Why are FDI inflows to India declining?

Flows to India declined to $45 bn in 2021. However, a flurry of new international project finance deals were announced in the country. In its latest World Investment Report UNCTAD said that FDI inflows to India declined to $45 billion in 2021 from $64 billion in the preceding year. While the United States remained the top recipient of FDI, China and Hong Kong also retained second and third position, respectively.

Among the top 10 host economies for FDI, only India saw a decline in its FDI inflows. However, outward FDI from India rose 43 percent to $15.5 billion in 2021. UNCTAD said global FDI flows recovered to pre-pandemic levels last year growing 64 per cent to $1.6 trillion, but the prospects for this year are grimmer.

This year, the business and investment climate has changed dramatically as the war in Ukraine results in a triple crisis of high food and fuel prices and tighter financing. Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession. UNCTAD foresees that the growth momentum of 2021 cannot be sustained and that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat. However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty.

Other corroborative evidence of diminishing foreign investor interest was provided last December by Union commerce minister, Piyush Goyal, on the floor of Parliament. Between 2014 and November 2021, as many as 2,783 foreign companies with registered offices or subsidiaries in India closed down operations with a total of 12,458 active foreign subsidiaries operating in the country.

The exit of one-fifth of foreign companies is indeed a huge number. To be sure, there are various reasons for this such as completion of business objectives and projects, restructuring by the parent company, amalgamation, and other management decisions. But the reasons also include uncertainties over the policy environment or regulatory hassles. There is definitely a cause of concern if foreign investors are choosing to exit rather than stay invested.

Experts say if foreign capital is to contribute to the India growth story, it is necessary to incentivise a much larger proportion of FDI inflows towards the building of green-field factories, industrial parks, and other infrastructure. Such investments depend on a more stable policy and regulatory framework than the streamlining of procedures and digitisation of paperwork that have improved India’s ranking in World Bank’s Doing Business indicators, which has now been discontinued. Reform to free up the land and labour markets and improving the environment to do business in the states is imperative.