Sluggish FDI Growth Presents New Challenge For India

In India, the economy is grappling with a concerning trend — a slowdown in foreign direct investment (FDI). Recent data reveals a notable decline in FDI equity inflows, plunging by 22% year-on-year to $46 billion in 2022–23. This downturn follows a previous year where inflows had already contracted by a percent.

Despite a slight improvement when considering reinvested earnings and other capital forms, the overall FDI growth paints a worrisome picture. In 2022–23, FDI growth plummeted by 16% to $71 billion, compared to a modest 3% increase to $85 billion in the preceding year. The trend continued into the current financial year, with FDI in the form of equity inflow witnessing a 13% year-on-year decrease to $32 billion by December 2023.

Acknowledging the issue, the finance ministry addressed the slowdown in its recent monthly economic commentary. It noted a dip in gross FDI inflows to India during April 2023-January 2024, with figures standing at $59.5 billion compared to $61.7 billion in the same period last year. The ministry attributed the contraction in net inflows to a rise in repatriation of investment.

However, the roots of this slowdown run deeper than recent statistics suggest. The deceleration in FDI growth in India has been evident since 2016–17, marking a stark contrast to the robust growth observed in the previous decade. In 2022–23, India’s FDI as a percentage of nominal GDP dropped to 2.1%, down from 2.7% the previous year, and a significant decline from the peak of 3.5% recorded in 2008–09.

Ritesh Kumar Singh, a corporate economist and former assistant director of the Finance Commission of India, attributes foreign investors’ hesitancy towards India to uncertainties in tax regimes, bureaucratic obstacles, and challenges in contract enforcement. He also highlighted India’s neglect of pursuing free trade deals as one of the contributing factors to the FDI slowdown.