FDI inflow still tilted in favour of services sector: India Ratings

Despite a significant surge in the foreign direct investment inflows over the years, the nature of FDI inflows in terms of countries from where they are originating and the states and sectors where they are being invested remains fairly skewed, according to a report by India Ratings and Research (Ind-Ra).

In 2014, the government launched its flagship programme "Make in India" to facilitate investments across sectors, but with a special focus to build a "world-class" manufacturing sector. Attracting higher FDIs in manufacturing was dovetailed with this effort which was supplemented by the rolling out of Production Linked Incentive (PLI) scheme across 14 key manufacturing sectors in FY21, the report says.

From a sectoral perspective, the highest FDI flowed into the services sector, followed by the manufacturing sector (excluding computer hardware) during April 2000 to March 2014 as well as during April 2014 to March 2022.

FDI increased to $153.01 billion in the services sector during April 2014 to March 2022 from $80.51 billion during April 2000 to March 2014. During the same period, FDI in manufacturing increased to $94.32 billion from $77.11 billion. "This suggests that despite the government's effort to attract more investments in the manufacturing sector through 'Make in India' campaign, the FDI inflow is still tilted in favour of the services sector," the report says.

Ind-Ra believes this could be because doing business in the services sector is less complicated than doing business in the manufacturing sector in India. "This could also be the reason for the majority of the FDI coming in the manufacturing sector is not a greenfield investment," the ratings agency says.

However, computer software and hardware have done well where the FDI increased to $72.7 billion during April 2014 to March 2022 from just $12.8 billion during April 2000 to March 2014. This sector has seen further traction after the roll out of the PLI scheme with major global brands such as Apple, Samsung, Flextronics, and Nokia announcing big investments in India.

Like the sectors, FDIs are also highly clustered around a few states. Of the total FDI inflow during October 2019 and March 2022, just four states attracted 83% of the FDI with Maharashtra accounting for 27.5%, Karnataka 23.9%, Gujarat 19.1% and Delhi 12.4%. The remaining six states in the top 10 FDI destinations were Tamil Nadu, accounting for 4.5% of the total FDI, followed by Haryana 3.7%, Telangana 2.4%, Jharkhand 1.9%, Rajasthan 0.8% and West Bengal 0.7%. The remaining part of India accounted for just 3.1% of the total FDI.

This, according to Ind-Ra, is due to the enabling conditions in these states. Three distinct FDI corridors have emerged – NCR of Delhi in the north, Maharashtra-Gujarat in the west and Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the South, the ratings agency says.

According to the World Investment Report 2022 of United Nations Conference on Trade and Development (UNCTAD), India is among the top 10 (ranked 7) FDI destinations globally.