What India's record FDI jump means for investors

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What India's record FDI jump means for investors
A trader wearing protective hand gloves counts Indian currency notes at a market. FDI inflow into India is a validation that the world’s largest democracy continues to offer the prospect of strong and long-lasting returns to investors even during a pandemic.Courtesy: Reuters

A 27% increase in foreign investments amid the pandemic once again underlines the strong fundamentals of the economy.

India’s record of $64 billion in Foreign Direct Investment (FDI) in 2020, the fifth largest recipient of inflows in the world, is yet another validation that the world’s largest democracy continues to offer the prospect of strong and long-lasting returns to investors even during a pandemic.

Foreign direct investments in India rose to $64 billion in 2020, making it the fifth-largest recipient in the world, United Nations Conference on Trade and Development (UNCTAD) said on Monday. Robust investment in the information and communication technology (ICT) industry and construction bolstered FDI inflows. Cross-border mergers and acquisitions surged 83 per cent to $27 billion with major deals involving ICT, health, infrastructure and energy.

"FDI in South Asia rose by 20 per cent to $71 billion, driven mainly by a 27 per cent rise in FDI in India to $64 billion," according to UNCTAD's World Investment Report 2021. "However, although the region has managed the health crisis relatively well, the recent second wave of COVID-19 in India shows that significant uncertainties remain," said the report.

The strong fundamentals of the Indian economy provide "optimism" for the medium term, it said.

Rush of global investors

Last year, global investors, including tech titans such as Google and Facebook, invested about $27 billion in Indian billionaire Mukesh Ambani's Reliance Industries, betting on the company's ambitions of becoming a major force in technology and e-commerce.

The World Investment Report 2021 by the UN agency said global FDI flows have been severely hit by the pandemic and they plunged by 35 per cent in 2020 to $1 trillion from $1.5 trillion the previous year. Lockdowns caused by COVID-19 around the world slowed down existing investment projects, and prospects of a recession led multinational enterprises (MNEs) to reassess new projects.

But in India, FDI saw an upswing, pushed up by acquisitions in the information and communication technology (ICT) industry. The pandemic boosted demand for digital infrastructure and services globally. This led to higher values of greenfield FDI project announcements targeting the ICT industry, rising by more than 22 per cent to $81 billion.

Readings from the Bombay Stock Exchange fascinate passersby. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows.
Readings from the Bombay Stock Exchange fascinate passersby. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows.Courtesy: Reuters

India bucks the FDI trend

By contrast, FDI fell in other South Asian economies that rely on export-oriented garment manufacturing. Inflows in Bangladesh and Sri Lanka contracted by 11 per cent and 43 per cent respectively. In Pakistan, FDI was down by 6 per cent to 2.1 billion dollars, cushioned by continued investments in power generation and telecommunication industries.

Despite the pandemic, FDI to and from the region remained resilient in 2020. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows.
– James Zhan, Director of Investment, UNCTAD

Overall, FDI flows to developing countries in Asia increased by 4 per cent to 535 billion dollars in 2020, reflecting resilience amid global FDI contraction, said the report. "Despite the pandemic, FDI to and from the region remained resilient in 2020. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows," said UNCTAD's Director of investment and enterprise James Zhan. "FDI prospects in 2021 for Asia are more favourable than the global average because of recovery in trade, manufacturing activities and a strong GDP growth forecast," he added.

A woman wears a protective mask as she rides a bike at a market in Vietnam after Hai Duong authorities end 34 days of social distancing. Asia continues to be a strong engine for global FDI due to high growth numbers and due to shift in manufacturing capacity from China.
A woman wears a protective mask as she rides a bike at a market in Vietnam after Hai Duong authorities end 34 days of social distancing. Asia continues to be a strong engine for global FDI due to high growth numbers and due to shift in manufacturing capacity from China.Courtesy: Reuters

Asia as a strong engine of growth

"Overall, Asia remains the strongest engine of global FDI," said Richard Bolwijn, one of the authors of the report. "It remains attractive because of the high growth numbers, because of the shifting of manufacturing capacity from China to other lower-income countries in the region, and because of the prospects for further growth of regional value chains."

The report said FDI prospects for the region are more favourable than the global outlook with a projected growth of 5 to 10 per cent, thanks to resilient intraregional value chains and strong economic growth prospects. Signs of trade and industrial production recovering in the second half of 2020 provide a strong foundation for FDI growth in 2021. Manufacturing, an important FDI sector for the region, already showed signs of recovery in the second half of 2020.

According to recent data released by India’s Department for Promotion Industry and Internal Trade (DPIIT), countries like the US, UAE, and Cayman Islands are clocking higher numbers as far as the FDI into India is concerned.

FDI from the US has more than tripled from $4.2 billion in FY20 to $12.8 billion in FY21, while those from the UAE have seen a 13-fold growth from $0.339 billion in FY20 to $4.2 billion in FY21. Singapore, though, continues to be the biggest contributor to FDI inflows into India at $17.4 billion in FY21, up 18% over the previous fiscal year.

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