How FDI flows into India lost momentum

Foreign portfolio investors were net sellers of Indian equities for nearly all of October, offloading shares worth ₹1.1 trillion. This sell-off has triggered concerns among analysts and economists about whether India’s prolonged stock market boom might be nearing its end. Meanwhile, foreign direct investment (FDI), a more stable and long-term form of foreign financial interest in India, is grappling with its own set of challenges.

Data from India’s central bank shows that between April and August, net foreign portfolio flows (inflows minus outflows) into India totalled $10.3 billion, a steep drop from $22.9 billion in the same period last year. 

Read this | Mint Explainer: Why India's net FDI is at its lowest level since 2007

By comparison, net FDI flows—representing foreign investments in factories and in shares of Indian companies and foreign subsidiaries in India—appears more resilient. Net FDI in the April-August period reached $15.4 billion, up from $8.4 billion. However, 2024 still marks the second-lowest level for net FDI during this five-month period in the past seven years.

In 2023, according to World Bank data, net FDI flows into India amounted to $28.1 billion, the lowest since 2012. As a share of GDP, this was 0.8%, down from 2.4% in 2020 and 2.1% in 2015. This FDI slowdown is not unique to India. Global FDI flows in 2023 were $847 billion, down from $1.8 trillion in 2022. To put this in context, in the post-financial crisis year of 2009, global FDI declined 37%. Still, at $1.5 trillion, it was almost double its levels in 2023.

Capital repatriation

One key factor driving the weakness in net FDI has been capital repatriation by foreign investors. Between April and August this year, foreign investors brought in $36 billion but withdrew $20.7 billion. For comparison, in 2023, they invested $67.6 billion and repatriated $39.6 billion. Monthly repatriation over the past 15 months has typically ranged from 50-80% of gross inflows, a significant increase from the 20-50% seen in the pre-pandemic era.

Read this | FIIs pulling out of India is not a surprise. But where is their money going?

Again, this is likely a global phenomenon. The US Federal Reserve has increased its key interest rate by over 5 percentage points in effective terms since 2022. Capital flows tend to reverse when interest rates in the US rise, especially at the rate they have since 2022. However, it’s also worth noting that with the US seeking to rewire supply chains away from China, global FDI flows should favour India as well. Thus, the increase in repatriation is all the more striking.

Outward investment

Outward FDI by Indian entities has also risen sharply. Between April and August 2024, it reached $8.7 billion, up from $5.2 billion in the same period last year—a new record, surpassing the previous high of $7.6 billion in 2021. Furthermore, for the first eight months of 2024, outward FDI totalled $14.5 billion, already exceeding the full-year figure of $13.9 billion for 2023.

According to data from the Indian central bank on foreign assets and liabilities of Indian residents (companies, partnerships, funds, etc), Singapore is the top destination for Indian outward investment. On a cumulative basis, as of March, it accounted for ₹2.33 trillion of assets held by Indian entities abroad—around 24% of the total investment by Indian entities in foreign countries. The US and the UK were next in line, accounting for 15% and 14% of foreign assets, respectively.

Manufacturing investments

Indian conglomerates and companies have been active in making foreign investments in recent years. For instance, in June, the Aditya Birla Group announced a $50 million investment in a chemicals plant in Texas. Earlier, in April, Infosys acquired 100% of in-tech, a Germany-based, auto-focused engineering R&D firm, for approximately €450 million.

Turning to FDI inflows into India, manufacturing attracted $9 billion in 2023-24, marking a decline from the previous two years. The most volatile sector, however, has been IT (computer and communications services), with inflows swinging from $10 billion in 2018-19 to $26.7 billion in 2020-21, and back down to $8.6 billion in 2023-24.

Also read | How best to attract FDI: Four pointers for an ‘investment-friendly charter’ 

Looking ahead, the production-linked incentive scheme remains a draw for FDI in manufacturing sectors such as semiconductors and mobile phones. At the same time, India will also seek solid and stable growth.

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