Decline in India’s Net Foreign Direct Investment (FDI) Inflows
Context:
Recently, the Finance Ministry reported a significant decline of 31% in India’s net FDI inflows, owing to Global Economic Uncertainty and Higher Interest Rates
Relevance:
GS03 (Economy)
Key Highlights:
- With a slight dip in gross FDI inflows from $61.7 billion to $59.5 billion during April 2023 to January 2024, the contraction was primarily attributed to an increase in repatriation rather than a substantial decrease in gross inflows. Accordingly the ministry suggested stabilizing Financing Conditions.
- Despite the decline in FDI inflows, with stable number of new project announcements, India is amongst the top five destinations for global greenfield projects, as highlighted in a UNCTAD report.
- The top contributors to FDI equity inflows into India are- Netherlands, Singapore, Japan, the USA, and Mauritius which collectively accounts for approximately 70% of the total inflows.
Foreign Direct Investment (FDI)
- According to the Reserve Bank of India (RBI), foreign direct investment (FDI) is an investment made through capital instruments by a person outside India in an unlisted Indian company or in 10% or more of the post-issue paid-up equity capital of a listed Indian company.
- It is a type of cross-border investment.
- FDI happens in various forms from acquiring shares to establishing a subsidiary or a joint venture and to even providing loans or technology transfers.
Challenges to FDI inflows in India:
- Multiple tax reforms in the recent past has built more complexities and uncertainties for the investors. The complex tax laws accompanied with multiple layers of taxation create challenges for foreign investors.
- The proactive participation of other emerging markets (China, Vietnam, and Indonesia) with lower costs of production, better infrastructure, and more investor-friendly policies has an indirect affect in attracting FDI to India.
How to Boost FDI Inflows in India:
- Streamline Regulations: India should simplify regulatory processes, like licensing and permits, through a single-window clearance system or digital platforms to reduce bureaucracy and enhance business ease.
- Boost Infrastructure: Focus on improving infrastructure across sectors such as transportation, logistics, power, and digital connectivity to attract foreign investors looking for efficient business environments.
- Enhance Investor Protection: Strengthen investor protection mechanisms, including robust intellectual property rights enforcement and improved dispute resolution methods, to build confidence among foreign investors and promote investment in key sectors.
