India’s clean energy sector sees surge in FDI while other sectoral investments decline

New Delhi: Foreign Direct Investment (FDI) equity inflows in the non-conventional energy sector surged in the first three of months of this financial year, making it the tenth-largest FDI destination of all time, underscoring rising global interest in India’s green energy initiatives.

Total FDI equity inflows in India's non-conventional energy sector during Q1, FY25 stood at $1.04 billion, up about 35% annually.

In FY24, non-conventional energy, construction and infrastructure were the only sectors to report an annual rise in FDI equity inflows.

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According to data from the commerce and industry ministry, total FDI equity inflows into the country's non-conventional energy sector stood at $18.93 billion between April 2000 and June 2024, amounting to about 3% of the total inflows during the period.

To be sure, FDI equity inflows in India's non-conventional energy sector surged by about 51% annually in FY24 to $3.76 billion.

Fall in traditional sectors

The rise in FDI equity inflows into the renewable energy sector comes when such investments have declined in traditionally strong sectors like telecommunications, automobiles and drugs and pharmaceuticals.

The total FDI equity flows stood at $44.42 billion in FY24, down from $46.03 billion reported during the previous year.

During the April 2000 and June 202 period, the services sector, which includes financial, banking, insurance, outsourcing, and research & development, reported the highest FDI equity inflows at $113.49 billion, followed by computer hardware and software sectors at $105.63 billion, and the trading sector at $43.86 billion.

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"In 2023-24, India’s renewable energy sector received $3.7 billion in foreign investment, with around 80% likely used to import solar modules from China or assemble panels from imported cells. With limited manufacturing expertise, India's solar equipment import costs could rise from $7 billion to $30 billion by 2030 to meet its renewable goals," said Ajay Srivastava, former trade service official and founder of economic think tank the Global Trade Research Initiative (GTRI).

"To reduce import expenses, India needs FDI focused on developing full-scale solar cell manufacturing from raw materials. Additionally, as the US restricts solar imports from China, Indian firms may avoid exporting Chinese equipment to the US," he added.

India allows up to 100% FDI under the automatic route for renewable energy generation and distribution projects.

Target for 2030

India aims to achieve 500GW of non-fossil energy capacity by 2030, about 50% of its energy requirements from renewable energy while aiming to achieve net-zero carbon emissions by 2070.

According to a report by SBI CAPS released last week, the green imperative is propelling the Indian power sector towards a variable renewable energy (VRE) dominant future, with its contribution to generation set to triple by FY2032.

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"India is poised to significantly augment its energy storage capacity, with a projected 12-fold increase to about 60 GW by FY32, outpacing the already impressive growth pencilled in for RE (renewable energy) sources. The evolving landscape of RE tenders reflects this trend, with a substantial uptick in the proportion of projects incorporating storage solutions, from 5% in FY20 to 23% in FY24," the report added.

During Q1FY25, Mauritius, Singapore and the US topped the list ofsource countries for FDI equity inflows to India, followed by the Netherlands, Japan, the UK, the UAE and the Cayman Islands.

Among the states, Maharashtra attracted the highest FDI equity inflows, followed by Karnataka, Gujarat, Delhi and Tamil Nadu.