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When domestic industries are shying away from new investment in the post-lockdown period, foreign investors are queuing up to invest in India. This gives India some solace amidst decelerating GDP, rising unemployment rate, increasing retail inflation rate, and falling consumption expenditure.

India witnessed a 13% rise in foreign direct investment (FDI) to reach $57 billion in 2020 as compared to about $50 billion in the previous year. The domestic figure was boosted by investments in the digital economy, according to the latest UNCTAD report.

India and China were the only two major economies that witnessed significant rise in foreign direct investment in an otherwise gloomy year for foreign direct investment (FDI). The UNCTAD report said that aggregate global FDI flows fell massively in 2020 – falling by as much as 42% to an estimated $859 billion from $1.5 trillion in the previous year. This was the lowest level since the 1990s - according to the latest UNCTAD report. 

While India witnessed a 13% year-on-year rise, the highest among key nations against China’s rise of 4%, in absolute terms, China remained far ahead with $163 billion inflows compared to India’s $57 billion. Inflows into India were boosted by those into the digital sector, the report said.

The report also stated that the investments in the digital economy continued through accusation. Cross border M&A grew by 83% to reach $27 billion. A notable deal was the 10% acquisition of the Jio platform by Jaadhu owned by Facebook valued at $5.7 billion. As per the report, infrastructure and energy deals also propped up M&A deals in India.

At the other end of the spectrum, countries in Europe and America, which were devastated by Covid-19 witnessed a sharp deceleration in FDI inflows. The UK and Italy each saw an over 100% crash in FDI inflows, followed by Russia (96% drop), Germany (61%), Brazil (50%), the US (49%), Australia (46%) and France (39%). The UNCTAD report also warned that uncertainty about the Covid-19 situation will continue to hamper global FDI inflows in 2021, threatening sustainable recovery prospects. Developing economies drew as much as by 72% of global FDI in 2020 – their highest share on the record. Asian nations did particularly well - attracting $476 billion in FDI last year.

There could not have been better news for India as investments remain critical to the country’s resurgence story as private consumption has been badly bruised by income losses following the prolonged lockdown. Also, India’s reliance on FDI grew substantially in recent years, as overleveraged domestic investors cut down on fresh expansions.

Even before the pandemic struck, the share of gross fixed capital formation (GFCF) in GDP collapsed to 29.8% year on year in FY20 from as much as 34.3% in FY12. However, after a record 47.1% slide in GFCF in the June quarter, there was some improvement in the September quarter.

That despite India’s record GDP deceleration, the foreign investors were upbeat about the economy’s future was, however, evident in the monthly movement of the FDI inflows. During the first quarter of the current year, India’s GDP declined by 23.9% and in the second quarter by 7.5%. But in the first six months, between April and September 2020, FDI inflows to India had grown by 15% from $ 26 billion in the same period last year to $ 30 billion.

The service sector including banking, insurance and non-banking financial institutions which were among the biggest sufferers of a closed economy during the lockdown has bagged the biggest share (167%) of the FDI inflows during April-September 2020. But there was a bigger surprise in the grabbing of 3.1% share by the hotel and tourism industry, which had nearly collapsed during the lockdown days. 

India’s success in attracting more FDI at a time when the world at large witnessed deceleration suggests the success of the country’s changed policies and reforms. The recent updates in FDI policies have made India a preferred destination for foreign direct investments.