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Home / Economy / Understanding India's record FDI flows, in charts

Understanding India's record FDI flows, in charts

The IT sector attracted more than twice as much FDI than the next leading sector, services.

Foreign direct investment (FDI) into India hit a record high in 2021-22. While that reflects continuing foreign interest in the Indian economy, there are reasons to be circumspect, notably for the small draw that is manufacturing and the capital moving out of India. Net FDI inflows, or inflows minus outflows, were the lowest since 2018-19.

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In 2021-22, gross foreign direct investment (FDI) inflows into India increased for the ninth consecutive year to $83.5 billion, an all-time high. The Indian central bank defines FDI as investments made by those residing outside India in an unlisted company or 10% or more of a listed company. Amid an uncertain external economic environment, the increased FDI is being pitched by many, including finance minister Nirmala Sitharaman, as a vote of confidence in the Indian economy .

In 2021-22, gross foreign direct investment (FDI) inflows into India increased for the ninth consecutive year to $83.5 billion, an all-time high. The Indian central bank defines FDI as investments made by those residing outside India in an unlisted company or 10% or more of a listed company. Amid an uncertain external economic environment, the increased FDI is being pitched by many, including finance minister Nirmala Sitharaman, as a vote of confidence in the Indian economy .

However, there is more to this argument. One, the rate of growth of gross incoming FDI fell sharply in 2021-22—to 2% from 10% in the previous year and 20% in the year before that. Bulk of this incoming FDI is concentrated in a few sectors such as computer software and hardware, and financial services.

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However, there is more to this argument. One, the rate of growth of gross incoming FDI fell sharply in 2021-22—to 2% from 10% in the previous year and 20% in the year before that. Bulk of this incoming FDI is concentrated in a few sectors such as computer software and hardware, and financial services.

Two, FDI outflows, which includes divestment of Indian assets by existing foreign investors and overseas investments made by Indians, also hit a record high of $44.3 billion, a growth of 16%. As a result, net FDI inflows (what’s coming in minus what’s going out) has actually fallen 10.6% since 2020-21, and is at its lowest levels since 2018-19.

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Between 2014-15 and 2021-22, repatriations and disinvestments by foreign investors have trebled. In other words, these foreign investors have preferred to take these surpluses out of India rather than reinvest it here. Adding to this net capital flight is Indians increasing their investments in assets abroad. In 2021-22, this increased 43% to $15.7 billion.

IT Focus

Incoming FDI has two broad components: new equity and reinvested earnings. New equity is the fresh money coming in, and hence a truer pulse of foreign interest in India’s economy. In 2021-22, nearly 25% of the total equity FDI inflows of $58.8 billion went into computer software and hardware alone, pointing to the resilience of India’s IT sector during the pandemic. The IT sector attracted more than twice as much FDI than the next leading sector, services.

Just five sectors attracted nearly 62% of the total FDI inflow in 2021-22, the other four being automobile, trading and construction. Conspicuous in this list is the thin presence of manufacturing-oriented sectors. The government classification of 63 sectors for inbound FDI doesn’t make a clear demarcation to allow for an exact calculation of inbound FDI. For example, computer hardware is clubbed with software. For 2021-22, Nasscom estimated hardware to make up only about 7.5% of IT sector revenues.

Outbound manufacturing

New investments are critical in Indian manufacturing in the larger context of creating new low-skilled jobs that can absorb the workforce moving away from agriculture. Even as the government seeks to prioritize domestic manufacturing as part of its ‘Make in India’ pivot, Indian entities are committing large sums of money to manufacturing abroad. Unlike inbound FDI, the sectoral classification of outbound FDI lists manufacturing as one of the nine heads. In 2021-22, 34% of the outbound FDI went to the financial, insurance and business services sector. Significantly, the second-highest share, of 23%, went to the manufacturing sector.

While some Indian multinationals are looking to strengthen their presence in global markets, others are seeking country- and industry-specific opportunities, including access to raw materials and a cheap labour pool. In 2021-22, Indian entities committed FDI in the manufacturing sector to both developed countries like the UK and the US, as well as to low-wage developing countries such as Vietnam and Bangladesh.

States of concentration

Karnataka, Maharashtra and Delhi accounted for 78% of the total inbound FDI in 2021-22. There is also concentration in where FDI is coming from, with a distinct and continuing presence of financial hubs and tax havens. In 2021-22, 27% of inbound FDI came from financial hub Singapore. Due to its ease of doing business, good integration with South Asian and South-East Asian markets, Singapore remains a preferred entry point for global FDI flowing into the region, including in India.

The US was second, with an 18% share. Notably, tax havens Mauritius and Cayman Islands feature significantly high on the list of FDI sources. Singapore and Mauritius lead in outward FDI as well. While inbound FDI has risen significantly over the past decade, there are signs of a slowdown, especially given uncertainty in the global economy due to the Ukraine-Russia conflict.

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