The FDI of India has been falling

Why in the News?

Though the figures of GDP growth and geopolitical scenario indicate the economic rise of India, its FDI has been falling.

India’s falling Foreign Direct Investment (FDI):

1. India’s growth prospects:
   1. The Indian economy grew at 7.8% in the first quarter of the ongoing financial year and is forecasted to grow at around 6-6.5% over the full year.
   2. Medium-term assessments, such as by the IMF, peg growth at roughly 6% between 2023 and 2028.
2. India has emerged as a prominent investment destination for multinationals as an alternative to China along with the geopolitical scenario seemingly shifting in India’s favour.
3. However, the foreign direct investment (FDI) has been falling:
   1. In 2022-23, FDI inflows (including reinvested earnings and other capital) were $71.3 billion, which is 16% lesser from $84.8 billion in 2021-22.
   2. FDI flows in 2022-23 were below levels in 2019-20. 
   3. The fall of FDI in these periods is due to fall in fresh equity flows.

• Equity flows dropped from roughly $59.6 billion in 2021-22 to around $47.6 billion in 2022-23.
  4. The investments through the reinvested earnings route have remained steady, though repatriation/disinvestment has picked up.
  5. FDI inflows between 2021-22 and 2022-23, fell not only in the computer software and hardware sector, but also in the automobile industry, construction (infrastructure activities), and metallurgical industries.

4. FDI flows into countries such as Vietnam and Indonesia (India’s competitors in the “China plus one”) have been steady.
   1. FDI in Vietnam stood at around $18 billion and in Indonesia, flows stood at around $10 billion during January-June this year.
5. The foreign portfolio investors (FPI) have increased with $15 billion pouring in the Indian markets, after withdrawing $16.5 billion in 2022.

Possible reasons for fall in FDI inflows:

In spite of India’s being an alternative in China+1 strategy, enough incentives through PLI scheme of the government and rising growth prospects, India’s FDI inflows are declining. This may be due to

1. 1. Reluctance among multinationals, and also the hesitation among domestic firms to invest in India due to policy uncertainty.
   2. Absence of the country from major trading blocks.
      1. India does not have a trade agreement with the European Union, not a part of RCEP (Regional Comprehensive Economic Partnership), a trade agreement between the 10 member states of ASEAN and their free trade agreement partners — Australia, China, Japan, New Zealand and Korea.
      2. India will be placed in a disadvantageous position as economic integration between these countries, which are at the centre of manufacturing supply chains, cannot be benefitted by India.