Uncertainty around the India-U.S. trade deal was a major reason why foreign portfolio investors were also taking more money out of the country than putting in it. File.
| Photo Credit: Reuters

Foreign direct investment (FDI) inflows into India have crossed the $1 trillion milestone in the April 2000-September 2024 period, firmly establishing the country’s reputation as a safe and key investment destination globally.

According to data from the Department for Promotion of Industry and Internal Trade (DPIIT), the cumulative amount of FDI, including equity, reinvested earnings and other capital, stood at $1,033.40 billion during the said period.

About 25% of the FDI came through the Mauritius route. It was followed by Singapore (24%), the U.S. (10%), the Netherlands (7%), Japan (6%), the U.K. (5%), the UAE (3%) and Cayman Islands, Germany and Cyprus accounted for 2% each.

India received $177.18 billion from Mauritius, $167.47 billion from Singapore and $67.8 billion from the U.S. during the period under review, as per the data.

The key sectors attracting the maximum of these inflows include the services segment, computer software and hardware, telecommunications, trading, construction development, automobile, chemicals, and pharmaceuticals.

According to the Commerce and Industry Ministry, since 2014, India has attracted a cumulative FDI inflow of $667.4 billion (2014-24), registering an increase of 119% over the preceding decade (2004-14).

FDI equity inflows into the manufacturing sector over the past decade (2014-24) reached $165.1 billion, marking a 69% increase over the previous decade (2004 -14), which saw inflows of $97.7 billion, an official has said.

To ensure that India remains an attractive and investor-friendly destination, the government reviews FDI policy on an ongoing basis and makes changes from time to time after having extensive consultations with stakeholders.

The overseas inflows into India are likely to gather momentum in 2025, as healthy macroeconomic numbers, better industrial output and attractive PLI schemes will attract more overseas players amid geopolitical headwinds, experts said.

They added that despite the global challenges, India is still the preferred investment destination.

Avimukt Dar, Founding Partner, INDUSLAW, said the inflows are likely to continue in a robust form. There is strong anticipation that private equity financing in the tech sector, which had slowed down in the past, will pick up again since various funds have enjoyed good exits in the public markets and are ready to deploy again.

“The government can continue with structural reforms, particularly in the space of M&A, by nudging SEBI to make the public takeover regime more friendly for foreign players,” Mr. Dar said.

Rumki Majumdar, an economist at consultancy Deloitte India, said FDI inflows are likely to remain modest amidst expected policy changes in the U.S. and the impact of policy stimulus on China’s economy.

Geopolitical situations may alter supply chains, and trade regulations would dampen investors’ sentiments, keeping capital flows volatile, she said, adding that the government will have to prioritise infrastructure capex with timely project execution, boost workforce skilling via PPPs and incentives, invest in digital ecosystems for productivity gains, and foster R&D for digital solutions that help inclusion and formalisation of the economy.

Commenting on the data, Manav Nagaraj, Partner, Shardul Amarchand Mangaldas & Co, said FDI in India is likely to continue to rise in all areas – early-stage investments, growth capital and strategic investments.

“India as an investment destination has historically been and continues to be attractive for foreign investors across various countries, whether from the U.S., the U.K., continental Europe or Asian countries,” he added.

FDI is allowed through the automatic route in most of the sectors, while in areas like telecom, media, pharmaceuticals and insurance, government approval is required for foreign investors.

Under the government approval route, a foreign investor has to get a prior nod from the Ministry or department concerned, whereas, under the automatic route, an overseas investor is only required to inform the Reserve Bank of India (RBI) after the investment is made.

At present, FDI is prohibited in some sectors. They are lottery, gambling and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.

FDI is important for India as it will require huge investments in the coming years for the infrastructure sector to boost growth. Healthy foreign inflows also help in maintaining the balance of payments and the value of the rupee.

“With Foreign Direct Investments (FDI) growing 47.8% to $16.17 billion during April-June 2024, India is expected to see further acceleration in the inflow on account of a potential Fed rate cut, modest growth outlook in the U.S., and the country’s favourable economic outlook,” experts say.

They also said that investment destinations have changed over the decade and have got more diversified, with capital flowing into new emerging sectors.

“Compared to eight years ago, power, construction, healthcare, chemicals, and non-conventional energy have now been attractive investment destinations,” Rumki Majumdar, Economist, Deloitte India, said.

India receives highest FDI from Singapore in 2023-24; Mauritius second biggest investor: Government data

“We foresee this trend of strong FDI to accelerate in the coming quarters. The anticipated U.S. election results, a potential Fed rate cut, modest growth outlook in the U.S., and India’s favourable economic outlook will likely attract global investors to India,” she added.

Aakash Dasgupta, partner, IndusLaw, said that while the FDI inflow seems to have jumped exponentially in the first quarter of 2023-24 in comparison to the same period in the previous financial year, it must also be remembered that FDI in Q1 of FY23 was particularly low. FDI inflows were at $10.94 billion in April-June 2023-24.

He said that the current FDI inflows are closer to the numbers in the years preceding the last year. Hence, while the jump is significant in relative terms, it must be viewed as correcting back to previous levels.

“It’s a positive indication and can be attributed to various factors, including deployment pressures mounting on the dry powder that foreign institutional investors are sitting on, performance of Indian capital markets in various sectors and favourable amendments to the FDI policy, such as allowing 100% automatic route investment in the space sector,” Mr. Dasgupta said.

“With the U.S. elections coming up, one may have to wait and watch the impact of FDI inflows over the next few months, but the overall outlook remains positive,” he added.

The government data showed that overseas inflows in May rose to $5.85 billion and in June to $5.41 billion from $2.67 billion and $3.16 billion, respectively, in the year-ago periods. In April, FDI inflows were down marginally at $4.91 billion against $5.1 billion in April 2023.

Total FDI, which includes equity inflows, reinvested earnings and other capital, grew by 28% to $22.49 billion during the first quarter of this fiscal from $17.56 billion in April-June 2023-24.

During the period, FDI equity inflows rose from major countries, including Mauritius, Singapore, the U.S., the Netherlands, the UAE, Cayman Islands and Cyprus.

Union Minister Piyush Goyal addresses a press conference, in New Delhi on July 30, 2024.
| Photo Credit: PTI

Commerce and Industry Minister Piyush Goyal on July 30 said there is no rethinking in the government to support foreign direct investments (FDI) from China as was pitched by the Economic Survey recently.

He said it was a report that always speaks about new ideas and gives out their own thinking.

The Survey, he said, is not at all binding on the government and there is no thinking on supporting Chinese investments in the country.

“There is no rethinking at present to support Chinese investments in the country,” the Minister told reporters in New Delhi.

In 2020, the government made its approval mandatory for FDI from countries that share landed border with India.

Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

The Minister was responding on a pitch made by the pre-Budget Economic Survey on July 22 for seeking FDI from China to boost local manufacturing and tap the export market.

As the U.S. and Europe are shifting their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then, export the products to these markets rather than importing from the neighbouring country, the survey has said.

India faces two choices to benefit from the ‘China plus one strategy’ — it can integrate into China’s supply chain or promote FDI from China.

“Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the U.S., similar to how East Asian economies did in the past. Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade. This is because China is India’s top import partner, and the trade deficit with China has been growing,” it has added.

China stands at the 22nd position with only 0.37% share ($2.5 billion) in the total FDI equity inflow reported in India from April 2000 to March 2024.

The ties between the two countries nosedived significantly following the fierce clash in the Galwan Valley in June 2020 that marked the most serious military conflict between the two sides in decades.

The Indian and Chinese militaries have been locked in a stand-off since May 2020, and a full resolution of the border row has not yet been achieved, though the two sides have disengaged from several friction points.

India has been maintaining that its ties with China cannot be normal unless there is peace in the border areas.

Following these tensions, India has banned over 200 Chinese mobile apps like TikTok, WeChat, and Alibaba’s UC browser. The country has also rejected a major investment proposal from electric vehicle maker BYD.

However, earlier this year, the Competition Commission of India (CCI) cleared JSW Group’s proposed acquisition of a 38% stake in MG Motor India Pvt. Ltd.

MG Motor India is a wholly owned subsidiary of Shanghai-headquartered SAIC Motor.

Though India has received minimal FDI from China, the bilateral trade between the two nations has grown multi-fold.

China has emerged as the largest trading partner of India with $118.4 billion two-way commerce in 2023-24, edging past the U.S. India’s exports to China rose 8.7% to $16.67 billion in the last fiscal.

The main sectors that recorded healthy growth in exports to that country include iron ore, cotton yarn/fabrics/made-ups, handloom, spices, fruits and vegetables, plastic and linoleum.

Imports from the neighbouring country increased 3.24% to $101.7 billion. The trade deficit widened to $85 billion in the last fiscal year from $83.2 billion in 2022-23.

According to the commerce ministry data, China was India’s top trading partner from 2013-14 till 2017-18 and in 2020-21. Before China, the UAE was the country’s largest trading partner. The U.S. was the largest partner in 2021-22 and 2022-23.

New Delhi:

This year’s Union Budget, which has been at the receiving end of the opposition’s ire because of the alleged preferential treatment given to certain states – especially Andhra Pradesh and Bihar – is not discriminatory and a set formula is in place for the devolution of taxes, Finance Secretary TV Somanathan has said. 

Speaking exclusively to NDTV on Thursday, Mr Somanathan also said that the Agnipath scheme is just a variation of short service commissions, which have existed forever, and is financially prudent. As announced in the Budget, the new pension scheme will be tweaked to address the key issues raised by beneficiaries, he added.

Asked about the opposition’s allegations of discrimination, the senior bureaucrat said he does not want to go into the political aspects of the matter but on the purely financial front, it was a question of following laid-down formulas. Disagreements, he said, could arise in central schemes. 

“When it comes to the finance ministry’s transfers, what are the things that we handle? We handle devolution, which is the share of taxes, and we have the finance commission grants –  both of these are determined by the finance commission, and we don’t deviate. The other new scheme that we operate is special assistance to states for capital investment, which is also largely formulaic. Some part of it is untied. Some part of it is tied to specific reform outcomes, and we have actually disbursed money to almost all the states under that scheme, and I have not heard any complaints on that,” Mr Somanathan said. 

“I think there has been no discrimination, definitely not in the allocations by the finance ministry. And I don’t think even in the case of other ministries. Problems or issues may arise when something is a programme of the central government, where the Centre has the prerogative to decide where and how it is used. So that is a matter where the elected executive at the Centre decides in its domain and the elected executive of the state can ask the Centre what it wants. But final decisions remain with the Centre, and that is a realm where officers like me have very little to say,” he added.

The finance secretary insisted that, putting politics aside, the coordination between the Centre and all states at the administrative level is very smooth. 

“I continue to be in regular touch with the finance secretaries of the state and the chief secretaries. Our dialogue continues to be very professional. So, this country is very resilient. We have some very good federal systems. And the all-India services are an example of a federal system where the same set of officers work both in the states and at the Centre. So, somebody who was my colleague till yesterday in this ministry is now the finance secretary of Andhra Pradesh. We have mechanisms for dealing with these problems which are outside the realm of politics,” he said. 

Agnipath Scheme

The Agnipath scheme has been a contentious issue between the Centre and the opposition and it is also believed to have cost the BJP Lok Sabha seats in some states, especially those from where a large number of youth enrol in the armed forces. 

When Mr Somanathan was asked about speculation that changes are likely in the scheme, which would benefit those who join the Army, Navy or Air Force as Agniveers, he said he is not aware of any such plans. 

“I am not an expert on Agnipath. You will have to ask the defence secretary, but I am not aware of any changes in the Agniveer system. I think it’s a good system. I think a lot of armies across the world have moved to short service commissions. The word Agniveer is new, but short service commissions have existed for ages, not only in India but elsewhere as well. Short service commissions are a useful way of ensuring that you have a youthful infantry. This is especially important given the kind of borders that India has, where there is very difficult terrain,” the finance secretary said. 

“I think there are a number of merits in the scheme. It is also financially very prudent because the armed forces are still on the old pension scheme, which is a very expensive scheme,” he pointed out. 

Pension Tweaks?

Mr Somanathan, who is heading a committee discussing possible changes in the new pension scheme, said an announcement has been made in the Budget by Finance Minister Nirmala Sitharaman and details are being worked out. He said that the government is committed to ensuring that the key areas of concern are addressed but emphasised that it does not want a system which is beneficial for one class of people, but “disastrous” for the rest. 

“We have had four rounds of consultations with our staff associations through the National Council of Joint Consultative Machinery. We have understood what the core concerns are. One thing that I can say as the head of the committee – I can’t speak for the government on this – is that a return to the old pension system is completely not feasible financially… It will be a disaster for those citizens of India who are not government servants. It may be desirable for one class of people, but it will be a disaster for the rest, so that is not feasible,” Mr Somanathan said. 

“But we have understood through these discussions what the core concerns of employees are. They would like an assurance of the amount of pension they would get and not be dependent on market fluctuations. Second, they would like some form of inflation protection for that pension. And the third, for those whose service falls short of the required guaranteed level, could there be a minimum pension for them? I think we will be able to find a way to address these concerns to a satisfactory level. And that is the effort that we are working towards,” he added, stressing that the steps would be taken keeping fiscal prudence in mind. 

Industry On Board With Internship?

Some aspects of the internship programme announced by the government in the Budget as part of its employment generation push have also been criticised and sources clarified on Wednesday that the top 500 companies would not be forced to participate. The finance secretary told NDTV that the government had consulted industry on the broad contours, but admitted that the specific scheme that was announced had not been discussed. 

“It is completely voluntary. We had consulted trade and industry on the broad issues of skilling and they have generally been very forthcoming in terms of saying that this is something they would like to partner on. They have not necessarily been consulted on the specific parameters of the scheme that’s been outlined in the budget, no. But it is not contrary to what they are capable of doing,” he said. 

“The scheme centres around the use of corporate social responsibility (CSR) funds in a focused manner for skilling. We are focusing on those companies which are part of the CSR requirement under the Companies Act. There are about 20,000 companies, very roughly, who spend approximately 26,000 crores on CSR. 500 companies would (account for) nearly two-thirds of that total. So this is a manageable universe which is easy to monitor and work with,” the finance secretary added. 

Stating that the government will pay 90% of the stipend and the relocation and incidental costs, he said the volunteering companies would skill the person in a trade that they are engaged in. They could also use companies in their supply chain for this. 

“Whatever expense they incur will be from their CSR funds. So it doesn’t affect their bottom line in any respect. They do a number of other CSR activities, but those are usually in the domain that the government can also do – the government can also set up schools and build toilets. But the government cannot do industrial skilling. So this is a unique advantage which the private sector has,” he said, stressing that the selection process for such interns would be fair and transparent. 

Thrust On Foreign Direct Investment

Making it clear that the government is welcoming Foreign Direct Investment (FDI) in “every way, shape and form”, the finance secretary pointed to the focus on plug-and-play infrastructure being set up in various places to ease the regulatory compliance burden on companies. 

“We mentioned a number of things in the speech on plug-and-play infrastructure… 100 such places being chosen… 10 nodes on the industrial corridors. So these are all going to make it easier for FDI to come and set up in India without having to go through the entire process of getting regulatory approvals for each step. So a pre-approved package of land, labour, infrastructure, pollution clearance, electricity, roads, water – everything that you need to set up. an industry – should be ready when you come in, and this is the aim we are working on,” he said. 

At end-June 2023, long-term debt (with original maturity of above one year) was placed at $505.5 billion. File
| Photo Credit: K. Pichumani

India’s external debt at end-June 2023 was placed at $629.1 billion, recording an increase of $4.7 billion over its level at end-March 2023 according to data released by the Reserve Bank of India (RBI) on September 28.

The external debt to GDP ratio declined to 18.6% at end-June 2023 from 18.8% at end-March 2023, the RBI said.

Valuation effect due to the appreciation of the U.S. dollar vis-à-vis the major currencies such as yen and SDR2 amounted to $3.1 billion. Excluding the valuation effect, external debt would have increased by $7.8 billion instead of $4.7 billion at end-June 2023 over end-March 2023.

At end-June 2023, long-term debt (with original maturity of above one year) was placed at $505.5 billion, recording an increase of $9.6 billion over its level at end-March 2023.

Balance of Payments

Meanwhile, India’s current account deficit (CAD) narrowed to $9.2 billion (1.1% of GDP) in Q1:2023-24 from $17.9 billion (2.1% of GDP) in Q1:2022-23 but it was higher than $1.3 billion (0.2% of GDP) in the preceding quarter, according to the RBI’s data.

The widening of CAD on a quarter-on-quarter basis was primarily on account of a higher trade deficit coupled with a lower surplus in net services and decline in private transfer receipts.
Net services receipts decreased sequentially, primarily due to a decline in exports of computer, travel and business services, though remained higher on a year-on- year (y-o-y) basis.

Net outgo on the income account, primarily reflecting payments of investment income, declined to $10.6 billion in Q1:2023-24 from $12.6 billion in Q4:2022-23, though higher than a year ago.
In the financial account, net foreign direct investment decreased to $5.1 billion from $13.4 billion a year ago.

International Investment Position

Net claims of non-residents on India increased by $12.1 billion during Q1:2023-24 and stood at $379.7 billion as at end-June 2023.

The rise in net claims of non-residents during the quarter was on account of higher rise in foreign-owned financial assets in India ($36.2 billion) when compared with Indian residents’ overseas financial assets ($24.1 billion) according to data released by the RBI.

Increase in reserve assets ($16.6 billion) was the largest contributor to the rise in Indian residents’ foreign assets during April-June 2023, followed by direct investment, loans and trade credit.

Inward portfolio investment ($15.0 billion) and foreign direct investment ($8.9 billion) together accounted for two thirds of the rise in foreign liabilities of Indian residents.