Reasons for the drop in foreign direct investment (FDI) into India

The early flurry of investments eventually settled down to a steady pace as a large number of ambitious investment plans either did not come to fruition or were abandoned.

In the words of N. Chandra Mohan

In stark contrast to the optimistic government pronouncements of record FDI inflows in 2021-22, the most recent UNCTAD World Investment Report reveals a different narrative on foreign direct investment inflows into India. This is due to the fact that the report examines data from a variety of sources. According to the journal, receipts will fall by thirty percent to forty-five billion dollars in the year 2021. One of the immediate reasons for this is that large-scale mergers and acquisitions (M&As), which have been shown to increase the amount of foreign direct investment (FDI), have not occurred recently. For example, in the year 2020, cross-border mergers and acquisitions increased by 83 percent to a total value of $27 billion across the industries of information and communication technology (ICT), health, infrastructure, and energy, bringing the total FDI to $64 billion. The next year saw a significant decrease of cross-border mergers and acquisitions, which totaled just $8 billion. This had an effect on the overall flows to the nation. Despite this, India continues to be one of the top 10 countries in the world to receive FDI.

The message that can be gleaned from India’s official foreign direct investment figures — which showed an increase of 2 percent to $84 billion in 2021-22 — is not that dissimilar to the numbers that were presented in the WIR 2022. This is mostly due to the fact that they incorporate equity inflows, reinvested earnings, and other capital into their calculations. These three factors are largely responsible for the record-breaking figures. Official records indicate that there was a decrease of 1.4 percent to $58.8 billion in stock inflows during the most recent fiscal year. This is the case even when like-to-like comparisons are used. According to the database maintained by the Reserve Bank of India, the amount of repatriation and disinvestment by foreign investors reached a record high of $27 billion in the fiscal year 2020-21 and $28.6 billion in the fiscal year 2021-22. However, gross FDI inflows must also account for this amount. When these are subtracted from the gross inflows, the resulting direct investments have a value of $54.9 billion, which is the same as it was in both of these years but is less than the $56 billion that was documented in 2019-20.

Therefore, the most important issue is, why are foreign direct investment (FDI) inflows into the nation decreasing? The downward trend in green-field investments is reflective of the drastically reduced desire among overseas investors for establishing operations in the country. After the reforms-friendly Prime Minister Narendra Modi took office in 2014 with initiatives like Make In India, India was once the world’s leading recipient of green-field foreign direct investment (FDI). In 2015 and 2016, the country received a total of $63 billion and $62.3 billion respectively in green-field FDI. The economy of the nation expanded at a rate of 8% and 8.3% respectively in the years 2015–2016 and 2016–2017, making it one of the big economies with the quickest growth rate in the world. After that, growth slowed down significantly to 6.8 percent in 2017–18, 6.5 percent in 2018–19, 3.7 percent in 2019–20, and -6.6 percent in 2020–21. The early flurry of investments eventually settled down to a steady pace as a large number of ambitious investment plans either did not come to fruition or were abandoned.

The data shown in WIR 2022 represent the steadily deteriorating mood of foreign investors against green-field ventures. They dropped from $54 billion in 2018, when they were at their peak, to $30 billion in 2019, $24 billion in 2020, and $15.7 billion in 2021. These figures are also congruent with those of fDi Markets of the Financial Times Group, and they most clearly point to challenges in conducting business on the ground, particularly in the various states, regulatory uncertainty, and difficulty with land acquisition. For instance, a high-stakes foreign direct investment (FDI) steel project in Odisha was abandoned seven years ago due in large part to difficulties in acquiring land.

ArcelorMittal, the largest steel manufacturer in the world, and Nippon Steel, the second largest steel manufacturer in the world, finally succeeded in establishing a footprint in India with a $6 billion bid to acquire Essar Steel. This came after ArcelorMittal abandoned plans for green-field steel factories in Odisha, Jharkhand, and Karnataka.

Another piece of data that supports the claim that interest from overseas investors is waning was presented in December of last year on the floor of the Parliament by Union Commerce Minister Piyush Goyal. There were a total of 12,458 active foreign subsidiaries operating in India when as many as 2,783 of those firms with registered offices or subsidiaries in the nation decided to shut down their activities between the years of 2014 and November 2021. It is a significant ratio that one-fifth of international enterprises have left the market. Undoubtedly, this is due to a variety of factors, including the accomplishment of business goals and the completion of business initiatives, the reorganisation of the parent firm, the merging of businesses, and other management actions. But in addition to that, there are factors such as unpredictability in the legislative climate or cumbersome regulatory requirements. If foreign investors are opting to pull out of their investments rather than maintain their holdings, this is undoubtedly a reason for worry.

It is vital to create incentives for a considerably bigger share of foreign direct investment (FDI) inflows towards the creation of green-field factories, industrial parks, and other infrastructure if one wishes for foreign capital to contribute to India’s growth narrative. Streamlining procedures and digitising paperwork have improved India’s ranking in the World Bank’s Doing Business indicators; however, such investments depend on a policy and regulatory framework that is more stable. This is more important than the streamlining of procedures and digitization of paperwork (that has now been discontinued). It is vital that reform be enacted in order to free up the land and labour markets and improve the climate in which businesses may operate in the states. It is notable that WIR 2022 cites the building of a steel and cement plant with a value of 13.5 billion dollars by ArcelorMittal Nippon Steel as one of the project financing transactions that are currently being executed in India. These ideas will never come to fruition unless we can swiftly obtain approvals from the forest, the environment, and any other relevant agencies. All of these factors point to the fact that the present view on foreign direct investment (FDI) is less optimistic than the bullish government declarations of record inflows.

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