Sluggish growth in foreign direct investment is the latest concern for the Indian economy. Despite being the fastest-growing large economy in the world, India’s FDI has been falling, suggesting a change in the global investment outlook. While several emerging Asian economies continue to attract foreign investment, some in the developed world—particularly the US—have also seen their FDIs grow. But things have played out differently for India despite the common thought that investors’ China + 1 strategy would mostly benefit us. Instead, ASEAN countries such as Vietnam, Indonesia and Thailand have been attracting large amounts of foreign investment in greenfield projects. Meanwhile, India continues to suffer from policy uncertainties that discourage foreign investors.
The FDI slump has been playing out over a few years. In 2022-23, FDI equity inflows declined 22 percent to $46 billion. In 2023-24, till December 2023, FDI equity inflows fell 13 percent year-on-year to $32 billion. The number looks slightly better when reinvested earnings and other forms of capital are added to the FDI equity inflow; in 2022-23, total FDI declined 16 percent to $71 billion, compared to a 3 percent increase to $85 billion in the previous year. Even as the finance ministry has blamed the trend on a global investment slowdown in recent times, India’s case seems more long-term in nature—setting in since 2016-17. In the 10-year period to 2022-23, India’s FDI grew at a compounded rate of 6.6 percent, compared to 27 percent in the previous decade. Total FDI as a percentage of the country’s nominal GDP was 2.1 percent in 2022-23, compared to 2.7 percent in 2021-22; the highest of this measure that India ever achieved was 3.5 percent in 2008-09.
So, instead of blaming our FDI contraction to a global slowdown, the government must look elsewhere for answers. Foreign investors continue to be wary of India’s bureaucratic hurdles, uncertain tax policies and difficulties in enforcing contracts. The government has announced many incentives for investment in the manufacturing sector, but it is also true that disbursal of those incentives is often marred by delays and at times even refused because of seemingly minor reasons. The competition for attracting foreign investment is getting tougher with many smaller developing economies playing their cards better. India needs to run faster if it wants to board the investment bus again.