According to a report released by Kotak Institutional Equities, India is yet to see a meaningful pickup in FDI investment despite the ‘China+1’ narrative and significant reforms. In fact, India has seen a moderation in gross FDI inflows in recent years, with the weakness most prominent in the services sectors. The report says that on the other hand, the US and a select set of DMs and EMs seem to have benefited from a sharp decline in the share of FDI inflows into China.

The report mentions that India has seen a sharp moderation in net FDI inflows in 9MFY24, led by a sharp increase in gross outflows, while gross FDI inflows have also moderated from the FY2022 peak. As such, India’s share of global net FDI inflows from foreign entities has reverted below CY2019 levels. The weakness is quite broad-based across sectors, with certain services-oriented sectors witnessing a sharp moderation in 9MFY24.

The report says that the recent weakness in gross FDI inflows to India is also symptomatic of a slowdown in global capital flows since CY2021. In its view, increasing geopolitical tensions between a US-led ‘economic’ bloc and China, government-funded industrial policies for strategic sectors and tightening global central bank liquidity were the key contributors to the recent weakness in capital flows. Electricity, electronics and IT & communication continue to attract strong investment interest globally, although investments seem to be trailing announcements in recent years.

According to the report US has seen a sharp increase in FDI, while China has lost out. In fact China has lost 9.30 pps in the share of global FDI over CY2019-23, while the US has gained 14.3 pps over the same period. Other major countries witnessing an increasing share of FDI inflows are Brazil, Canada, Japan, Korea, Mexico and Poland. US has seen a massive increase in FDI in the manufacturing sector in recent years, driven by diversification in supply chains, geopolitical tensions between the US and China, large incentives for investment under the Inflation Reduction Act and CHIPS Act and large investments in AI.

However the report says that India has taken significant positive steps in the past five years through various reforms and incentive measures, but it is yet to see a meaningful increase in investments over this period. Nonetheless, investments in certain sunrise sectors will accelerate in the coming years. But it is important for India to focus on the domestic market while increasing its presence in higher value-added goods for exports. It may be difficult for India to penetrate established value chains, where the forces of near-shoring and on-shoring put India at a significant disadvantage.

But Does India Needs Endorsements?

Does India needs endorsements from others? The answer could be different because that will depend on which side you are. If you are against the current regime you know your answer. If you are a common citizen, with neutral views, the answer will always be yes. And of course if you are, in popular term, a Bhakt then you don’t need any answer.

If we look at the development, India’s growth story right from Independence, one fact is clear – India’s growth story is characterized by resilience, dynamism, and complexity, reflecting the diverse and evolving nature of the country’s economy and society. In fact India’s growth story is a complex narrative shaped by a multitude of factors spanning history, politics, economics, culture, and more.

When India gained independence from British colonial rule in 1947 the initial decades were marked by efforts to establish a democratic system, agrarian reforms, and industrialization through state-led planning. The economy followed a mixed model with a significant role for the public sector.

But when in 1991, India faced a severe economic crisis, significant reforms under the leadership of then-Prime Minister PV Narasimha Rao happened. These reforms, often referred to as liberalization, privatization, and globalization (LPG), opened up the economy to foreign investment, reduced trade barriers, and promoted private sector participation. This period saw rapid economic growth, averaging around 6-7 per cent annually in the 1990s and early 2000s, and even higher rates in the mid-2000s to early 2010s.

In the meantime India emerged as a global hub for information technology and business process outsourcing services. Cities like Bangalore, Pune, Hyderabad, and Chennai became prominent IT hubs, attracting investment and talent from around the world. It so happened because India’s large and youthful population proved to be a potential demographic dividend, providing a significant workforce and consumer base. But everything was happening without any specific involvement of the government.

However, since 2014, when Prime Minister Narendra Modi took over India has been investing in infrastructure development, including roads, railways, ports, and airports, to support economic growth and urbanization. Despite its growth, India faces numerous challenges including poverty, inequality, corruption, bureaucratic red tape, inadequate infrastructure, environmental degradation, and regional disparities. Additionally, the COVID-19 pandemic posed significant challenges to India’s economy and highlighted vulnerabilities in its healthcare and social systems.

Despite all these factors, India remains a promising economy with vast potential. Efforts to address structural reforms, improve ease of doing business, invest in education and healthcare, and promote sustainable development are crucial for sustaining and accelerating growth in the future.

Even in its recent report the World Bank has said that Indian economy is projected to grow at 7.5 per cent in 2024, revising its earlier projections for the same period by 1.2 per cent. Overall, growth in South Asia is expected to be strong at 6.0 per cent in 2024, driven mainly by robust growth in India and recoveries in Pakistan and Sri Lanka, the World Bank said in its latest South Asia Development Update. According to the report, South Asia is expected to remain the fastest-growing region in the world for the next two years, with growth projected to be 6.1% in 2025.

“In India, which accounts for the bulk of the region’s economy, output growth is expected to reach 7.5% in FY23/24 before returning to 6.6% over the medium term, with activity in services and industry expected to remain robust. South Asia’s growth prospects remain bright in the short run, but fragile fiscal positions and increasing climate shocks are dark clouds on the horizon. To make growth more resilient, countries need to adopt policies to boost private investment and strengthen employment growth,” the bank said in its report.

In India, the World Bank said, economic activity surprised on the upside in 2023Q4, with growth of 8.4 per cent from a year ago. “The expansion was supported by rapid increases in investment and government consumption. More recent survey data point to continued strong performance,” it said. In February, India’s composite purchasing managers index (PMI) stood at 60.6, well above the global average of 52.1 (a value above 50 indicates expansion). Growth in FY2023/24 is estimated to have exceeded earlier forecasts, it said.

According to the report, in India, inflation has remained within the Reserve Bank of India’s 2–6 per cent target range since a spike in mid-2023, and the policy rate has remained unchanged since February 2023. Food price inflation has been elevated, partly reflecting a weak harvest due to El Niño, it said.

Financial conditions in India have remained accommodative. Domestic credit issuance to the commercial sector grew by 14 per cent (year-on-year) in December 2023, the fastest pace since 2013. Financial soundness indicators continued to improve. The nonperforming-loan ratio fell to 3.2 per cent last year, well below its recent peak, in March 2018, of about 11 per cent.

With so much positive factors, who needs an endorsement?

About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

More articles by the author

Table of Contents