India not "+1" of 'China+1' ; share of net FDI inflows from overseas entities reverts back to pre-Covid levels: Kotak

India’s share of global net FDI inflows from foreign entities has reverted below CY2019 levels.

Although global corporations keep off the Chinese shores and the China+1 strategy is in place backed by a slew of reforms, a report by Kotak Institutional Equities notes that India is yet to land a substantial surge in foreign direct investment (FDI).

India’s share of global net FDI inflows from foreign entities has reverted below CY2019 levels. For the nine months to December 31 in FY24, India has seen a sharp moderation in net FDI inflows to $8.5 billion, down from $43-44 billion in the peak years of 2020-21.

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Kotak added that the recent weakness seen in the gross FDI inflows to India is also symptomatic of a slowdown in global capital flows since CY2021.

This could be a result of the increasing geopolitical tensions between a US-led ‘economic’ bloc and China, government-funded industrial policies for strategic sectors and tightening global central bank liquidity.

According to the report, "the weakness [in FDI inflows] is quite broad-based across sectors, with certain services-oriented sectors witnessing a sharp moderation in 9MFY24."

Sectors such as electricity, electronics and IT and communication continue to attract strong investment interest globally, although investments seem to be trailing announcements in recent years.

In comparison, software-services, BFSI and trading companies are receiving the highest FDI inflows domestically.

Global FDI pie

China has lost 9.30 percentage points in the share of global FDI pie over CY2019-23, while the US has gained 14.3 percentage points over the same period. Other major countries witnessing an increasing share of FDI inflows are Brazil, Canada, Japan, Korea, Mexico and Poland.

Over the past few years, USA has seen a massive increase in FDI in the manufacturing sector. This is driven by diversification in supply chains, the ongoing geopolitical tensions between the US and China, and large incentives for investment under the Inflation Reduction Act and CHIPS Act, along with large investments in AI.

Outlook for FDI in India

"India has taken significant positive steps in the past five years through various reforms and incentive measures, but it is yet to see a
meaningful increase in investments over this period," noted Kotak.

"We remain hopeful that investments in certain sunrise sectors will accelerate in the coming years", added the report.

Kotak also suggested that India realign its focus towards the domestic market, while increasing its presence in higher value-added goods for exports, as "it may be difficult for India to penetrate established value chains, where  India is at a significant disadvantage."

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