NEW DELHI: Foreign direct investment (FDI) into India may decline sharply in 2020 because of the impact of the coronavirus pandemic and the consequent lockdown measures, supply chain disruptions and economic slowdown even as FDI inflows to Asia’s third largest economy jumped over 20% to $51 billion in 2019, according to the United Nations Conference on Trade and Development (UNCTAD).
According to the latest World Investment Report 2020 by UNCTAD, India jumped from 12th position in 2018 to 9th position in 2019 among the world’s largest FDI recipient.
“In South Asia, FDI is also expected to contract sharply. In India, the biggest FDI host in the sub-region, with more than 70% of inward stock, the number of greenfield investment announcements declined by 4% in the first quarter, and M&As contracted by 58%," the UNCTAD report said.
However, UNCTAD said India’s economy could prove the most resilient in the region. “FDI to India has been on a long-term growth trend. Positive, albeit lower, economic growth in the post-pandemic period and India’s large market will continue to attract market-seeking investments to the country," it added.
The report said India’s most sought-after industries, which include professional services and the digital economy, could see a faster rebound as global venture capital firms and technology companies continue to show interest in India’s market through acquisitions. “Investors concluded deals worth over $650 million in the first quarter of 2020, mostly in the digital sector.12 Large deals in energy were also concluded, such as the acquisition by Total (France) of Adani Gas (India), valued at $800 million," it added.
According to the report, global FDI flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005. In addition, FDI is projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022, the report says.
Global FDI flows rose modestly in 2019, following the sizable declines registered in 2017 and 2018. At $1.54 trillion, inflows were 3% up. The rise in FDI was mainly the result of higher flows to developed economies, as the impact of the 2017 tax reforms in the United States waned, UNCTAD said.
“The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects," said UNCTAD Secretary-General Mukhisa Kituyi.
The Organization for Economic Cooperation and Development last week said the world economy may contract by 6% or 7.6% in 2020, depending on a single-hit or a double-hit scenario of the coronavirus pandemic, respectively. It expects India’s economy to contract by as much as 7.3% in FY21 if a second wave of coronavirus sweeps the country.
Investment flows are expected to slowly recover starting 2022, led by global value chains (GVCs) restructuring for resilience, replenishment of capital stock and recovery of the global economy, the report said.
“The impact, although severe everywhere, varies by region. Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies," said James Zhan, UNCTAD’s director of investment and enterprise.