Reviving FDI in Emerging Economies

Foreign Direct Investment (FDI) flows to Emerging Markets and Developing Economies (EMDEs) have fallen to a two-decade low in 2023, prompting concern over declining global investment appetite and necessitating proactive reforms by India to remain competitive and attractive for capital inflows.

GLOBAL TRENDS AND INDIA’S FDI POSITIONING

• Declining Global FDI Flows
  • Trend Observation: FDI inflows to EMDEs fell to $445 billion in 2023, the lowest since 2005, with their GDP share shrinking to 2%.
  • Impact: Global slowdown, fewer trade deals, and rising geopolitical tensions have contributed to this dip.
• India’s FDI Experience Amidst Global Headwinds
  • Comparative Performance: India saw a 14% increase in gross FDI in FY25, but net FDI plunged 96% due to repatriation and low reinvestment of profits.
  • Implication: Despite being better placed structurally, India mirrors the global trend with critical domestic challenges.
• Sectoral and Geographic Trends in FDI
  • Sectoral Composition: Growth areas include digital services, EVs, clean energy, and manufacturing, while legacy sectors like telecom decline.
  • Regional Spread: FDI remains concentrated in Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Delhi.

POLICY GAPS AND STRUCTURAL REFORMS NEEDED

• Addressing Structural Bottlenecks
  • Logistics & Infrastructure: High turnaround times (e.g., Kolkata port: 140+ hours) hinder investor confidence.
  • Action Required: Prioritise port efficiency, logistics modernization, and contract enforcement.
• Trade Facilitation and Strategic Alliances
  • Bilateral Deals: India must accelerate deals with EU, UK, Australia, UAE to counter China+1 strategy.
  • Integration Strategy: India’s FTAs must align with domestic capabilities and seek higher trade coverage.
• Regulatory Framework and Investment Climate
  • Ease of Doing Business: Swift land acquisition, legal clarity, and tax reforms are prerequisites.
  • Institutional Coordination: A centralised body must streamline approvals across Union and State entities.

UNLOCKING FUTURE INVESTMENT POTENTIAL

• Capitalising on Demographic Advantage
  • Human Capital: India's young workforce can become a magnet for investment with appropriate skilling and job creation.
  • Policy Focus: Education, digital infrastructure, and ease of hiring need sustained focus.
• Leveraging Global Shifts
  • Investment Redirection: Geopolitical realignments post-COVID-19 and supply-chain diversification create space for India.
  • Repositioning: India must project reliability, openness, and scale to investors.
• Confidence and Clarity as Core Pillars
  • Investor Sentiment: Capital seeks transparent, stable, and credible economic governance.
  • Strategic Messaging: India must project consistent policies and institutional commitment to reforms.

Practice Question

In the context of declining global FDI flows, critically analyse the challenges India faces in attracting and retaining foreign capital. Suggest structural reforms required to make India a preferred investment destination.      (250 words)