Over the past two decades, Foreign Direct Investment (FDI) inflows into India have risen significantly. In 2000, India received a little over $2 billion in FDI while in 2022 India received $84.8 billion (many would argue, that this is way below India’s actual potential). It would be pertinent to point out, that a significant percentage of FDI which India receives is directed towards the services and tech sector.
2023 has witnessed a drop in FDI inflows with the April-September period witnessing a 20% drop as compared to 2022. India has stated that this is a temporary phenomenon and that the country’s investor friendly policies as well as focus on physical infrastructure will ensure that the country remains as one of the favoured destinations for FDI.
Factors which have contributed towards FDI inflows into India
Several factors and policy decisions have contributed towards the rise in FDI in flows over the past two decades. First, there has broadly been a continuity in economic policy ever since the economic reforms of 1991. Second, not just central governments but even state governments have been pro-actively working towards attracting FDI by reaching out to potential investors. One of the important tools used by state governments for drawing foreign investments — apart from overseas roadshows — is state investors summits and a focus on more investor friendly policies.
Here it would be important to mention that ever since taking over as India’s PM — in 2014 — Narendra Modi has laid emphasis on ‘competitive federalism’ or competition amongst states for drawing FDI. In this context, ‘Ease of Doing Business’ (EODB) rankings of states was started – this was a joint initiative of the World Bank and the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry (Government of India). These rankings seek to enhance the overall business environment in states. States are judged on the basis of a Business Reforms Action Plan (BRAP) which consists of specific parameters (this exercise began in 2014). Some of the major companies which have invested in recent years include — Amazon, Walmart and Foxconn.
Third, while seeking to adapt to the changing geopolitical situation — especially deterioration of ties between China and the west and the focus of several countries to reduce their dependence upon China — the Modi government has introduced several crucial reforms pertaining to FDI – the most significant being the removal of caps in the defence, telecom and oil sectors.
The China factor and India’s economic links with the Gulf
India is likely to benefit from the emphasis of several companies to diversify global supply chains reduce their dependence upon China. Several companies like Apple have also expanded their operations in India and plan to further increase production in India over the next few years.
Apart from this, India’s burgeoning ties with the Gulf are also important. India has signed a Free Trade Agreement (FTA) – referred to as CEPA (Comprehensive Economic Partnership Agreement) — with UAE. Not only have trade relations witnessed a rise but UAE also emerged as the fourth largest investor in India in 2022-2023. UAE’s investments were largely in the services, power and construction sector. UAE had committed to investing $75 billion in India’s infrastructure sector.
India has also been seeking to strengthen economic relations with Saudi Arabia. Saudi Aramco and Abu Dhabi National Oil Company (UAE) will be participating in the Ratnagiri Refinery and Petrochemicals (RRPCL) project — a joint venture company , formed in 2017, by Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL).
While this project has been in limbo for some time, during high level bilateral meetings between Saudi and Indian officials, the refinery project has been on the agenda and both countries are seeking to expedite it as part of their overall thrust on a robust energy partnership. India’s economic ties with Saudi Arabia have also witnessed steady growth – bilateral trade between both countries reached a record high of $52.75 billion in 2022-2023. and both sides have been exploring ways to boost bilateral investments across sectors.
While the above trends are important in the context of FDI inflows, a few points need to be borne in mind.
First, a handful of states account for a large chunk of FDI. Three states – Telangana, Maharashtra and Andhra Pradesh account for over 2/3rd of FDI which India received in the April 2022-March 2023 period.
There is no doubt, that several states which have been dubbed as economic underperformers for very long have been focusing on more investor friendly policies. This is evident from the EODB rankings, where states from Eastern India have performed reasonably.
Second, not only are there disparities between states but also within states itself. FDI inflows are largely concentrated in one or a handful of cities even in states which have been successful in attracting foreign investment.
While there is no doubt that there has been an increase in FDI it is important to address some of the above issues and ensure that FDI is not restricted to specific regions and sectors.
[Nattanan Kanchanaprat / Pixabay]
The views and opinions expressed in this article are those of the author.
Tridivesh Singh Maini is a New Delhi based analyst interested in Punjab-Punjab linkages as well as Partition Studies. Maini co-authored ‘Humanity Amidst Insanity: Hope During and After the Indo-Pak Partition’ (New Delhi: UBSPD, 2008) with Tahir Malik and Ali Farooq Malik. He can be reached at [email protected].
