In recent years, India has become an increasingly important destination for foreign direct investment (FDI), climbing from 12th to ninth place in 2019, according to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report. In the calendar year 2020, says UNCTAD, India’s FDI inflows rose 13% on 2019’s levels – a remarkable achievement given that global FDI flows collapsed 42% by comparison.
Setting the pace: India’s FDI inflows climb 13%, bucking the global trend
The sums involved are significant. According to Indian government data, total FDI inflows reached USD 67.54 billion between April and December 2020 – the highest amount ever recorded for the first nine months of a fiscal year, and up 22% from the same period in 2019. FDI equity inflows also posted a record high: at USD 43.85 billion in the period April to November, which represents an increase of more than a third compared with the first eight months of the 2019 fiscal year.
India’s remarkable achievement is in part due to the effects of policies that its government has put in place to attract FDI.
India’s relative rise is seen in various inward investment data. Take, for example, inflows of funds from state-owned investors (SOIs): here, India has surpassed China in three of the past six years (see chart). And although total SOI into China over this period did exceed that of India, the sums going to China have fluctuated significantly. India’s share, however, has risen steadily, and last year was three times that of China’s.
For FDI overall, India’s record highs came even as the COVID-19 pandemic undermined global investment flows elsewhere. While nations like the UK, Italy and Russia saw FDI drop by around 100% (or more), China and India bucked the trend – with India, as noted, recording a 13% increase to USD 57 billion in the 2020 calendar year (see chart). Investments in technology, infrastructure and energy sectors were notable.
India, then, is clearly a highly attractive investment destination – far more so than it was just a decade or two ago. That’s in large part due to the government’s understanding that FDI is key for the country’s future as a driver of economic growth and as a source of non-debt funds to develop the economy. In consequence, it has undertaken reforms to remove hindrances that previously slowed FDI.
Many of the reforms originated with the 2014 “Make in India” initiative, which saw FDI policies in more than two-dozen sectors liberalised, including in railways, insurance, defence, pharmaceuticals and aviation. More recent moves include a 2020 decision to raise the FDI limit in the defence sector from 49 to 74%, with a similar increase announced in early 2021 for the insurance sector.
The World Bank’s index covers a range of investment-related areas, with India doing particularly well in aspects such as dealing with construction permits, getting access to electricity, obtaining credit and protecting minority investors – it scores in the top 30 for all. On the other hand, its ranking is lowered in areas such as starting a business, registering property and enforcing contracts.
India’s opening-up has been phenomenally successful, yet it remains a destination where much FDI is undertaken passively or jointly with local partners – rather than a place where investors can go it alone.
On top of that, matters became more difficult in 2020 for those looking to invest from countries that share a land border with India when the government mandated that entities based in those countries or their citizens would need approval for FDI – ostensibly to protect local firms struggling from the economic effects of COVID-19 from being bought cheaply.
That said, we fully expect that India’s generally FDI-friendly policies will continue to attract investment in increasing amounts. Additionally, India will likely benefit from the consequences of rising labour costs in China – as other Asian nations have done.
India’s government is well aware of the importance of FDI to the country’s resurgence, and of how significantly the pandemic damaged private consumption. It knows, too, that the country has become more reliant on FDI in recent years as overleveraged local investors pulled back from expansion. In short, the incentives for Delhi to continue along its FDI-friendly path are strong.
Add to that an abundance of talent, a trusted regulatory set-up, attractive incentives, good governance, solid infrastructure and a vibrant investor community that enjoys links to international capital markets and investors, and it’s clear that India is well positioned as an FDI destination in 2021 and far beyond.