FDI - momentum continues despite the pandemic
Despite the pandemic, last year saw a record amount of FDI into India. On a gross basis (without repatriation), India received US$82bn of FDI inflows last year (FY21). This was 10% higher than the preceding year. Of this, US$61bn was equity inflows – which means the actual inflow of capital. This was also an all-time high and almost 20% higher than FY20.
A large part of this though was attributable to a single large transaction – capital raising by Reliance in its subsidiary Jio Platforms. Thus, just over a quarter of the FDI equity inflows last year (~US$16bn) was attributable to this single transaction. Accordingly, August-2020 saw FDI equity inflows of almost US$18bn, 6x of the inflows during August-2019.
It was thus widely expected that FDI inflows will be muted this year due to the absence of that large transaction. However, in the first half of this year, FDI inflows have been higher than last year – almost US$32bn of Equity inflows in 1HFY22 vs. US$31bn of inflows in 1HFY21. The automobile sector has seen strong FDI this year – almost US$5bn till September this year as against less than US$500mn during the same period last year. Some of this would be the capital raising by companies like Ola.
The key takeaway is that despite the pandemic, the attractiveness of India as an investment destination does not seem to have been impacted. Foreign firms have not held back on their investments in the country. Their confidence in the longer-term outlook in the proverbial India growth story seems to have remained intact. At least for now. Given India’s worsening trade balance, continued buoyancy in this stable and long-term source of capital is critical for funding the external gap and maintaining external account stability.
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