Decline in FDI inflows

Decline in FDI inflows

Subject: Economy

Section: External Sector

Context: 

UNCTAD’s latest World Investment Report suggests a different narrative on foreign direct investment inflows into India in sharp contrast to optimistic official statements of record FDI inflows in 2021-22.

• The publication shows inflows dropping by 30% to $45 billion in 2021.
• A proximate cause is that big-ticket mergers and acquisitions (M&As) which boosted FDI flows in the recent past were not repeated.
• In 2020, for instance, cross-border M&As surged 83% to $27 billion in ICT, health, infrastructure and energy to boost overall FDI to $64 billion.
• During the following year, cross-border M&As were down by a massive 70% to $8 billion, which impacted overall flows to the country.
• Nevertheless, India remains among the top 10 global FDI recipients.

Statistics

• According to official FDI statistics which rose by 2% to $84 billion in 2021-22 — is not very different from the WIR 2022 numbers.
• This is largely because they include equity inflows, reinvested earnings — which are largely responsible for the record numbers — and other capital.
• If like-to-like comparisons are restricted to equity inflows, official statistics show a decline of 1.4% to $58.8 billion last fiscal.
• However, gross FDI inflows also must factor in the record amount of repatriation and disinvestments by foreign investors, which surged to $27 billion in 2020-21 and $28.6 billion in 2021-22.
• Deducting these from gross inflows constitute direct investments which were similar at $54.9 billion in both these years and lower than $56 billion registered in 2019-20.

Reasons for the decline

• Rapidly waning foreign investor sentiment on green-field investments. 
  • From $54 billion in 2018, they plunged to $30 billion in 2019, $24 billion in 2020 and $15.7 billion in 2021.
• Difficulties in doing business on the ground especially in the various states, regulatory uncertainty and land acquisition problems.
• Foreign companies closing down offices or subsidiaries in India.
  • Between 2014 and November 2021, as many as 2,783 foreign companies closed down operations out of a total of 12,458 active foreign subsidiaries operating in the country.
  • This was due to completion of business objectives and projects, restructuring by parent company, amalgamation, and other management decisions.
  • But the reasons also include uncertainties over the policy environment or regulatory hassles.

Way forward

• If foreign capital is to contribute to the India growth story, it is necessary to incentivise a much larger proportion of FDI inflows towards the building of green-field factories, industrial parks, and other infrastructure.
• Such investments depend on a more stable policy and regulatory framework than the streamlining of procedures and digitisation of paperwork that have improved India’s ranking in World Bank’s Doing Business indicators.
• Reform to free up the land and labour markets and improving the environment to do business in the states is imperative.
• It is interesting that WIR 2022 mentions that project finance deals under execution in India include the construction of a steel and cement plant worth $13.5 billion by ArcelorMittal Nippon Steel.
• Such plans cannot fructify unless forest, environment and other clearances are speedily provided.