MUMBAI: Despite the many government efforts such as the national manufacturing policy and the production-linked incentives to boost manufacturing aimed at attracting foreign direct investments (FDI), the country’s share in this declined to a low 2.1 per cent at $28.2 billion of global fund flows through this route in 2023, after peaking at 6.5 per cent in 2020. This has the country’s global FDI ranking also plunging to a low 16th slot from eighth rank in 2022.
According to the World Investment Report 2024 by the UN Trade and Development, the country's global FDI rank fell to 16 in 2023 from the eighth position in 2022, India Ratings said in a note.
Despite a significant surge in FDI inflows over the years (1995: $2.1 billion to $28.2 billion in 2023), the nature of FDI inflows in terms of states/sectors where they are flowing into have remained skewed, says the report pointing out that as much as 49.5 per cent of the total FDI went to Maharashtra and Gujarat during October 2019– March 2024, and the Karnataka-Tamil Nadu-Andhra-Telangana belts getting 30.3 per cent of the total and rest going to Delhi and Haryana.
“The FDI inflows suggest three key corridors–Maharashtra-Gujarat in the West (49.5 per cent) of FDI inflows during October 2019–March 2024; the Karnataka-Tamil Nadu-Andhra-Telangana belt in the South (30.3 per cent) and the NCR region (Delhi and Haryana) in the North (17.8 per cent).
The highest share of FDI flows in the services sector, followed by manufacturing (excluding computer hardware). The proportion of FDI inflows to the services sector increased to 40.9 per cent during FY15-FY24 from 37 per cent during FY01-FY14. Among services, banking/insurance, trading and telecommunications get the maximum money.
The concentration of FDI in a few states suggests that better infrastructure (physical and human) and growth potential are key preconditions to attract higher FDI. The states which have evolved their economic policies around broader national-level economic policies are able to take advantage and attract higher FDI inflows, according to Devendra Kumar Pant, the chief economist at the agency.
The proportion of inflows to the three corridors during October 2019–March 2024 was 94.6 per cent of the total FDI inflows and proportion of these eight states in the total GSDP in FY23 was 55.5 per cent. The Eastern states despite having more mineral wealth has been lagging on the FDI side so far with only Jharkhand (1.1 per cent) and Bengal (0.7 per cent) were able to attract some FDI in the eastern region.
Within services, FDI has mostly flowed into trading, telecoms, banking/insurance, IT/business outsourcing and hotels/tourism. Within manufacturing, it has remained concentrated in automobiles, chemicals, drugs and pharmaceuticals, metallurgical, electrical equipment, and food processing.
While the government has set an ambitious target of increasing the share of manufacturing in GDP to 25 per cent, it has had limited success in attracting higher FDI into this sector. A buoyant manufacturing sector is important both from the point of view of stable growth and to generate employment in the country, according to Paras Jasrai, a senior analyst with the agency.