FDI in Indian economy

Drop in FDI inflows mirrors Global Trends: Finmin 


From UPSC perspective, the following things are important :

Prelims level: Indian Economy; Trends in FDI

Mains level: Indian Economy; Trends in FDI

Why in the News?

India’s net Foreign Direct Investment (FDI) inflows have dropped almost 31% to $25.5 billion over the first ten months of 2023-24 as per the Finance Ministry

Recent key Observations related to FDI inflow as per the Finance Ministry

Recent FDI in the context of India:

  • From April 2023 to January 2024, the net inflows decreased more significantly due to increased repatriation of investment.
  • India remains one of the top destinations for global greenfield projects, with a stable number of new project announcements.
  • The country received significant FDI in sectors like services, pharmaceuticals, construction, and non-conventional energy.
  • The Netherlands, Singapore, Japan, the USA, and Mauritius contribute around 70% of total FDI equity inflows into India.
  • There’s a possibility of a modest increase in global FDI flows in the current year, driven by a decline in inflation and borrowing costs in major markets. However, significant risks remain, including geopolitical issues, high debt levels in many countries, and concerns about further economic fracturing.

Recent FDI scenario in the context of the world:

  • Overall, global FDI flows rose by 3% to an estimated $1.4 trillion in 2023 due to economic uncertainty and higher interest rates led to a 9% fall in FDI flows to developing countries.
  • Drivers of Global FDI: Capital-intensive projects, particularly in renewable energy, batteries, and metals sectors, drove a large proportion of global FDI in 2023, highlighting the importance of energy transition.
  • Decline in International Investment Projects: Both greenfield projects and project finance (mainly infrastructure) and cross-border Mergers and Acquisitions (M&As) saw declines in 2023, attributed to higher financing costs. International project finance and M&A activity decreased by 21% and 16%, respectively.

    What is Foreign direct investment (FDI)?

    Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.

    Government Bodies regulating FDI:

    India offers an automatic route for FDI in several sectors, simplifying the investment process for foreign investors in India. However, certain sectors require government approval, and reporting requirements, in line with the Foreign Exchange Management Act (FEMA), are in place to ensure transparency in foreign investments in India. FDI in India is subject to regulation and oversight by various government bodies, such as:

    • Department for Promotion of Industry and Internal Trade (DPIIT): DPIIT formulates and implements policies to promote and regulate foreign investment in India across sectors.
    • Reserve Bank of India (RBI): RBI manages the monetary aspects of foreign investments in India.
    • Securities and Exchange Board of India (SEBI): SEBI regulates FDI in the capital market.

    Conclusion:  India remains a top destination for greenfield projects, but international investment projects declined due to higher financing costs. This is indeed a silver lining for the Indian government to plan and execute for targeting more FDI inflow considering the Global scenario.


Practice Question for mains

Q- Explain the reasons for India’s decline in net FDI inflows in 2023-24 and analyze its implications amid global trends

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