India’s FDI inflows fall for the first time in a decade – What does it mean?

24 May 2023 , 02:57 PM

Foreign Direct Investment (FDI) inflows of India fell year-on-year by 16% to $71 billion in FY 23. This is the first time in a decade that the country has seen y-o-y decline in FDI. Net FDI inflow came down y-o-y by 27.5% to $28 billion. Net FDI figure is the difference between FDI inflows and FDI outflows. FDI outflows are the investments by Indian companies in foreign countries.

The decline in FDI inflows shows once again that India cannot remain immune to global economic slowdown. Slowdown in US and Europe is a reason for this decline in FDI. Another reason is the devastation that start-ups suffered because of Covid lockdowns. A large part of FDIs that came to India came in the form of investments in start-ups. These investments have slowed down considerably now. Investors in countries such as US have become more risk-averse with regard to investments in start-ups. A number of venture capital funds in US, that invest in startups, are facing redemption pressure from their investors. This resulted in them withdrawing large amounts of money from their bank deposits. This in turn triggered the crisis at banks such as Silicon Valley bank.

Highest decline in FDI inflows in FY 23 was seen in manufacturing, computer services, and communication sectors. A large number of startups are in computer services sector. It is imperative that the government takes urgent steps to encourage FDI in the country. FDI also results in creation of employment in different sectors. The biggest challenge before the country is how to create meaningful employment for its large population of youth.  India’s unemployment rate in April stood at 8.11%. If this unemployment rate is to be brought down, FDI should go up, and not down.