The Indian economy has been leading economic growth through FDI in the South Asian region for a long time. The Indian economy is witnessing major disruption due to the pandemic but could be most resilient in the long-term.
The Indian economy has been hammered severely due to the prolonged economic meltdown, Coronavirus pandemic, and lockdown. But it could prove to be most resilient in the sub-continent over the long term, believes United Nations.
As UN says, a positive but slower economic growth in the post-Covid-19 pandemic and the large market in India will continue to attract investments that will aid the Indian economy to become the most resilient in the sub-region of South and South-West Asia over the long term.
As the UN report said, “India’s economy could prove the most resilient in the sub-region over the long term. FDI inflows have been steadily increasing and positive, albeit lower, economic growth after the pandemic and India’s large market will continue to attract market-seeking investment.”
The report also pointed out that India’s rapidly-growing telecom and digital space could see a faster rebound as global venture capital firms and technology companies are showing interest in the market through acquisitions.
Compiled by United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), the report is titled ‘Foreign Direct Investment Trends and Outlook in Asia and The Pacific 2020/2021‘. The study says that FDI inflows to South and South-West Asia slightly decreased by 2% in 2019, from $67 billion in 2018 to $66 billion in 2019.
It also says that the growth was mainly driven by the Indian economy, which accounted for 77% of total FDI inflows in the sub-region. In 2019, India witnessed a $51 billion FDI inflow, up 20% from 2018. The study also points out that the majority of FDI inflows were destined towards the sectors like Information and Communications Technology (ICT).
The report also claims that investment in ICT in India has evolved from information technology services for multinational enterprises (MNEs) to the growing local digital ecosystem where many domestic players, especially in e-commerce, have witnessed significant international investment.
For example, Reliance Group’s Jio has drawn investment from American technology giants Facebook and Google. The two companies invested $5.7 billion and $4.5 billion in Jio, respectively.
Not only FDI inflow but the South and South-West Asia also witnessed slight growth in FDI outflow as well. The region reported growth in FDI outflow for the fourth consecutive year, from $14.8 billion in 2018 to $15.1 billion in 2019. India and Turkey contributed vastly to the total FDI outflow from the region. India accounted for 80% of the total FDI outflow from the region. In 2019, India invested $12.1 billion abroad, up 10% as compared to 2018.
However, the report predicts that in short term, both inflows and outflows of investment to and from the sub-region would decline. This is likely because of the Covid-19 impact on global economies.
In the first three quarters of 2020, the value of Greenfield FDI inflows in the region has declined by 43% as compared to the same period in 2019. At 87%, lion’s share of these Greenfield FDI inflows was destined for India. However, the overall Greenfield FDI inflows to the country have slumped by 29%. Talking about the FDI outflows from India, there was a decline in 2020, with the large MNEs revised their earnings down by 25% in early 2020 due to the Covid-19 pandemic.
According to the report, in the previous years, inflows of Greenfield investments have been uneven across the Asia-Pacific region. Vietnam was the second largest receiver of Greenfield investment in 2019 with an 11% stake in the pie. India on the other hand accounted for 10% and Sri Lanka received 8% of total investment. The report said that Asia-Pacific’s share in the global FDI inflows slumped from 45% in 2018 to 35% in 2019. Also, this region’s share in global FDI outflows decelerated from 52% in 2018 to 41% in 2019.
According to the study, by 2025, core digital sectors like information technology (IT) and business process management, digital communication services, and electronics manufacturing could grow to double the size. This will be aided by the tendency of digitalization in sectors like agriculture, education, energy, financial services, logistics; which have been accelerated by digital solution adoption by many individuals and companies due to the Covid-19 pandemic.
Indian economy and FDI Relaxation in FDI
The Indian government has implemented several significant investment policies since 2019 in a bid to boost the Indian economy. These include relaxation of the FDI limits in the sectors like insurance, coal, lignite mining, contract manufacturing, and single-brand retail trading. The Indian defense sector also has witnessed an increase in the ceiling for FDI to 74% via the automatic approval route.
Besides these, the recent geopolitical tension between India and China has resulted in the Indian government intensifying the FDI screening process for investments sourcing from neighboring countries – Afghanistan, Bangladesh, China, and Nepal.
According to the UN study, the pharmaceutical sector in India along with several other countries in the region might see a decline in investment in the short-term due to the pandemic. Several European and United States-based pharmaceutical companies in this sector are likely to switch to more localized sourcing as they suffered dearly due to the supply-chain disruption during the Covid lockdowns.