Drop in FDI inflows mirrors global trend: Finmin

The decline in India’s net foreign direct investment (FDI) inflows, which have dropped almost 31% to $25.5 billion over the first ten months of 2023-24, is in line with the slowdown in such investments to developing countries, the Finance Ministry has said, while holding out hope for an uptick in investments this year.

The decline in India’s net foreign direct investment (FDI) inflows, which have dropped almost 31% to $25.5 billion over the first ten months of 2023-24, is in line with the slowdown in such investments to developing countries, the Finance Ministry has said, while holding out hope for an uptick in investments this year.

While overall global FDI flows rose 3% to an estimated $1.4 trillion in 2023, economic uncertainty and higher interest rates did affect global investment, reflected in FDI flows to developing countries falling by 9%, the ministry said in its February review of the economy.

“Mirroring the slowdown in FDI flows to developing countries, gross FDI inflows to India also dipped but only slightly in the period April 2023-January 2024 [from $61.7 billion to $59.5 billion]. In net terms, the comparable figures were $25.5 bn. vs. $36.8 billion. The contraction in net inflows was more due to an increase in repatriation of investment; the contraction in gross inflows is negligible,” the review noted.

While a modest increase in global FDI flows is likely this calendar year, thanks to a decline in inflation and borrowing costs in major markets which may stabilise financing conditions for international investment deals, there are still significant risks, the ministry said. These risks include geopolitical risks, high debt levels accumulated in many countries, and concerns about further global economic fracturing, it said.

Citing an UNCTAD report, the ministry said that despite the drop in FDI inflows, the country witnessed “a stable number of new project announcements” keeping it in the top 5 destinations for global greenfield projects. Around 65% of India’s FDI equity inflows came in the services, drugs and pharmaceuticals, construction (infrastructure activities) and non-conventional energy sectors. The Netherlands, Singapore, Japan, the USA, and Mauritius account for around 70% of the total FDI equity inflows into India, it added.

“Global FDI in 2023 was largely driven by capital-intensive projects, especially in the renewable energy, batteries and metals sectors, underscoring the relevance of energy transition in driving a large proportion of cross-border investments,” the Ministry pointed out.

International investment projects, including greenfield projects and project finance (mainly infrastructure) and cross-border mergers and acquisitions (M&As) contracted in 2023. Higher financing costs in 2023 significantly impacted international project finance and M&As activity, with a decline of 21% and 16% in deals, respectively, the ministry said.