Economic Survey 2024: India’s FDI inflow weakens due to geopolitical conflicts, high borrowing costs, says FM Sitharaman

The Foreign Direct Investment (FDI) inflows have been weak, according to the Economic Survey 2024 released today. This is mainly attributed to geopolitical conflicts, high borrowing costs, and global economic fracturing. Tabling the Economic Survey 2023-2024 in Lok Sabha, Union Finance Minister Nirmala Sitharaman said that geopolitical developments and monetary policy changes across countries resulted in increased caution among investors, leading to moderate growth in FDI flows. Global FDI flows declined in 2023 compared to 2022.

The decline in global Foreign Direct Investment has impacted FDI flows to India. Net FDI inflows to India declined from USD 42.0 billion during FY23 to USD 26.5 billion in FY24. However, gross FDI inflows moderated only by 0.6 percent from USD 71.4 billion in FY23 to just under USD 71 billion in FY24. The survey claimed that there was no change in investor interest in India. The contraction in net inflows was mainly due to repatriation/disinvestment due to many profitable exits.

Globally, net FDI inflows witnessed a moderation due to increased scepticism on account of domestic structural issues, uneven exposure to geopolitical conflicts, and the impact of monetary policy tightening. 

The economic shocks caused by the Russia-Ukraine conflict have led to subdued growth in large countries like Germany and France. Net FDI inflows to India declined from USD 42.0 billion during FY23 to USD 26.5 billion in FY24. However, gross FDI inflows moderated by only 0.6 percent in FY24. The contraction in net inflows was primarily due to a rise in repatriation/disinvestment.

FDI inflows in the industry and services sectors have weakened in recent years. In both sectors, the FDI-to-GDP ratio has gone below pre-pandemic levels. The share of industry sectors' FDI in GDP declined from 0.62 percent in FY20 to 0.39 percent in FY24. During the same period, the share of the services sector in GDP fell from 0.87 percent to 0.69 percent.

The survey has divided FDI inflows into physical and digital FDI flows. Physical FDI includes sectors such as automobiles, pharmaceuticals, and construction, while digital FDI includes computer services, telecommunications, consultancy services, and information and broadcasting. Around FY14, physical FDI was about three times the value of digital FDI. 

Due to the rise in foreign investment in sectors such as software and hardware, consultancy services, and telecommunications, among others, digital FDI witnessed an increase and a relative decline in physical FDI.

The survey quoted the United Nations Conference on Trade and Development (UNCTAD) stating that the global FDI decreased marginally by 2 percent to USD 1.3 trillion in 2023 from USD 1.4 trillion in 2022. Global trade has grown slowly as the value of world merchandise trade declined by 5 percent in 2023. The external debt as a part of GDP in the Emerging Market and Developing Economies (EMDEs) increased from 26.2 percent in 2012 to 29.8 percent in 2023.

FDI declined due to weakening growth prospects, economic fracturing trends, trade and geopolitical tensions, industrial policies, and supply chain diversification, leading MNCs to adopt a cautious approach.

Mergers and acquisitions, which mostly affect FDI in developed countries, fell by 46 percent.

The declining FDI flows to India are in contrast with India gaining market share in global trade in goods and services exports. India was a leading destination for AI-related FDI in 2022, receiving 122 AI-related FDI projects in 2022 from multinational companies such as ABB, Accenture, Deloitte, IBM, and Microsoft investing in India. 

The survey quoted research done by NASSCOM, which stated that India is an attractive destination for AI investment due to its relatively low operating costs and the world’s second-largest pool of highly skilled AI, machine learning, and big data workers. According to IMF 2023 data, in the last two decades, India’s FDI and equity portfolio inflows have totalled about 2.5 percent of GDP annually. 

According to the survey, the UNCTAD, in its World Investment Report 2024 (WIR 2024), ranked India 15th in terms of FDI inflow (top 20 host economies) for the year 2023.

Sectorally, FY24 reported a decline in FDI equity inflows to the services sector and, therefore, overall FDI equity inflows to India. Higher interest rates, geopolitical conflicts, heightened global uncertainties, and rising protectionism that favour domestic sourcing have all contributed to lower FDI inflows into the sector.