Why Are Foreign Companies Disinvesting in India?

Highest Disinvestment Recorded Since 2011-12, Says a Report

Newsreel Asia Insight #230
May 23, 2024

Foreign direct investment (FDI) into India has seen a significant decline, dropping to $26.6 billion in the fiscal year 2023-24, according to data released by the Reserve Bank of India (RBI). This marks a 37% decrease from the previous fiscal year and represents the lowest level of FDI since 2006-07, according to an analysis by ThePrint.

The decline in “actual” FDI can be attributed to a substantial increase in the amount of money that foreign companies are withdrawing from India. ThePrint reports that foreign companies pulled out $44.4 billion during 2023-24, a 51% increase from the previous year. This is the highest annual repatriation recorded since the RBI began tracking this data in 2011-12, the newspaper noted.

Actual FDI is calculated as the difference between the total amount of money foreign companies invest in the country (gross investments) and the amount they take out (repatriation or disinvestments). The current trend shows that while the inflow of foreign investments into India is falling, the outflow is increasing.

In the last fiscal year, gross foreign investments into India stood at $71 billion, slightly lower than the $71.4 billion recorded in 2022-23. However, with foreign companies repatriating $44.4 billion in 2023-24, the actual direct investment into the country was reduced to $26.6 billion.

The decline in FDI and the increase in money being repatriated by foreign companies present several challenges for India.

The drop in actual FDI can slow down economic growth. FDI is crucial for providing capital, creating jobs and promoting innovation. Lower investment levels mean fewer new projects, reduced economic activity and potentially slower growth in GDP.

With more money being taken out than brought in, India’s balance of payments could be negatively affected. This could put pressure on the country’s foreign exchange reserves and affect the stability of the rupee.

A decline in FDI may signal waning confidence among foreign investors in India’s economic prospects. This can be detrimental in the long run, making it harder to attract new investments.

Local businesses, particularly those dependent on foreign investment for expansion and operations, will feel the pinch. This includes sectors like manufacturing, technology and infrastructure.

Reduced investment can lead to slower job creation. Many new jobs in India come from foreign-funded projects, so a decline in FDI can worsen unemployment. For example, the IT and BPO (Business Process Outsourcing) sectors have historically seen substantial foreign investment, leading to numerous job opportunities.

FDI doesn’t just create jobs directly; it also has a multiplier effect on the economy. The establishment of a new factory or service centre creates indirect employment in supply chains, transportation, retail and other related industries.

World Bank’s South Asia Economic Focus Report 2020 mentioned that every $1 billion in FDI can create between 10,000 to 15,000 jobs in the region.

With reduced investment, there may be fewer new products and services in the market. This could limit choices for consumers and potentially drive up prices if supply constraints arise.

One reflection of government policy failures could be an overly complex or unfriendly regulatory environment. If foreign companies find it difficult to operate due to red tape, high taxes or unpredictable policy changes, they may choose to invest elsewhere.

Macroeconomic instability, such as high inflation, fiscal deficits or inconsistent economic policies, can also deter foreign investors. The government needs to ensure a stable and predictable economic environment to attract and retain investment.

Poor infrastructure and logistical challenges can also be a barrier to investment. If foreign companies face difficulties in transporting goods or accessing reliable utilities, they might withdraw their investments.

Regular dialogue with foreign investors to understand their concerns and address them proactively can help retain existing investments and attract new ones. Offering incentives and support for long-term investments can also be beneficial.

Investing in education and vocational training to build a skilled workforce can make India more attractive to high-tech and high-value industries, ensuring that investments lead to significant economic and employment benefits.