The recent World Investment Report by UNCTAD, released in April 2023, highlighted the decline in global FDI by around 12 percent to $1.3 trillion in 2022. The report terms the global environment for international business and cross-border investment as challenging. The current global investment scenario gives policymakers reasons to raise their guard against a possible slowdown in global FDI activity.
The decline in FDI activity was uneven, with developed countries registering a fall of 37 percent while developing countries witnessed a 4 percent growth. Although greenfield investments saw a substantial rise in both developed and developing countries in value terms, the value of cross-border M&As and International project finance deals witnessed a decline in both regions. The report warns that early signs indicate a negative FDI outlook, with investors remaining uncertain and turning risk-averse.
Slowing FDI activity
According to the UNCTAD, the FDI flows to India saw a 10 percent growth in 2022 to $49 billion. This is still lower than $50 billion and $64 billion recorded in 2019 and 2020, respectively. Interestingly, the FDI equity inflows from India’s traditional sources of FDI, such as Mauritius, the US, and the Netherlands registered a decline. However, inflows from the UAE and Singapore grew in FY23. A drop of around 16 percent in the outward FDI (OFDI) flows from India in 2022 is in line with slowing FDI activity. Evidence from Q1 of FY24 further strengthens the concerns about the slowing of India’s FDI activity. The FDI equity inflows have dropped 34 percent to $10.9 billion in Q1 of FY24, dragged down by sectors such as computer hardware and software, telecom, auto, and pharmaceuticals.
India’s Outward FDI flows in the first half of 2023 nosedived to $11 billion from around $23 billion in the same period last year. The growth in FDI flows to India is expected to remain subdued in the coming months. The geopolitical tension coupled with the tightening of monetary policy across the globe is expected to further restrict the flows of FDI. The slowing global economy further adds to the woes. Moreover, the declining profitability ratio of firms that have entered into a foreign technical collaboration in the RBI’s survey on Foreign Collaboration in Indian Industry calls for greater caution from the policymakers.
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The slowing global FDI activity can prove to be a stumbling block at a time when the Indian government is projecting itself as an attractive investment destination to counter China’s dominance in Global Value Chains (GVCs). The government must ensure that the much-touted Production Linked Incentive (PLI) scheme, which targets foreign investors while offering sops to domestic investors, does not lose momentum. Augmenting the scheme with more sector-specific measures rather than a one-size-fits-all strategy, may prove beneficial in the current global economic scenario. Focus must be given to link incentives to value addition and export sales and not just on the volume of production, especially in sectors with a greater scope of attracting foreign investors. This may benefit India’s efforts to move up the value chain to greater value-adding activities.
A bottom-up approach
A bottom-up approach to FDI policymaking by, identifying the strengths of the various states in India, will help reap greater dividends in terms of attracting FDI and reducing the inequality in the distribution of FDI within the country. At present, the larger states such as Maharashtra, Karnataka, Gujarat, and Tamil Nadu receive the lion’s share of India’s FDI inflows. From a long-term perspective, creating strategic assets in manufacturing, such as an efficient workforce, R&D capabilities, etc. will act as a catalyst for sustained FDI inflows into the manufacturing sector. While it is essential to focus on manufacturing, IT and related sectors, which are India’s strengths, are showing signs of slowing FDI activity. It is therefore important to ensure that the services sector does not suffer due to increased focus on manufacturing in the current global scenario.
Often, OFDI and its possible benefits are given scant attention by policymakers of developing countries. India must encourage its firms to venture abroad and integrate with global production networks. Indian firms venturing abroad benefit not only in terms of expanding the market for their products but also play a critical role in securing natural resources, strategic assets, technical know-how, and R&D collaborations, to name a few benefits. Although the revamped Foreign Exchange Management Rules (Overseas Investment) notified in 2022 have helped in the process, there are grey areas that require clarification.
Policy measures to support firms to invest overseas in the form of low-interest loans, tax benefits, etc., aimed at reducing the cost of acquisition abroad may help in overseas investments breaking even in a shorter time horizon, and a larger number of firms might be encouraged to venture abroad to access strategic assets and expanding their markets. It is the need of the hour for India to adopt a dynamic policy making in FDI to counter the complex global economic scenario and achieve the status of a reliable and attractive investment destination.
https://www.financialexpress.com/policy/economy-global-fdi-warning-signs-ahead-3253149/
