Although India’s foreign direct investment (FDI) scene has experienced a decrease, experts are finding cause for optimism, particularly in the context of global supply chain diversification. Notably, China, a major FDI player, encountered its inaugural quarterly FDI deficit in the July-September period.

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India’s foreign direct investment (FDI) landscape has seen a decline, but experts believe there are reasons to remain optimistic, especially in the context of global supply chain diversification. China, which has been a dominant player in FDI, recently experienced its first-ever quarterly FDI deficit in the July-September period. This shift in the FDI dynamics points towards India’s growing appeal as an investment destination.

In a recent presentation to India’s finance ministry, the United Nations Conference on Trade and Development (UNCTAD) highlighted India’s positive developments in the FDI sector. UNCTAD’s findings indicate that India ranks among the top three countries in terms of greenfield FDI announcements, suggesting that the country is attracting fresh global capacity expansion, potentially as part of efforts to diversify supply chains. A senior finance ministry official has expressed optimism that these developments will lead to increased investment flows by 2024.

Bibek Debroy, Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), pointed out that India has been actively creating an environment conducive to FDI while also seeking to reduce its dependence on China, especially in the aftermath of the COVID-19 pandemic. Furthermore, various countries are exploring ways to reduce their reliance on China in light of other global pressures. India is gradually becoming integrated into global supply chains, suggesting its increasing relevance as a destination for foreign investment.

Former Chief Economic Adviser and International Monetary Fund Executive Director KV Subramanian emphasized that India has an advantage over China, which is currently grappling with structural challenges. China’s economy faces significant demographic headwinds, with its demographic dividend turning negative. Additionally, China’s financial sector has significant bad loans, and its real estate sector is dealing with oversupply and overinvestment issues.

To capitalize on the changing FDI dynamics and benefit from China’s negative FDI trends, Subramanian stressed the importance of continuing structural reforms that were initiated post-COVID. He noted that the window of opportunity for India in this context is finite.

India has made efforts to attract foreign investment by reducing the corporate tax rate to 15% for new manufacturing investments and implementing production-linked incentive (PLI) schemes for multiple sectors.

While India’s FDI equity inflows dropped 34% to $10.9 billion in the June quarter from the previous year, economists attribute this decline to high interest rates and global economic uncertainty affecting mergers and acquisitions worldwide. Nevertheless, they remain optimistic about India’s long-term FDI prospects. India’s FDI intentions are high, and despite short-term challenges, the outlook remains positive. Rahul Bajoria, Managing Director and Head of EM Asia (ex-China) Economics at Barclays, advised distinguishing between the challenging outlook in the next six months and the fairly positive view for the next three years.

India’s FDI landscape is evolving, with the country emerging as a potential beneficiary of changing global supply chain dynamics and challenges faced by China. While short-term challenges exist, India’s long-term prospects for attracting foreign investments remain promising, provided it continues its efforts to create a conducive business environment and complete structural reforms.