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FDI in India has reached a record high of 81.7 billion USD in FY 2021, indicating the country's favorable investment environm

FDI, Foreign Direct Investment in India has registered a new high in the financial year 2020-21, with total inward FDI amounting to 81.72 billion USD. It includes capital, equity, and re-invested revenue, which surged 10% against the FDI received in the previous financial year, 74.39 billion USD.

According to the Indian government, the rise in FDI inflow can be attributed to several facilitative reforms and measures authorities have taken to make India a preferred global investment destination. India’s total FDI inflow has grown at a 6% CAGR, Compound Annual Growth Rate, between FY 2015-16 to FY 2019-20 (1).

How Much FDI India Received in FY 2021?

FDI equity inflow contributed to 59.64 billion USD out of 81.72 billion USD in FDI inflow that India received in FY 2021.

The inward FDI equity indicates 19% growth over the last fiscal year, which stood at 49.98 billion USD.

Notably, a major proportion, 51.47 billion USD, of this inflow was received during the first nine months of FY 2021, from April to December 2020, with a peak recorded in August 2020 (2).

India’s Top Investor Countries in FY 2021

In FY 2021, Singapore emerged as India’s top foreign investor nation, responsible for FDI equity of 15.71 billion USD from April to December 2020. In total, Singapore contributed to 29% of India’s FDI inflow.

The United States was the second-highest investor nation, with a 23% share in the total FDI received. Compared to the preceding fiscal year, there was a 227% rise in FDI equity amount from the United States.

Mauritius is India’s third-largest investor nation in FY 2021, with a 9% share. A look at cumulative FDI figures from April 2000 to December 2020 shows that Mauritius has been India’s largest FDI equity inflow contributor for the last two decades.

Other leading investors nations in FY 2021 include UAE, Cayman Islands, Japan, Netherlands, UK, and Germany.

Considering the percent increase in FDI received in FY 2021, over the last financial year, Saudi Arabia is a top investor with over 2,816.08 million USD investment against 89.93 million USD investment in FY 2020. The UK also increased its FDI equity share by 44%, compared to the last fiscal (3).

Top Sectors Attracting FDI in FY 2021

Computer software and hardware have emerged as the top sector attracting maximum FDI equity inflow by 44% in FY 2021. Between April to December last year, the sector had attracted more than 24.4 billion USD FDI equity inflow, recording a four-fold jump from FY 2019, when the amount was around 6.4 billion USD. Notably, this sector had received 7.7 billion USD FDI in FY 2020.

Multiple factors such as accelerated digitalization, augmented use of AI to overcome obstacles set by the coronavirus pandemic, and increased policy focus on manufacturing in India have contributed to the impressive surge in FDI.

The newly introduced PLI, Product-Linked Incentive Schemes (4), are also likely to accelerate the trend.

Other attractive leading sectors in FY 2021 include construction and infrastructure activities, which received 13% FDI equity inflow, and the service sector with an 8% share.

Other promising sectors receiving over 100% jump in equity received in FY 2021 include retail trading, rubber goods, drugs and pharmaceuticals, electrical equipment, and automobiles (5).

Sectors that have witnessed a steep decline in FDI compared to the past financial year include telecommunication (-94%) and hotel and tourism (-84%). While FDI into the telecom sector amounted to 4.44 billion USD in FYI, it witnessed a mere drop to 357 million USD in the initial nine months (6).

Leading Indian States in Attracting FDI in FY 2021

The top Indian states receiving FDI equity include Gujarat (37%), Maharashtra (27%), and Karnataka (13%), followed by Tamil Nadu and Delhi. These states collectively accounted for a 92% share of India’s total FDI equity inflow in FY 2021 (April to December). Notably, in FY 2020, the value stood at 81%.

Gujarat has been India’s top FDI investment destination for the fourth consecutive year, receiving over 30.23 billion USD in FY 2021, despite the coronavirus pandemic. Most of the FDI equity was directed towards computer software and hardware, 94%, and construction activities, about 2%.

Notably, Gujarat had received about 78% of India’s total FDI equity inflow, and it is driven by the state’s re-engineered strategy for industrial growth (7).

Gujarat boasts resilient industrial infrastructure and logistics networks backed by technological advancements across the supply chain. On the other hand, Delhi had witnessed a slowdown in FDI inflow compared to previous financial years.

Growth Drivers of India’s Increasing FDI Appeal

India has recorded its highest-ever FDI inflow in FY 2021, even as worldwide outbound investment momentum has significantly dropped. China is the only other country that has witnessed a surge in FDI.

In India, the digital, infrastructure, and energy sectors have captured this growth. India also requires greater foreign capital for its ambitious goals of securing manufacturing self-reliance, participating in international value chains, and reducing its trade dependencies (8).

There is no surprise that federal and state governments are pushing to facilitate FDI via several policies, incentives, and inducements.

Ease of Doing Business

India’s investor-friendly policies and focused reforms by state and central governments have improved the country’s overall investment temper, reflected in its World Bank’s Doing Business ranking of 63 in 2020. The jump in the ranking, from 142 in 2014, indicates big improvements India has made in the past several years.

Reforms such as digitization of bureaucratic departments like customs and incorporation, digitization of land and property registration departments, a single window for trade facilitation, and systematic efforts to streamline compliances and associated regulatory procedures have contributed immensely to this achievement.

Digital Economy

India has made a perceivable commitment to digitize its economy to push for the adoption of newer competitive technologies in several sectors such as money and banking, taxation, finance, e-commerce, rural development, agriculture, and governance (9).

India stood at 48 positions on the 2020 World Digital Competitiveness Rankings by the Internal Institute for Management Development, Lausanne, Switzerland. Factors such as technology, knowledge, and future readiness to explore more digital technologies contributed to India’s ranking assessment.

India has witnessed a sustained surge in telecom investment in the last few years, with 2020 being the exception.

Startup Hub

Amplified investment in tech infrastructure coupled with a vast and young talent base has made India among the top conducive startup ecosystems globally.

The 2020 GSER Global Startup Ecosystems Report featured two Indian cities, Bengaluru, ranked 26, and Delhi, ranked 36, on its list of the world’s most favorable ecosystems to build a successful worldwide startup. Even on the GII, Global Innovation Index, published by WIPO, India has shown significant strides by jumping to 48 positions in 2020 from 81 in 2015.

Robust Manufacturing and Infrastructural Base With Improved Connectivity – h3

India has a competent and diversified base for manufacturing all kinds of products to meet the needs of all kinds of sectors, including power generation, heavy electrical equipment, transmission, and more. There are expectations that India will become the third-largest construction market by 2022 worldwide.

Initiatives such as Smart Cities Mission, Housing for All, AMRUT, Sagarmala Project, etc., are aimed to facilitate a vision of “New India,” which is smart, technologically developed, and advanced.

India is aggressively courting overseas investors to become a part of the vision and add to its realization through mutually beneficial collaborations. For instance, through PPP, public-private partnerships for the delivery of high-priority public infrastructure and utilities.

India has also declared the ambitious NIP, National Infrastructure Pipeline, covering social and economic infrastructure projects. It is touted as the first-of-its-kind initiative to offer world-class infrastructure pan India with roads, energy, railway, and urban development projects being major beneficiaries.

FDI Policy Reforms

The central government has announced several FDI relaxations and policy initiatives in multiple sectors, including defense, public sector undertakings such as telecom, oil refineries, insurance, power exchanges, and stock exchange (10).

A vigorous FDI policy is also in place (11). Crucial reforms the Indian government has undertaken include implementation of the GST, Goods and Services Tax since 2017 to set up a single market (12), the introduction of the Insolvency and Bankruptcy Code in 2016, and consolidation of labor laws under four primary codes, including industrial relations, wages, social security, occupation safety, and health and working conditions (13).

The Indian government has also introduced PLI schemes in 13 flagship sectors to make these sectors internationally competitive regarding production capabilities and export viability (14). The incentives are offered on the incremental sale of products in target segments. They are set to allure significant foreign investment. Leading foreign companies such as Samsung, Foxconn Hon Hai, Wipro GE, AT&S, and Pegatron have received approvals for manufacturing under their respective PLI schemes.

Advantages for FDI in India:

  • A highly effective and deep-rooted democratic regime ensures a stable and calm political environment.
  • A well-developed administration, an independent judicial system, and vast geography, making India a repository of resources
  • Educated, hardworking and skilled workforce
  • India hosts an ever-growing consumer base, making it among the globe’s largest markets for manufactured products and services
  • Proximity to key manufacturing areas and suppliers and low development costs, making India an effective base from which MNCs can export to other high-growth developing markets
  • Transparency International offered Indian companies the top rank among developing markets in terms of compliance and transparency

Some of the weak points for FDI in India:

  • lack of additional infrastructure slows down the development of the country
  • the slow and cumbersome administrative process at the federal level hinder any economic reform, bureaucratic red tape
  • rigid and among the most complex labor regulations in the world
  • high corporate debt and NPA, non-performing assets
  • weak public finances
  • net importer of energy resources

India remains a prominent investment destination worldwide because of its inherent advantages, a huge market with a young population, investor-friendly reforms, democratic setup, increased urbanization, a steady surge in rural consumption levels, and a sustainable increase in disposable per capita incomes.

The Economic Impact

Despite the dreaded coronavirus pandemic, investors’ interest in India continues to rise.

Considering the FDI inflows, there is no doubt that the economy will swing into action post-pandemic. Services are likely to grow exponentially again. However, there is a bigger story in these numbers that is worth telling.

There has been a deep digitization process currently happening in India. It means that digital technology is becoming a connector, glue, and interface between almost every aspect of public life and touchpoints between the government and citizens or the consumer and market.

From the investments secured by Reliance Industries for its digital ventures to the ever-increasing numbers of unicorns, the massive digital transactions landscape, the burgeoning SaaS business, and other initiatives like direct transfers of government funds via digital technology, all of these are increasingly among the most attractive investment reasons to look at India.

To make India more attractive, the government has also introduced several benefits via the PLI schemes in electronics, and the BPO, Business Process Outsourcing industry.

However, it is only one part of the story.

The bigger question is why the interest is rising in infrastructure and construction.

India is looking to spend 1.4 trillion USD in the upcoming years in constructing infrastructure, including roadways, whose pace is hitting the record books. There are also plans to build a series of green highway corridors in collaboration with the World Bank.

From inland waterways to speedways, roads, and tunnels, even in the most remote parts of the country, including the high Himalayas and distant corners in the Northeast, the action in infrastructure is relentless despite the pandemic.

There have also been interesting innovations in infrastructure, including testing of plastic waste usage for road construction.

The second wave of coronavirus shows us the importance of recovery, relief, and reform as a key ingredient of economic resilience. There is little doubt that our world would be divided into pre and post-COVID. And post-COVID is a whole new world.

There is an opportunity that investors are banking on, thinking of it as a double barrel of infrastructure push; on one side is a digital infrastructure designed to transform the societal interaction contours at every level, and on the other side, there is a new physical infrastructure bridging the last-mile disconnect.

From banking for unbanked to farm produce for the palate conscious, there is only little that these two engines can’t deliver.

These two influences add to a basic societal change that is likely to build a whole new generation of buyers, consumers, and users, who would propel future demand and revenue.

We can also divide the history of FDI into two parts. The first happened after liberalization in 1991 and took off at the turn of the millennium. It is the phase where investors discovered sectors, and there was certain braggadocio and novelty at that time.

And with the arrival of our honorable Prime Minister Narendra Modi and his government in 2014, India is now in the second phase of our FDI history.

It is a far more mature phase, and investors have started noticing India’s story’s depth and its longevity rather than merely an opportunity.

As the world starts accepting that living with the waves of coronavirus will be a regular feature of our future, the search for opportunity’s longevity is likely to lead India pretty frequently.