The Reserve Bank of India’s recent monthly bulletin, released on 22nd May 2023, revealed some fascinating insights. The corporate earnings exceeded expectations in Q1FY23, and NBFC’s YoY profitability improved due to easing cost pressures amid moderate revenue growth.
Overall, the indicators showed that India’s growth trend is robust. But, it also revealed a shocking truth of a considerable fall in FDI inflows. This is the first time India has seen a year-on-year inflow decline in the past decade.
So, what is the reason behind this fall? Let’s find out.
What’s Happening?
India’s Foreign Direct Investment (FDI) landscape has hit a significant setback, witnessing a 16% year-on-year decline in FDI inflows, amounting to $71 billion in FY23. This marks the first time in a decade that the country has experienced such a downturn in FDI.
Additionally, on a net basis, FDI declined by 27.5% to $28 billion, as outward flows decreased by 23% to $13.6 billion. The decline in outflow indicates a cautious approach taken by Indian companies towards investments in other countries as well.
Reason Behind FDI Decline
In recent years, a significant portion of Foreign Direct Investments (FDIs) flowing into India has been directed towards startup investments. However, these investments have experienced a considerable slowdown recently. According to the Times of India, factors such as high inflation and weak demand in the United States and Europe have dried up flows into startups, which had previously been a significant recipient of global investment. Despite the decline in flows, overall market sentiment has not been heavily impacted.
Furthermore, the manufacturing, computer services, and communication sectors witnessed the highest decline in FDI inflows in FY23. It is worth noting that this decline comes after a particularly robust base in FY22, where FDI inflows reached nearly $85 billion.
Therefore, the drop in FY23 represents a significant change from the previous year’s exceptionally high levels.
What’s Next?
As MNCs focus on diversifying their production away from China, India is slowly evolving as a go-to destination. Recently, Apple announced its plans to manufacture a significant portion of its new models in India by 2025. Similarly, Tesla is also in talks with the government to tap into Indian markets.
If more companies decide to establish their presence in India, it will boost FDI inflows and create employment opportunities for Indian citizens as well.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information only. This is not investment advice.
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