74.4	-18.4	56
2020-21	82	-27	55
2021-22	84.8	-28.6	56.2
2022-23	71.4	-29.3	42.1
2023-24	71	-44.4	26.6

Analyzing the Reasons for Decline

This section explores key factors contributing to the recent drop in foreign investment in India and how these issues have impacted investment flows and the overall financial landscape such as:

Hawkish FED Policies

“Hawk” refers to a fierce policy adopted for a cause in modern American usage. A hawkish economic policy is one in which the central banks or other economic policymakers take stringent steps towards a particular cause at the expense of others.

The US Federal Reserve is following hawkish economic policies, which means the US dollar is not available in open markets. For seven straight meetings, the Fed has maintained interest rates at 5.25-5.50 to control inflation. Since the borrowing cost has risen, the US is not investing much in India.

However, it is pertinent to note that there was an increase of 364 billion USD of the US’s FDI investment abroad in 2023 compared to the previous year. The US prefers countries close to its coasts as a policy, as the US has increased FDI in countries like Mexico. The US is following protectionist policies and investing strategically in safe waters due to the instability in international affairs.

Increasing FDI Outflows

The Gross FDI in India from April to September 2022, the first half of FY 2022, stood at just 10.1 billion USD. The last time it was lower than this was in 2007-08, 15 years ago. Similarly, as a percentage of India’s GDP, gross FDI flows dropped to just 1% in the first half of FY 2023, while net FDI inflows fell by 0.6%. These levels were last seen in 2005-06. 

Considering FY 2023, although the Gross FDI was 70.9 billion USD, 44.4 billion USD were repatriated by foreign countries through dividends, share sales, or disinvestment. Moreover, Indians invested 15.96 billion USD overseas.

The reasons for disinvestments are as follows:

• Industrial policies
• Supply chain diversification
• Lack of clear policies
• Restrictive FDI regime
• Limited export processing zones
• Exit barriers
• High import tariffs
• Stringent labour laws
• Poor infrastructure
• Centralized decision-making

Scrapping Bilateral Investment Treaties

BITs are agreements between two countries that provide various protections from one country investing in the other. One major protection is that Arbitration or court cases involving the company would take place in a third country to eliminate any possibility of bias. Out of 74 BITs that India had signed before 2015, 68 BITs have been cancelled. Four more BITs were signed, but only two of them are operational. 

When a company from another country is unaware of the ways to operate in India, it relies on the protection offered by the BITs. An absence of BITs means that the dispute where the foreign company is involved shall be dealt with in India, making the judgement more biased in favour of the Indian interests involved. The June 2022 publication of the Peer Reviewed Journal said that it has observed “A significant reduction in FDI inflows to India in response to BIT terminations by more than 30% compared to countries without terminations.”

Free Trade Agreements

Free Trade Agreements are agreements between two countries that enable easy trading. The agreement may include fewer or no tariffs, relaxation of certain regulations, provision of quotas, subsidies, etc. India is pushing ahead with free trade agreements with several major economies; it has already signed one with Australia and the UAE and is pursuing one with the EU, UK, and the US. The issue with FTA is that it gives companies in these countries access to India’s markets without them actually having to invest here.

In December 2023, Minister of State for Commerce and Industries Som Prakash told the Rajya Sabha That the threat of global recession had impacted FDI inflows, the Russia-Ukraine conflict, global protectionist measures and a decline of real GDP growth rates in Singapore, the US and the UK. However, again, the effect of the FTAs can be seen in India’s growing exports.

In 2023-24, India made record exports, with a 0.4% increase from the previous year. The previous year itself saw a 14% increase in trade. India’s rank in merchandise exports improved from 19th in 2014 to 17th in 2023. Moreover, it has a surplus trade with the US.

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Conclusion

In December 2023, Minister of State for Commerce and Industries Som Prakash told the Rajya Sabha That the threat of global recession had impacted FDI inflows, the Russia-Ukraine conflict, global protectionist measures and a decline of real GDP growth rates in Singapore, the US and UK. Overall, the termination of BITs can be a major reason for such a decline.

The ease of doing business rank was very poor in the years when India saw the highest FDI, thus not making it the major reason. Though the FTA may reduce FDI, it attracts foreign money through exports, as can be seen from the increasing exports from India.

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