By Saugata Bhattacharya
One of the most effective drivers of sustained gross domestic product (GDP) growth is private sector investment, which, to the limited extent of available data, does not yet appear to have become broad-based. But private sector investment, although concentrated in a few sectors, does appear to have started rising in FY23 itself, accelerating in H1 FY24.
One crucial channel of private investment is foreign direct investment (FDI), important not just in terms of investment commitments but even more as an indicator of sentiment, especially foreign investor interest and confidence in India’s growth story and business opportunity.
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In this context, multiple news reports have flagged signs of a slowdown in FDI inflows in FY23, which has only deepened with the numbers for the months of April-January FY24 (10MFY24). These concerns are misplaced. This article tries to point to the flawed reasoning. The foreign investment narrative is far richer in terms of the underlying dynamics of FDI inflows and outflows.
First, in order to make sense of the data, the definitions underlying the numbers need to be understood. The reported slowdown pertains to “net FDI” flows, which is not the appropriate metric. The top line is gross FDI (that is total inflows) minus outflows on various accounting heads.
The first element in outflows are “repatriations” of existing FDI investors; a component of these outflows are investors exiting because conditions of investment were not met. More importantly, existing investors exit older investments, which is the established model for early-stage investors, particularly given the ongoing initial public offering (IPO) boom.
Lastly, there are outbound FDI investments from Indian companies, looking to invest in minerals, and acquiring shares in foreign firms — in essence, looking to access consumer markets, minerals and other inputs, and acquiring technology.
Second, the following are the reported numbers of actual FDI investment inflows. Over April-January of FY24 (10MFY24), net FDI inflows totalled $15.42 billion, compared to $26.7 billion and $31.7 billion over the corresponding 10MFY23 and 10MFY22, respectively. This is definitely a large drop.
However, gross FDI remained more or less at the same levels over the corresponding 10 months: $59.5 billion in FY24, and $61.26 billion in FY23. However, these amounts remain lower than the gross investments of the 10 months of the previous two fiscal years, FY21 and FY22 ($70.4 billion and $69.6 billion, respectively).
Third, what explains this? The following are some potential causal factors of, and reasons for, the changes in these flows. One of the reasons for the unusually high inflow in FY21 (the first pandemic year) was a series of funds infusion from investors across the world into companies of one specific conglomerate.
This was augmented by private equity/venture capital (PE/VC) investors, funding start-ups and tech companies during the online boom. This flow was largely enabled by the flood of liquidity infused by the global central banks during the early pandemic years. Withdrawal of liquidity from end-2022 quickly led to a scaling back of these investments, leading to a more “normal” level of inflows. This is corroborated by official data.
Among the top 10 FDI sectors, flows into computer software and hardware during 9MFY24 dropped to $3.4 billion (compared to $9.4 billion and $14.5 billion in the full FY23 and FY22, respectively). Note, though, that a lot of these non-start-up investments by FDI investors were actually mergers and acquisitions of existing commercial entities, and not investments in new projects. In that context, Grant Thornton Bharat’s Dealtracker records a 59% decrease in deals by value in 2023 compared to 2022.
A more notable development — the core of the FDI slowdown narrative relating to the drop in net inflows — was a significant increase in repatriation and disinvestment of FDI capital. This jumped to $34 billion in the 10MFY24, compared to $24.1 billion, $24.6 billion and $15.8 billion in the corresponding 10 months of the previous three years. The causes remain unresolved, in the absence of specific data.
The presumption is that much of this repatriation spike in FY24 were investors exiting their private (and possibly public) equity holdings at a profit with the IPOs. As a subset, some of these gross inflows might have been intended for funding equity via complex financial structures, which did not fructify.
There is one more possible reason for repatriation: investors sometimes bring in funds for certain projects, which might not ultimately be implemented due to inability to get permissions and regulatory clearances. This remains unlikely, however, in the absence of any media reports of cancellation of projects with large foreign equity investments.
This presumption is also bolstered by figures on reinvestment of profits by existing FDI investors—$16.1 billion in 10MFY24 and has been more or less stable. This implies that India investments are expected to remain profitable in future.
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Given all this, what might we expect of FDI inflows in the coming years? Consider the sectors which got a third of inflows — finance (banks, non-banking financial companies, insurance, mid-office) and software (global capability centres, R&D, testing and analysis, etc.). This is likely to sustain. The challenge is to increase investments in other segments, particularly manufacturing.
The performance-linked investment scheme has already led to success in the electronics and cellphone manufacturing ecosystem. The policies and administrative ecosystem which facilitated this needs to be replicated in other sectors.
The author, Saugata Bhattacharya, is an economist.
Views are personal.
By Saugata Bhattacharya
One of the most effective drivers of sustained gross domestic product (GDP) growth is private sector investment, which, to the limited extent of available data, does not yet appear to have become broad-based. But private sector investment, although concentrated in a few sectors, does appear to have started rising in FY23 itself, accelerating in H1 FY24.
One crucial channel of private investment is foreign direct investment (FDI), important not just in terms of investment commitments but even more as an indicator of sentiment, especially foreign investor interest and confidence in India’s growth story and business opportunity.
In this context, multiple news reports have flagged signs of a slowdown in FDI inflows in FY23, which has only deepened with the numbers for the months of April-January FY24 (10MFY24). These concerns are misplaced. This article tries to point to the flawed reasoning. The foreign investment narrative is far richer in terms of the underlying dynamics of FDI inflows and outflows.
First, in order to make sense of the data, the definitions underlying the numbers need to be understood. The reported slowdown pertains to “net FDI” flows, which is not the appropriate metric. The top line is gross FDI (that is total inflows) minus outflows on various accounting heads.
The first element in outflows are “repatriations” of existing FDI investors; a component of these outflows are investors exiting because conditions of investment were not met. More importantly, existing investors exit older investments, which is the established model for early-stage investors, particularly given the ongoing initial public offering (IPO) boom.
Lastly, there are outbound FDI investments from Indian companies, looking to invest in minerals, and acquiring shares in foreign firms — in essence, looking to access consumer markets, minerals and other inputs, and acquiring technology.
Second, the following are the reported numbers of actual FDI investment inflows. Over April-January of FY24 (10MFY24), net FDI inflows totalled $15.42 billion, compared to $26.7 billion and $31.7 billion over the corresponding 10MFY23 and 10MFY22, respectively. This is definitely a large drop.
However, gross FDI remained more or less at the same levels over the corresponding 10 months: $59.5 billion in FY24, and $61.26 billion in FY23. However, these amounts remain lower than the gross investments of the 10 months of the previous two fiscal years, FY21 and FY22 ($70.4 billion and $69.6 billion, respectively).
Third, what explains this? The following are some potential causal factors of, and reasons for, the changes in these flows. One of the reasons for the unusually high inflow in FY21 (the first pandemic year) was a series of funds infusion from investors across the world into companies of one specific conglomerate.
This was augmented by private equity/venture capital (PE/VC) investors, funding start-ups and tech companies during the online boom. This flow was largely enabled by the flood of liquidity infused by the global central banks during the early pandemic years. Withdrawal of liquidity from end-2022 quickly led to a scaling back of these investments, leading to a more “normal” level of inflows. This is corroborated by official data.
Among the top 10 FDI sectors, flows into computer software and hardware during 9MFY24 dropped to $3.4 billion (compared to $9.4 billion and $14.5 billion in the full FY23 and FY22, respectively). Note, though, that a lot of these non-start-up investments by FDI investors were actually mergers and acquisitions of existing commercial entities, and not investments in new projects. In that context, Grant Thornton Bharat’s Dealtracker records a 59% decrease in deals by value in 2023 compared to 2022.
A more notable development — the core of the FDI slowdown narrative relating to the drop in net inflows — was a significant increase in repatriation and disinvestment of FDI capital. This jumped to $34 billion in the 10MFY24, compared to $24.1 billion, $24.6 billion and $15.8 billion in the corresponding 10 months of the previous three years. The causes remain unresolved, in the absence of specific data.
The presumption is that much of this repatriation spike in FY24 were investors exiting their private (and possibly public) equity holdings at a profit with the IPOs. As a subset, some of these gross inflows might have been intended for funding equity via complex financial structures, which did not fructify.
There is one more possible reason for repatriation: investors sometimes bring in funds for certain projects, which might not ultimately be implemented due to inability to get permissions and regulatory clearances. This remains unlikely, however, in the absence of any media reports of cancellation of projects with large foreign equity investments.
This presumption is also bolstered by figures on reinvestment of profits by existing FDI investors—$16.1 billion in 10MFY24 and has been more or less stable. This implies that India investments are expected to remain profitable in future.
Given all this, what might we expect of FDI inflows in the coming years? Consider the sectors which got a third of inflows — finance (banks, non-banking financial companies, insurance, mid-office) and software (global capability centres, R&D, testing and analysis, etc.). This is likely to sustain. The challenge is to increase investments in other segments, particularly manufacturing.
The performance-linked investment scheme has already led to success in the electronics and cellphone manufacturing ecosystem. The policies and administrative ecosystem which facilitated this needs to be replicated in other sectors.
The author, Saugata Bhattacharya, is an economist.
Views are personal.
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