India has done reasonably well in attracting foreign direct investments (FDIs) among emerging market economies. However, the nature of FDI inflows in terms of countries from where they are originating and the states/ sectors where they are being invested remains fairly skewed, according to a report by India Ratings.
According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2022, India is among the top 10 (ranked 7) FDI destinations globally.
“Despite a significant surge in the FDI inflows over the years, the nature of FDI inflows in terms of countries from where they are originating and the states/sectors where they are being invested remains fairly skewed,” India Ratings and Research said in the report.
India in 2014 launched a flagship programme ‘Make in India’ to facilitate investments across sectors but with a special focus to build a world-class manufacturing sector. Attracting higher FDIs in manufacturing was dovetailed with this effort, which was supplemented by the rolling out of the production-linked incentive (PLI) scheme across 14 key manufacturing sectors in FY21.
“From a sectoral perspective, the highest FDI flowed into the services sector, followed by the manufacturing sector (excluding computer hardware) during April 2000 to March 2014 as well as during April 2014 to March 2022. While within services, FDI predominantly flowed into trading, telecommunications, banking/insurance, IT/business outsourcing and hotels/tourism, within manufacturing it remained concentrated in segments such as auto, chemicals, drugs and pharmaceuticals, metallurgical and food processing,” India Ratings said in its report.
FDI increased to $153.01 billion in the services sector during April 2014 to March 2022 from $80.51 billion during to April 2000 to March 2014. During the same period, FDI in manufacturing increased to $94.32 billion from $77.11 billion. This suggests that despite the government’s effort to attract more investments in the manufacturing sector through the ‘Make in India’ campaign, the FDI inflow is still tilted in favour of the services sector.
Ind-Ra said it believes this could be because doing business in the services sector is less complicated than doing business in the manufacturing sector in India. “This could also be the reason for the majority of the FDI coming in the manufacturing sector is not a greenfield investment. However, computer software and hardware have done well where the FDI increased to $72.7 billion during April 2014 to March 2022 from just $12.8 billion during April 2000 to March 2014. This sector has seen further traction after the roll out of PLI scheme with major global brands such as Apple, Samsung, Flextronics, and Nokia announcing big investments in India.”
Like the sectors, FDIs are also highly clustered around few states. Of the total FDI inflow of $146.7 during October 2019 and March 2022, just four states attracted 83 per cent of the FDI with Maharashtra accounting for 27.5 per cent, Karnataka 23.9 per cent, Gujarat 19.1 per cent and Delhi 12.4 per cent.
The remaining six states in the top-10 FDI destinations were Tamil Nadu, accounting for 4.5 per cent of the total FDI, followed by Haryana 3.7 per cent, Telangana 2.4 per cent, Jharkhand 1.9 per cent, Rajasthan 0.8 per cent and West Bengal 0.7 per cent.
“The remaining part of India accounted for just 3.1 per cent of the total FDI. Although there is no specific reason for clustering of FDIs around only few states, Ind-Ra believes perhaps it is due to the enabling conditions in these states. As a result, three distinct FDI corridors have emerged — NCR of Delhi in the north, Maharashtra-Gujarat in the west and Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the South,” India Ratings said.
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