India’s FDI Share Falls, But Services And Industrial Corridors See Gains: India Ratings

Despite a significant surge in the foreign direct investment (FDI) inflow over the years (1995: USD 2.1 billion, 2023: USD 28.2 billion), the nature of FDI inflows in terms of states or sectors where they were flowing to have remained skewed, asserted India Ratings.

With the increased infrastructure spending by the Union and state governments post 2021-22, the medium-term outlook is positive for FDI inflows, opined India Ratings and Research’s in a report on Sunday.

India’s share in global foreign direct investments (FDI), after peaking at 6.5 per cent in 2020, declined gradually to 2.1 per cent in 2023. Quoting the World Investment Report 2024 by UN Trade and Development, India Ratings noted that India slipped to the 16th position in attracting FDIs in 2023 from the eighth position in 2022.

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The FDI inflow in India suggests three key corridors – Maharashtra-Gujarat in the West, Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the South, and NCR region (Delhi and Haryana) in the North.

The highest FDI continues to flow in the services sector, followed by manufacturing (excluding computer hardware), according to the report.

The proportion of FDI inflows to the services sector increased to 40.9 per cent during 2014-15-2023-24 from 37.0 per cent during 200-01-2013-14. Among services, the top three sectors attracting FDI were banking/insurance, trading, and telecommunications.

Within manufacturing, FDI has mostly remained concentrated in segments such as automobiles, chemicals, drugs and pharmaceuticals, metallurgical, electrical equipment, and food processing.

“Concentration of FDI in few states suggests that better infrastructure (physical and human) and growth potential are key preconditions to attract higher FDI. The states which have evolved their economic policies around the broader national-level economic policies are able to take advantage and attract higher FDI inflows and thus there are better growth prospects for these state economies,” said Devendra Kumar Pant, Chief Economist, India Ratings and Research.

The government introduced the National Manufacturing Policy, 2011 (NMP) to increase the share of manufacturing in GDP to 25 per cent within a decade and create 100 million jobs.

The policy focused on attracting foreign investments and technologies by leveraging India’s expanding market for manufactured goods to encourage the building of more manufacturing capabilities and technologies within India. The realignment of global supply chain has helped India being one of the alternative supply sources due to the advantages of raw materials and low labour costs.

“While India had set an ambitious target of increasing the share of manufacturing in GDP at 25 per cent, it had limited success in attracting higher FDI in the sector. India aspires to be a developed economy by the turn of century of India’s Independence; hence, a buoyant manufacturing sector is important both from the point of view of stable growth and to generate employment in the country,” said Paras Jasrai, Senior Analyst, India Ratings and Research.

FDI as a percentage of GDP and Gross fixed capital formation (GFCF) averaged 0.9 per cent and 3.3 per cent, respectively during 2000-01-2004-05 and increased thereafter. While FDI as a percentage of GDP oscillated between 1.1 per cent to 3.5 per cent, as a percentage of GFCF it oscillated between 3.3 per cent to 10.0 per cent during 2005-06-2019-20.

“Both these ratios peaked in the COVID-19-impacted year (FY21). Thereafter, it is on a declining trend,” said the India Ratings report.

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