Slowing FDI flows at odds with positive India narrative

India’s gross FDI inflows have weakened significantly in FY23 while gross outflows have stayed at elated levels, which is at odds with the positive India narrative. Also, the composition of FDI inflows does not reflect a rapid transition towards manufacturing FDI as yet. However, robust services exports have offset the weakness in capital account flows.

Quarterly gross FDI inflows have seen a sequential decline in FY23, which is at odds with expectations of increased FDI led by diversification of supply chains, China + 1, etc. Also, gross FDI outflows have stayed at elevated levels over the past three years. As a result, net FDI inflows into India in FY23 fell to below FY19 levels.

FPI flows saw a strong rebound in Q1 on expectations of likely peaking of global interest rates and an improving macro-outlook in India. However, the strong and broad-based market rally has tempted strategic investors, especially PE/VC funds, to accelerate their exits to a higher level versus previous quarters’.

Talking to Bizz Buzz, Arun Natarajan, Founder, Venture Intelligence said, “Clearly, big ticket private equity investors have far more confidence in investing behind basic sectors like healthcare, infrastructure, manufacturing and financial services at this point.”

From the perspective of internet and mobile companies, the new investments in unicorns like Infra Market and Lenskart and also the significant build of ‘Dry Powder’ (un-invested capital) with India-dedicated VC firms, provides scope for optimism that the funding winter will begin to thaw in the second half of the year, he added.

As noted in our September 21, 2022 report FDI, welcome to India, India presents a cumulative investment opportunity of $1.4 trillion over the next decade. The realization of this vast opportunity is predicated on gradual ramp-up of investments in manufacturing-oriented sectors. We note a gradual shift in FDI composition from services towards manufacturing in recent years. However, project announcements from foreign private entities continue to be somewhat muted despite a sharp uptick in private sector announcements in recent quarters. Nonetheless, we remain hopeful of gradual ‘crowding-in’ of foreign investments over the next decade driven by diversification of global supply chains, improving manufacturing competitiveness of India versus China, import substitution of electronics and shift in energy mix to domestic energy, says a report by Kotak Institutional Equities.

India’s recent weakness in the capital account has not impacted the balance of payment (BoP) much due to robustness in services exports. The study notes that both software and non-IT services exports have continued to be strong in recent quarters. The ramp-up of business services exports, especially led by professional and management services may help diversify India’s services exports basket. However, the robustness of this sector may be tested in case of a global slowdown in FY24 and by AI in the medium term.