Although India continued to attract FDI in 2020 during the Covid-19 pandemic, it was heavily weighted towards the country’s tech sector and companies such as Jio. (Photo by Indranil Mukherjee/AFP via Getty Images)

India has made tragic headlines in recent weeks due to a violent resurgence of Covid-19. The country registered more than 400,000 daily cases in late April, the first nation to cross this morbid threshold. 

With hospitals in many cities overwhelmed, a second national lockdown seems imminent. However, the government of India is dragging its feet on the matter, burned by the shutdown last year that caused economic output to plummet, leading GDP growth to hit -8%. A whopping 12% bounce back was forecast in 2021, but the new and ongoing wave of Covid has derailed that trajectory

“After last year’s Covid wave was over, India was recovering at a very good rate, but right now, that all seems to be going down again,” says Vishal Rajvansh, founder of the Competition & Commercial Law Review based in Mumbai. 

Amid this bleak backdrop there have been some bright spots, especially with regards to foreign direct investment (FDI). While global FDI flows dropped by 42% in 2020, India was the world’s third-largest recipient of foreign investment, boasting the highest annual increase in FDI (13%) – followed by Japan (9%) and China (4%) – according to the latest World Investment Report from the UN Conference on Trade and Development.

“Last year, India’s IT sector drove a sharp recovery in overall FDI to the country that has actually been a record high for the country,” says Rajvansh. In terms of capital, FDI flows to the country grew by 28% to $54.18bn between April 2020 and January 2021, according to the Commerce and Industry Ministry. Although this is an impressive achievement, it belies a major underlying issue in the Indian economy. 

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FDI wins for key players in Indian tech, energy and pharma

The pandemic has boosted the digital economy the world over. For large Indian tech companies, the gains have been particularly handsome. Jio Platforms is the ultimate testimony to this. 

Owned by India’s richest man, Mukesh Ambani, Jio Platforms is the holding company for India’s largest mobile network operator Jio (and other digital businesses). Since the pandemic began last year, it has received a phenomenal spree of investment from the likes of Facebook, Google, Intel, Qualcomm, Silver Lake and Vista Equity – exceeding $15bn. In short, the company is en route to becoming the world’s next tech giant

As the below chart shows, foreign investment into Indian tech jumped enormously in 2020. In fact, between April and December, 58% of all FDI into India’s ten leading sectors went to tech (software) – driven by investments into Jio Platforms. 

The country’s infrastructure sector (especially energy) and pharma industry have also seen FDI balloon – as per the above chart – thanks to some large mergers and acquisitions (M&A). The country’s production of Covid-19 vaccines has helped drive these gains in pharmaceuticals. 

Big losses for everyone else in the Indian economy

Although the aforementioned trends are impressive, especially with regards to Indian tech, they mask two wider problems.

The pandemic has had a substantial impact on small businesses globally, but it has been worse for India. Dr Sultan Salem and Rafik Haj Ibrahim, University of Birmingham

First, since the start of the pandemic, FDI to India has been driven by M&A in big companies such as Jio Platforms or ShareChat. “The pandemic has had a substantial impact on small businesses globally, but it has been worse for India,” say Dr Sultan Salem and Rafik Haj Ibrahim from the University of Birmingham in the UK. “Those in the manufacturing and service sector have been impacted the most. The latest wave of Covid will only amplify this.”

Second, FDI to India is too concentrated in certain sectors – something that Covid has only exacerbated. 

Between April and December 2020, a humongous 75% of all FDI capital into India’s ten leading sectors went to tech (software) and infrastructure, according to data from the Department for Promotion of Industry and Internal Trade (DPIIT). Meanwhile, investment to all other sectors has slowed – and in hotels and tourism it has plummeted.

“One of the sectors that has been most affected is manufacturing, especially clothing, but across the spectrum, factories have had to operate for limited times and with limited resources,” says Rajvansh. “Global and domestic retail has slowed.”

Even before the pandemic, India was struggling to attract enough FDI in manufacturing. The country’s ‘Make in India’ campaign, launched in 2014, has failed to bring in the level of best-in-class manufacturing that Prime Minister Narendra Modi aimed for in his pro-business agenda, the credibility of which is now in further question after the current wave of Covid. 

For example, in the year before Covid-19 struck, 58% of FDI to India went to services, IT and telecommunications, according to DPIIT data. In fact, for years, these three sectors have been highly dominant, very much outperforming FDI to manufacturing-related industries (especially high-value ones). 

In short, Covid-19 has rehashed the extent to which India needs to diversify foreign investment across its economy. While the value of FDI to the country has almost consistently grown since 2012 (see the above chart), foreign investment as a percentage of GDP has been stagnant or negative over the past five years, according to data from the World Bank

Although India has received a large and fairly consistent number of greenfield FDI projects in recent years (as per the below chart), figures have not significantly increased for almost a decade. This would certainly change if the country did a better job of attracting more FDI in manufacturing. 

The US-China trade war has proved beneficial for India since many big manufacturing companies have shifted their production and operations to the country. However, India will need more than good luck to attract consistent and substantive FDI in the sector. To improve this and help diversify investment, the country is likely to decrease corporate income tax rates, remove FDI caps in different sectors, and step up the production-linked incentive scheme. 

What will foreign investors do now?

It is too early to know how the latest wave of Covid will impact FDI to India, but a repeat of 2020’s patterns seems likely, which means more wins for tech, pharma and infrastructure. 

India’s FDI regulation became more scrutinising last year because countries such as China were taking advantage of vulnerable companies hit by Covid. Vishal Rajvansh, the Competition & Commercial Law Review

“We will find out in June or July [how bad the impact will be on investment],” say Salem and Ibrahim. “Currently, the scarcity of immunisation is generating a national setback. Unless they have herd immunity of the people, India will not see a clear light out of the tunnel for a more welcoming FDI environment.

“For the foreseeable future, sectors that are heavily linked to FDI will be experiencing significant negative impact, [especially] in manufacturing. India [does not have the right] environment to attract FDI in the current climate, [so the] central government needs to establish a radical policy to [support investors].” 

Last year, the government’s Rs20trn ($272.66bn) recovery programme helped rescue the economy, alongside corporate India’s efforts, but many commentators believe that this year they will not have the funds or willpower to repeat such a performance.

On the other hand, large multinationals active in India (mainly from the US) have stepped up aid to the country. Accenture, which employs 200,000 people in India, recently put pressure on the US government to increase financial and medical support to the country. Moreover, Deloitte has promised 12,000 oxygen concentrators, Mastercard has said it would fund 1,000 high-end oxygen generators and 2,000 hospital beds, and Boeing has offered $10m in relief – according to the Financial Times.  

The country needs all the help it can get. This means that India’s recent border tensions with China are a cause for concern, not least since they triggered a significant drop-off in Chinese investment in February. Investment from China has played a significant role in elevating FDI to India in recent years. 

“India’s FDI regulation became more scrutinising last year because countries such as China were taking advantage of vulnerable companies hit by Covid,” contends Rajvansh. “It was monopolistic kind of behaviour, so the government has stepped in to curb it.” For example, before the government changed regulation, the People’s Bank of China was aggressively acquiring shares in struggling Indian banks. 

However, Salem and Ibrahim think that, despite tensions and India’s tightened rules, Chinese investors will continue to flock to the country and/or acquire economically distressed Indian companies. Indeed, just in April, the Chinese tech giant Tencent raised $225bn to back Indian social media start-up ShareChat.

The sheer size of India’s economy means investors from China and the rest of the world will be keen to return to the country as soon as possible. Indeed, it is en route to becoming the world’s leading location for FDI, replacing the US and China, but only if it manages to diversify its economic attractions in the medium term, and bring this latest wave of Covid-19 under control in the shorter term.