Statsguru: Attracting foreign direct investment will need more effort

Attracting foreign direct investment (FDI) would need more effort despite some recent high-profile announcements.

Outward flows have grown faster than inward FDI, according to annual data from the “Census on Foreign Liabilities and Assets of Indian Direct Investment Entities for 2022-23” released last week by the Reserve Bank of India (RBI). FDI into India grew 6.9 per cent in 2022-23, while outward direct investments grew by 19.5 per cent. The ratio of inward to outward direct investment was 5.5 times in 2022-23, compared to 6.3 times in the previous year. It was 5.6 times in 2018-19 (chart 1).

Over 21 per cent of the outward direct investment was in the form of debt, while equity accounted for nearly 96 per cent of the inward flows (charts 2,3). 





The manufacturing sector was the largest recipient of FDI. It accounted for 51.9 per cent of total FDI in 2022-23, compared to 48.7 per cent in the previous year. However, it is lower than the pre-pandemic share of 53.1 per cent. The services sector was the second leading recipient, with a 42.8 per cent share in 2022-23. It was 42.4 per cent in 2018-19 (chart 4).

Attempts to encourage more companies to manufacture in India for the rest of the world may be bearing some fruit. A number of foreign companies have set up subsidiaries in India. Around 18.7 per cent of their sales were geared towards exports in 2018-19.

This has increased to 22 per cent by 2022-23. In services, 48.5 per cent of the sales of foreign subsidiaries was geared towards exports, underscoring that services companies remain more globally competitive than manufacturing in India (charts 5,6).


 

More reforms will be needed before India can attract large amounts of FDI, which as a percentage of gross domestic product in India was 1.5 per cent in 2022 compared to 1.9 per cent globally. It has had a lower share than the world in eight out of the last 10 years.