Tuesday's Talking Points
FDI Inflows hit a USD 1 trillion milestone!
What’s the Point?
Foreign Direct Investment (FDI) in India has reached a significant milestone of USD 1 trillion since April 2000. While the slowdown in FDI witnessed in FY23 reversed by FY24, gross FDI inflows have continued to accelerate in FY25. However, net FDI flows, after accounting for divestments and repatriation, continue to trend lower. Several factors support a positive outlook for FDI inflows: (1) Improvement in capex outlook (crowding in of private capex, improving capacity utilization), (2) Enhanced exit environment through IPOs, and (3) Focus on incentivizing investments via schemes like Production Linked Incentives, in addition to themes such as China + 1 and India’s sound geopolitical positioning. While India has made significant technical progress, FDI continues to bring in expertise and global demand for manufacturing and services. Thus, while lower net FDI creates some near-term pressure on the overall external balance, increasing gross FDI flows continue to enhance economic activity.
Numbers in Perspective
Source: Centre for Monitoring Indian Economy (CMIE), Reserve Bank of India (RBI)
Factors contributing to positive outlook on FDI flows
- Depth and Diversity in India’s growth: India currently offers multiple sectors with FDI inflows exceeding USD 1 billion (See table above). This reflects the diversity of India’s growth potential, with significant under-penetration across sectors witnessing large adoption rates due to higher disposable incomes, digitization, etc.
- Targeted environment to attract investments: Through policies, rhetoric, and showcasing India’s potential as an office and factory to the world, India has positioned itself as an investment destination of choice. Schemes like Production Linked Incentives and programs like Invest India play an important role in converting investment interests into actual investments in the economy.
- Improved Exit Environment a significant factor: Over the past few months, India has seen a significant number of large-scale IPOs in the equity market. In fact, 2024 has seen the highest amount raised through IPOs and FPOs combined (See Chart 4). This has allowed investors at various stages to monetize their investments. While this may lead to an outflow of foreign capital, it raises confidence in the economy’s ability to find buyers at the right price for businesses. This further improves the outlook for attracting fresh capital to invest in entities in India.
- Improvement in Capex Outlook from Private Corporates: India’s private corporates are poised to spend higher amounts of capital on increasing capacities. Aggregate capacity utilization levels have been around 75% for at least five quarters, indicating higher capex potential. A study of private capex suggests that aggregate capex from listed corporates has continued to increase in FY25. As of Sep 2024, trailing 12M listed corporate capex stood at ₹10 trillion, compared to ₹7.8 trillion as of March 2023 (Source: I-Sec Research).
Source: CMIE, RBI, Kotak Research, *Refers to average trailing 12 month capacity utilisation.
Why is FDI important for the economy?
For India to become the office and factory to the world, the ecosystem needs to integrate players from across the globe. Allowing foreign players to set up operations, bring in their technical expertise and know-how, and enhance the local value addition ecosystem can be growth-enhancing strategies in the long run. Increasing gross inflow activity from FDI across multiple sectors is a positive sign.
While increasing repatriations and divestments have added some pressure on net FDI inflows, our external balance sheet is more resilient today due to improved software and merchandise exports. An improved exit environment is helpful as it encourages other foreign players and boosts confidence. India needs significant investments in its capacities and technical know-how, and seems to be continuing on that path.
Sources: Bloomberg, RBI, CMIE, Kotak Institutional Equities, and other publicly available information
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