When would FDI in India touch the milestone of $100 billion a year?

They were willing to set aside Covid uncertainties to put their money in the India story. In fact, the combined inflows to India during the pandemic years—$81.9 billion in 2020-21 and $83.5 billion in 2021-22— were more than what it mopped up in the first six years of the Manmohan Singh rule (2004-05 to 2009-10) or the first three years of the Narendra Modi regime (2014- 15 to 2016-17).

FDI inflows comprise equity investments, reinvested earnings and other capital. In the recent set of data for 2021-22, which the Reserve Bank of India released last month, Karnataka was the top recipient state with 38% share in FDI equity inflow, followed by Maharashtra (26%) and Delhi (14%). Karnataka received foreign money mainly in sectors such as computer software and hardware, automobile and education.

As the global economic crisis worsens with the Ukraine war, will India be able to keep this going? Will it be able to attract $100 billion FDI in a year? If so, when? GoI has not announced any target so far. Deepak Bagla, MD and CEO of Invest India, argues FDI is not just about money; it is about global acknowledgement and trust. “We can have FDI inflows worth $100 billion annually in 24 to 36 months, provided we have a supporting global ecosystem,” he says.

In addition to Russia’s invasion of Ukraine, some other factors contributing to an increasingly unpredictable financial environment are high inflation and interest rates, concerns about an impending recession in some parts of the world, supply chain bottlenecks and shortage of inputs such as semiconductors. “Yet, India’s pace of growth will attract investors. It is the fastest growing large economy in the world,” says Bagla.

Invest India is an investment promotion and facilitation agency under the Department for Promotion of Industry and Internal Trade. Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, argues the number can surpass the $100 billon mark. “In three years from now, annual FDI inflow upwards of $120 billion is plausible,” he says. EVR Ramana Reddy, Karnataka’s additional chief secretary who helms key departments such as commerce, industries and IT, says India should attain the $100 billion FDI mark “very soon”, provided the startup ecosystem remains intact.

“Out of 100 unicorns created in India last year, 40 happened to be from Karnataka. Startups played a key role in our FDI inflows too,” he says. India’s FDI data since 2000-01 reflects a roller-coaster ride, at times witnessing a dramatic rise, for instance a 155% y-o-y jump in 2006-07, and then occasional slips such as a 26% shrinkage in 2012-13. Such swings in data make it difficult for analysts to project future FDI trends. In the last 22 years, gross FDI rose y-o-y in 17 years and fell on five occasions (2002-03, 2003-04, 2009-10, 2010-11, 2012-13).

In the past decade, FDI inflows contracted only once – in 2012-13. Top five contributors to India’s FDI equity inflow for the entire period (2000-22) are Mauritius (27% of the total), Singapore (22%), US (9%), the Netherlands (7%) and Japan (6%). In 2021-22, Singapore was the top investing country, followed by the US and Mauritius. However, India’s net foreign investments, a figure arrived at by subtracting the outflow (Indians buying assets abroad or foreigners selling assets in India), have not been robust particularly during the second year of the pandemic.

Net FDI fell to $39.3 billion in 2021-22 from $44 billion a year ago “due to higher outward FDI by India and repatriation by foreign investors”, according to an RBI bulletin issued last month. With more and more Indian companies buying assets in foreign soil, it is likely that there will be pressure on net FDI in the coming years as well. Net numbers, however, don’t take away from the fact that India has been receiving more foreign money during the pandemic. It’s mainly because most sectors are open for 100% FDI under the automatic route.

Agencies

An emphasis on ease of doing business plus the recent rounds of reforms in FDI policy in sectors such as insurance, defence, petroleum and telecom have bulked up the kitty. Former Union industry secretary Ajay Dua says it is time for India to aggressively look out for foreign capital in the manufacturing sector by showcasing its production-linked incentive (PLI). “Most of India’s FDIs come via mergers and acquisitions.

We nee d to target more FDI i n fl ow s into greenfield manufactu- ring projects. We must constantly imp r o v e the PLI scheme and use it to attract FDI,” he says. The PLI scheme is believed to be the key reason why FDI in manufacturing went up by 76% in 2021-22.

STATE OF PLAY

While GoI’s policy initiatives were helpful, India’s FDI journey would not have been this remarkable (from $4 billion in 2000-2001 to $83.5 billion in 2021-22), had states not competed with each other to roll out the red carpet for foreign investors. FDI equity inflow from October 2019 to March 2022 shows Maharashtra (27% of total inflow), Karnataka (23%) and Gujarat (19%) were the top FDI recipients.

The other states attracting large FDIs include Delhi, Tamil Nadu, Haryana and Telangana. In 2021-22, 30 states and Union territories received FDIs, including northeastern states like Meghalaya ($1.09 mn) and Nagaland ($0.013 mn). Karnataka’s additional chief secretary Reddy says the state reached out to 1,500 global companies in the last one year, with 400 of them responding positively.

“This targeted approach will continue this year too. In Davos recently, our chief minister (Basavaraj Bommai) held meetings with 25 top CEOs. We instantly received an investment commitment of about `60,000 crore,” he adds. In neighbouring Telangana, about 500 CEOs of companies operating in the state are given the mobile numbers of IT and industries minister KT Rama Rao and principal secretary of industries and IT Jayesh Ranjan. “About 500 CEOs can contact us any day, anytime. If a message is dropped, we respond.

They can settle any issue instantly. The existing investors are our brand ambassadors,” says Ranjan, adding that in the eight years of the state’s existence, Telangana received $35 billion worth of FDI of which 24% was repeat investment. As states fiercely compete with each other to woo foreign investors, multinationals often deploy a smart tactic of negotiating with states simultaneously, creating almost a bidding war.

“True, if a foreign company wants to invest in India but finds another state offering better incentives, we bring in our policy of ‘meet and beat’. Means, we better that offer,” says Ranjan. A healthy race among states to woo foreign capital will help India accelerate the pace of reaching the $100 billion FDI milestone.

‘$120 billion FDI inflow plausible in three years’
By Bibek Debroy, Chairman, Economic Advisory Council to PM


FDI is desirable because it brings technology, ef ciency and better management practices, enabling India to become part of the global supply chain. FDI is preferable to imports from other countries because multiplier bene ts occur in India and also because FDI aids exports. Depending on the product, there is both a domestic consumer market, which is increasing, and a cheaper production base for exporting, the last especially important because rms are seeking to diversify from former host destinations. From India’s perspective, financing current account decits through nondebt-creating in ows like FDI are superior to in ows that create debt.

The government has progressively liberalised FDI entry. Defence, oil re neries, telecom, power exchanges, stock exchanges and insurance are cases in point. (For specific sectors, FEMA rules have been amended.) This is in addition to improving the business climate, which bene ts domestic and foreign investors alike. The numbers speak for themselves. From just over $45 billion in 2014-15, FDI in ows have increased to over $83 billion in 2021- 22. A large chunk of this is in the form of actual equity.

Global rankings show India remains an attractive investment destination and this has been reinforced in the course of the post-Covid recovery. At this rate, three years from now, annual in ow of upwards of $120 billion is plausible. Sectors not only indicate India’s comparative advantage (including that in R&D), but also the desirable outcome of reducing import dependence. Not just computer software, but computer hardware and drugs and pharmaceuticals come to mind. Add to that automobiles, telecom services, nancial services, trading and a sector that India emphasises, renewable energy. Bilateral trade and investment agreements, now that WTO is in a bit of a limbo, facilitate FDI ows and FDI doesn’t always mean inward FDI in ow into India. There is FDI out ow from India too. That’s precisely the reason India has been reviewing existing stock of such regional and bilateral agreements and is in the process of negotiating fresh ones.

For instance, other than Singapore, Mauritius and Cayman Islands, countries such as the US, Netherlands and the UK are major sources of FDI in ows. Quantum and nature of FDI is a function of the source country and the destination. While in an overall sense, the destination is India, FDI actually materialises in speci c states and is thus dependent on the investment and business climate of that state.

Most FDI in ows have come into Karnataka, Maharashtra, Delhi, Tamil Nadu, Gujarat and Haryana. There is, of course, a methodological problem in this, since investments, domestic and foreign, are shown against wherever corporate headquarters are located, not where manufacturing actually takes place. Nevertheless, this vindicates the perception about some states being more attractive destinations than others.

While liberalisation occurs at the level of Union government, many subsequent clearances (land, labour, water, electricity, environment) occur at state level, not to speak of transport and legal infrastructure. The reaction of states will determine whether, three years from now, annual in ows are $120 billion, or considerably higher.