Corporate Performance

Published: Dec 29, 2021
Updated: Dec 29, 2021

FDI inflows buck pandemic

While the economy continued to grapple with technical recession in the first half of fiscal year 2020-21, a positive development has been an increase in Foreign Direct Investment (FDI) inflows in the country during the first half of 2020-21. For the past few years, India has been a recipient of FDI inflows. In the past two decades, the total FDI inflows in India have increased from $ 4 billion in FY01 to $ 74 billion in FY20. Further, in the first half of FY21, India has received 15% higher investment inflows when compared with the same period last year, despite a subdued global economic and investment environment which was hampered on account of the coronavirus pandemic that brought economies to a near halt, according to a study by Care Ratings, a well-known rating agency.

The Care study points out that over the past couple of years, the government has been undertaking various measures to attract foreign investment in India. With such measures, in the World Bank’s Doing Business 2020 ranking, India moved up 14 places to the 63rd rank among 190 nations from the earlier 77th rank, owing to the latest reforms in the areas of starting a business, dealing with construction permits, trading across borders and resolving insolvency. India also figured among the top 10 performers on the list for the third time in a row. Optimism on the India growth story among foreign investors, combined with ample liquidity in the global market, has aided flows into India. In addition, performance- linked incentives have gained traction under the ‘Atmanirbhar Bharat’ initiative undertaken by the government to boost the manufacturing sector. India might have also benefited from the global anti-China sentiment as investors strategized to tap alternative supply chains

In this study, the agency has assessed the inflows of foreign direct investment in India in the first half of the fiscal year 2020-21. The analysis also covers the sectoral assessment, region-wise overview and country-wise FDI investment during the first half of the ongoing fiscal year

Key highlights

• During April 2000-September 2020, the cumulative FDI inflows amounted to $ 722 billion while FDI equity inflows aggregated $ 500 billion.

• In H1FY21, the equity inflows amounted to $ 30 billion, which was highest in the comparable periods in the past 5 years.

• The higher inflows in H1 FY21 can be ascribed to the surge in the computer software and hardware sector that pipped the services sector and garnered the highest $ 15.5 billion worth of FDI inflows. The sector has benefited during the pandemic on account of work from home policies and greater engagement in digital channels.

• Gujarat surpassed Delhi, Karnataka and Maharashtra to gain top position in H1 FY21 compared with its 4th rank in H1 FY20.

• While Singapore retained its top position, the US emerged as the second highest source of FDI in H1 FY21 replacing Mauritius, indicating stronger ties between the two countries and confidence of investors in the Indian economy.

Cumulative FDI investment

• During April 2000-September 2020, the cumulative FDI inflows (inclusive of equity inflows, re-invested earnings and other capital) amounted to $ 722 billion.

• During this period, the FDI equity inflows aggregated $ 500 billion, which is equivalent to Rs 29.6 lakh crore.

• In terms of cumulative equity inflows from countries during April 2000-September 2020, the top 10 countries accounted for nearly 86% of total equity inflows. Mauritius dominated with a 29% share, followed by Singapore with 21% and the US with 7.38%

• During April 2000-September 2020, 63 sectors received FDI equity inflows with the highest inflows in the services sector (17%), computer software and hardware (12.5%), telecom (7.5%). The top 10 sectors, namely trading, construction development, automobile, chemicals (except fertilizers), construction (infra) activities, drugs and pharma, and hotel and tourism, along with the afore-mentioned top 3, accounted for 66% of the total FDI equity inflows.

• Gujarat has seen the highest cumulative inflows of FDI worth $18.6 billion, accounting for nearly 35% of the total FDI inflows, followed by Maharashtra (20% share) and Karnataka (15% share).

• During the first half of FY21, the total FDI inflows comprising FDI equity inflows, re-invested earnings and other capital was the highest in the same period in the past 5 years. Considering the first half of the past 5 years, the total inflows have grown at a CAGR of 8% per annum during H1 FY17-H1 FY21.

• In H1 FY21, the aggregate total FDI inflows amounted to $ 39.9 billion, 14% higher than $ 34.9 billion in H1 FY20. In terms of annual growth barring H1 FY19, all first halves of fiscal years since FY17 have registered double-digit growth, with the highest yoy growth witnessed in H1 FY17 (18.9%). Overview of FDI equity inflows

• FDI equity inflow is a main component of total FDI inflows. It accounts for nearly 75% of the total FDI inflows in the country.

• India has witnessed sustained FDI equity inflows. In terms of annual inflows, the FDI equity inflows have grown considerably from $ 2.4 billion in FY01 to $ 50.0 billion in FY20.

• During the first halves of the past 5 years, i.e., from H1 FY17 to H1 FY21, the FDI equity inflows have grown at an annual pace of 9% (CAGR).

• In H1 FY21, the equity inflows amounted to $ 30 billion, which was the highest in the comparable periods in the past 5 years.

• In terms of annual growth, the FDI equity flows grew by 15% in H1 FY21, a near stable growth from H1 FY20 (15.1%).

• The surge in the FDI equity inflows can in part be attributed to the opening of the various sectors by the government and allowing 100% FDI investment via the automatic route, which eased the process of investment in the country.

Sector-wise assessment

• The top 9 sectors, as shown in Chart 3, accounted for over 75% of the total FDI equity inflow in H1 FY21.

• While historically the services sector dominated in terms of FDI inflows, the computer software and hardware sector outperformed the services sector and garnered $ 15.5 billion worth of FDI inflows, which was 59% of the total FDI inflows received by the country in H1 FY21.

• The services sector slipped to second position, with $ 2.3 billion worth of investments followed by trading (3% share or $ 949 million).

• In H1 FY21, among the top 9 sectors, most sectors witnessed double digit contraction in FDI equity inflows, barring computer software and hardware and drugs and pharma, the sectors which had gained importance during the pandemic.

• Sectors like telecom (-100% growth), services (-49% growth), construction development (-55%), automobiles (-80%), and construction (infra) activities (-61%) were some of the sectors registering a contraction in FDI inflows.

• The sharp fall in FDI in the telecom sector from $ 4.2 billion in H1 FY20 to a mere $ 7 million in H1 FY21 can be ascribed to inherent stress and high regulation, along with intense competition in the sector.

• In H1 FY21, Maharashtra, Delhi, Karnataka and Gujarat accounted for more than 85% of the total FDI equity inflows.

• Gujarat surpassed Delhi, Karnataka and Maharashtra to gain top position in H1 FY21 compared with its 4th rank in H1 FY20. The inflows surged from $ 3.5 billion in H1 FY20 to $ 16 billion, accounting for 53% of the total FDI equity inflows in H1 FY21.

• Delhi, which was the highest recipient of FDI equity inflows in H1 FY20, slipped to the 4th position, with a 63% decline in FDI equity inflows in in H1 FY21 compared with the corresponding period of last year.

• Karnataka and Maharashtra retained their second and third positions respectively in H1 FY21. However, Karnataka received 21% lower inflows when compared with H1 FY20 while Maharashtra received near stable inflows aggregating $ 3.6 billion in the first half of FY20 and FY21.

• While Tamil Nadu received 30% less FDI equity inflows in H1 FY21, Jharkhand received considerably higher FDI inflows in H1 FY21 compared with the same period of FY20.

Top investing countries

• The top 9 countries depicted in Chart 4 accounted for around 75% of the total FDI equity inflows in H1 FY21.

• Singapore remained the top source of FDI equity inflows in India with $ 8.3 billion inflows in H1 FY21, 4% higher than the same period of FY20. During this period, it accounted for nearly 28% of the total FDI equity inflows. The inflows from Singapore have gone up as many Indian firms are getting incorporated in Singapore’s jurisdiction since last year.

• Interestingly, the US emerged as the second highest source of FDI in H1 FY21 (24% share), replacing Mauritius which slipped to the 3rd position. In H1 FY21, the inflows from the US increased over 3 times to $ 7.1 billion compared with $ 2.2 billion in H1 FY20.

• Mauritius accounted for 7% of inflows in H1 FY21, much lower than its 24% share in H1 FY20 as the inflows fell by 69% in H1 FY21 over the corresponding period of last year, despite its tax haven status and Double Taxation Avoidance Agreement (DTAA) with India.

• Inflows from France increased by nearly 3.5 times over to $ 1.1 billion in H1 FY21 ($ 334 million in H1 FY20).

• With regard to other sources of FDI inflows, the flows from the UK increased by 58% yoy in H1 FY21 while other countries reported lower inflows in the country — Japan (-63% yoy), Netherlands (-36% yoy), Germany (-22% yoy) and Cyprus (-56% yoy). Together, these countries accounted for 13% of total FDI equity inflows, lower than cumulative 20% share in H1 FY20.

Conclusion

Despite headwinds amidst the pandemic, the FDI inflows remained robust in India, supported by liquidity surplus in the global market and confidence amongst the investors. Going ahead, ease in investments led by various measures undertaken by the government is expected to further propel inflows in India. Higher foreign investment is expected to kickstart the private investment cycle. For the year 2020-21, the FDI equity inflows could be expected to be around $ 70 billion, according to Care Ratings.