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28th March 2024 (12 Topics)

Slowdown in Foreign Direct Investment

Context

The Indian economy is grappling with a slowdown in foreign direct investment (FDI). In 2022-23, FDI equity inflows dropped by 22% year-on-year to USD 46 billion, following a 1% contraction from the previous year.

1: Dimension-Slowdown in FDI flows to developing countries

  • Affected global investments:While overall global FDI flows rose 3% to an estimated USD 1.4 trillion in 2023, economic uncertainty and higher interest rates did affect global investment, reflected in FDI flows to developing countries falling by 9%.
    • The decline in India’s net foreign direct investment (FDI) inflow is in line with the slowdown in such investments to developing countries.
  • Reductions for India: Gross FDI inflows to India also dipped but only slightly in the period April 2023-January 2024 [from USD 61.7 billion to USD 59.5 billion]. In net terms, the comparable figures were USD 25.5 bn. vs. USD 36.8 billion.

2: Dimension-Risks for global market

  • Significant risks: These risks include geopolitical risks, high debt levels accumulated in many countries, and concerns about further global economic fracturing.
  • Positive factors:However, a modest increase in global FDI flows is likely this year, due to a decline in inflation and borrowing costs in major markets which may stabilise financing conditions for international investment deals.

3: Dimension-Need of FDI in Indian Economy

  • Long-term growth:FDI leads to the long term growth of the economy. MNCs bring about technology transfer to the domestic companies which lead to the organic growth or expansion takes place in the companies also in the Employment.
  • Per capita income increases and consumption improves. Tax revenues increase and government spending rises.
  • GDP increases and there is also a lagged effect due to which subsequent years GDP too increases.
  • Higher growth rate:FDI puts the companies and hence the economy on higher growth mode and the right process of FDI is selection of the strategic sectors in the economy that generate highest RoI.
  • Forex reserves rises significantly: Exports get a fillip and balance of payments show surplus which causes rupee to appreciate vis-à-vis Dollar.
  • Skill development: In FDI there is technology transfer or the movement of technical knowhow to the domestic country due to which skill development takes place and together with higher capital this raises productivity and profitability.

Fact Box

India’s FDI equity inflows

  • Around 65% of India’s FDI equity inflows came in the services, drugs and pharmaceuticals, construction (infrastructure activities) and non-conventional energy sectors.
  • The Netherlands, Singapore, Japan, the USA, and Mauritius account for around 70% of the total FDI equity inflows into India.

About FDI

  • A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
  • Routes through which India gets FDI
  • Automatic route: The non-resident or Indian company does not require prior nod of the RBI or government of India for FDI.
  • Government route: The government's approval is mandatory. The company will have to file an application through Foreign Investment Facilitation Portal. The application is then forwarded to the respective ministry, which approves/rejects the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT then issues the Standard Operating Procedure (SOP) for processing of applications under the existing FDI policy.

UPSC PYQ

Q: Justify the need for FDI for the development of the Indian economy. Why is there a gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (UPSC 2016)

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