Why is Foreign Direct Investment Declining in India? (2024)

• 27 March 2024

India’s economy is growing in tandem with global trade, with India’s share in global trade increasing. However, on the other hand, the figures for Foreign Direct Investment (FDI) tell a different story. Recently released data shows a decline in FDI. What’s notable is that instead of new investments, there has been a rise in reinvested earnings.

Let’s understand the implications of this trend and what it means for India’s future.

What’s Happening?

According to recent government data, FDI in India has seen a decline. In 2023, FDI dropped by 21% to $41.31 billion, compared to $52.34 billion in 2022. This decline is concerning as FDI is crucial for India’s economy.

During CY23, October saw the highest FDI inflow, totalling $6,338 million USD.

Additionally, during April-December 2023, India witnessed a 13% decline in FDI. Whereas, the FDI inflow in the same period of the previous fiscal year stood at $36.74 billion. However, there has been some recovery in foreign investment in the October-December quarter. In this quarter, investment increased by 18% to $11.6 billion, compared to $9.83 billion in the same quarter of FY22-23.

But why is the FDI inflow decreasing in India? Let’s try to understand.

Reasons Behind the Decline in FDI Inflow in India

There are several reasons for the decline in FDI in India, which are a cause for concern for us. Let’s understand them in detail:

Sectoral Impact:The decline in FDI investment in India is mainly due to less investment in sectors such as computer hardware and software, communication, vehicles, and the medical sector.

Foreign Trends:It seems that foreign investors are not as enthusiastic about India as we Indians hope, and this is reflected in the declining trend in India.

Uncertainty Regarding Taxes:Efforts have been made to make the tax system favourable for industrialists in India, but tax-related complexities still persist.

Export Challenges:The Indian government has not taken adequate steps to boost exports. Customs department and export-related rules are causing problems for foreign investors.

In addition to these, the Indian government is not paying attention to Free Trade Agreements (FTA), which makes it difficult for foreign companies to manufacture goods in India and then export them.

If India increases domestic demand and simplifies rules for foreign investment, FDI can increase again.

Growing Trend of Reinvestment

A fascinating trend emerges when we look at the figures for Foreign Direct Investment (FDI). The share of reinvestment is increasing in total FDI. This trend reflects the challenge of attracting new investments to the Indian economy. According to a report, in FY2013-23, FDI in new investments increased by only 2.5%, while reinvestment increased by 7% during the same period.

What Does It Mean for Investors?

The decline in FDI may be a cause for concern for investors. However, it is important to remember that India is still an attractive destination for foreign investment. India’s strong economy, growing population, and large market make it an attractive place for foreign investors.

What’s Next?

According to NDTV Profit, there is an interesting change in the interest of foreign investors. HSBC’s Chief Economist Pranjul Bhandari says that investment trends are now moving towards sectors like renewable energy, green hydrogen, artificial intelligence (AI), electric vehicles (EVs), and semiconductors. She says, “If there is stability in new sectors and business ease improves, the gross FDI flow can double in a few years, and the annual investment figure can reach a peak of $55 billion again”.

However, there has been limited improvement in the announcements of new projects by foreign companies. But according to Kotak Institutional Equities, in the next decade, India can get an opportunity for investment worth a total of $1.4 trillion.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The article is for information purposes only. This is not an investment advice.
*Disclaimer:Teji Mandi Disclaimer

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