FDI in India during COVID-19 Pandemic
A foreign direct investment is a business transaction that involves acquiring a significant stake in a foreign company. It's commonly used to describe a company's plan to expand its operations in a new region. FDI are large investments made by a corporation into a foreign concern. The objective of the investment is to expand a company's operations, or develop a multinational presence. Looking for a foreign direct investment can be challenging, as most companies only consider investing in countries that offer promising growth and a skilled workforce.
Generally, an investment in a foreign company is referred to as FDI if it involves acquiring a substantial stake in the foreign business. these can be made in various forms such as acquiring a raw material, establishing a presence in a new region, or expanding a company's operations. Companies usually look for companies that offer good growth and a skilled workforce in open economies. Aside from capital, foreign direct investment can also include the provision of technology and management. This type of investment is beneficial for a corporation as it establishes control over the foreign business.
According to the UN Conference on Trade and Development, the amount of foreign direct investment dropped significantly in 2020 due to the SARS-CoV-2 pandemic. In 2020, China became the top draw for foreign direct investment, with total investment of $163 billion. There are a number of ways that a corporation can make a foreign direct investment. It can be done through a merger or joint venture, an associate company, or through the establishment of a subsidiary or an existing foreign company. The minimum ownership stake that a corporation must have in a foreign-based company is 10%. Sometimes, a corporation can acquire less than 10% of a foreign company's voting shares. Developing nations have been encouraging the flow of FDI as it can help them create jobs and boost their infrastructure development. On the other hand, foreign direct investment can be very risky due to the regulation and oversight that it involves.
FDI During Pandemic in India:
Foreign Direct Investment flows to India dropped 26 percent in 2021, compared with the previous year, due to the lack of large deals in the pipeline. Foreign direct investment flows to India in 2021 grew 77 percent to reach a record high of $1.65 trillion. The uptick in flows was largely due to the absence of large deals in the pipeline in 2020.
Despite the uptick in investment flows to developing nations, many sectors such as energy and food remain under-developed. The total FDI in the developed economies rose to an estimated $777 billion in 2021, three times the level in 2020 and the highest since 2011. In Europe, the uptick in flows was mainly due to the large swings in economies. In the US, the increase was attributed to the uptick in cross-border acquisitions.
In developing economies, the total FDI flows increased by 30 percent to reach $870 billion in 2021. The growth was mainly driven by a recovery in East and South-East Asia and a boost in West Asia. In Africa, the total amount of FDI received increased by over 200 percent to reach $6.3 billion in 2021. Developing economies, on the other hand, saw weaker growth due to the lack of sufficient infrastructure investment. China received a record amount of foreign direct investment in 2021, with a 20 percent increase. Brazil also saw a boost from higher foreign investment flows.
The ASEAN region's robust growth contributed to the uptick in global FDI flows. n Europe, the majority of the increase was attributed to the swings in conduit economies. The other surges were attributed to the uptick in cross-border acquisitions. Developing economies' total FDI flows grew by 30% to reach $870 billion in 2021. The growth was mainly driven by a recovery in East and South-East Asia, as well as a boost in West Asia. Inflows into Africa also rose, largely due to a single transaction in South Africa in 2021. However, China saw record foreign direct investment (FDI) inflows of $179 billion in 2018, up 20% from the previous year, while Brazil's tally grew to $58 billion from a low point in 2020. Asean's role in attracting FDI increased, with member countries' total transactions growing by 35%.
The pandemic has led to increased demand for digital infrastructure, which in turn led to higher levels of FDI projects targeting the information and communication technology industry. The report noted that the second wave of COVID-19 outbreak in India had led to a 19% drop in greenfield projects worth USD 24 billion in the country. It said the outbreak could have a larger impact in 2021. According to the Investment Trends Monitor, the recovery stimulus packages and the long-term financing conditions for infrastructure projects have strengthened investor confidence. However, the number of new projects in the global value chains remained subdued. The report also noted that the global FDI outlook for 2022 was positive, though it expected the 2021 rebound to be muted. The report also noted that the robust growth in infrastructure projects would continue to support the growth momentum. New investment in the manufacturing and GVCs remained subdued due to the geopolitical tensions that have affected various regions. It will take time for the recovery of the manufacturing industry to take place. The prolonged duration of the pandemic and the pace of vaccinations are some of the uncertainties that could affect the recovery of the manufacturing industry.
Indian govt point of view:
In the first half of the current financial year, India received $42.9 billion worth of foreign direct investment. According to government data, the figure has reached $48.5 billion in October 2021. This amount is equivalent to the amount for the period from April to October 2020. It can be expected that it will not go down much, as some major deals are expected to happen in the near future. It is expected that the inflow will not go down despite the current economic situation. Sources said that despite the current economic conditions, the inflow has not declined. The government also asserted that the record number of deals signed during the current financial year have helped maintain the inflow.
The total foreign investment inflow in 2014 was over $35 billion, which is a significant increase from the previous year's figure. The steady growth of the inflow has been attributed to the country's improving economic conditions. Whereas top 3 recipients of FDI in India are Maharashtra, Gujarat and Karnataka and the primary reason are the historical development of these states and also availability of skilled workforce in select sectors..
Pic Courtsey:-Surya Prakash at unsplash.com
(The views expressed are those fo teh author and do not represent views of CESCUBE.)
