Top Trends Driving India’s FDI Story

03 Jan 2023

The international investment climate is in a state of flux and is affecting investment flows across the world. While economies are recovering from the effects of the pandemic, the current geopolitical unrest is creating concerns among investors. Various challenges are compelling businesses to reevaluate the global business priorities and access potential vulnerabilities.

Against this turbulent backdrop, it is comforting to observe that global investors continue to view India as a reliable partner and an appealing investment destination. The latest CII-EY MNC Survey 2022 evaluates the level and nature of MNC decision-makers’ interest in India. The report examines the factors attracting investors and the path forward to maintain this momentum.

India is one of the fastest growing big economies and has the potential to draw USD475 billion in foreign direct investment (FDI) over the next five years. Strong consumer trends, digitalization, a booming services sector, and the government’s strong emphasis on infrastructure and manufacturing are just a few of the factors contributing to the optimism about India’s potential.

Let us take a look at the key drivers of Indian FDI story:

Fast Paced Growth

Currently the fifth-largest economy in the world, India is projected to rise to become the fourth largest economy, surpassing Germany in 2025 and the third largest in 2027, surpassing Japan, fueled by rapid economic growth.

Determined Policy Reforms

The direction of Indian growth has been facilitated by implementing institutional reforms for ease of business, structuring modern Free Trade Agreements (FTAs) to boost trade and creating cross-border investment opportunities. All of which are well received by foreign companies and investors.

Domestic Consumption Base

It is anticipated that by 2030, consumer spending across India will increase by a real USD 1.7 trillion due to a large domestic consumption base and rapid growth in consumer culture. This would essentially be the third-highest growth in demand across economies. The share of health, education and other services in the overall consumption basket indicates new investment opportunities.

Demographic Advantage and a Growing Services Sector

India is the export hub for software services. According to IBEF, Indian IT outsourcing-service market will expand by 6-8% between 2021 and 2024, the market for IT and business services will reach USD 19.93 billion by 2025, and the software service sector will reach USD 1 trillion by 2030.

Successful developments services that are technologically dynamic and can be traded internationally, as well as, the accessibility of skilled labour, makes India an ideal destination for MNCs.

Consistent Focus on the Manufacturing Sector

As India’s flagship programme “Make in India’’ completes eight years in 2022, various reforms undertaken by the government to make India competitive have begun showing results sending a strong signal to the world about India potential as a global manufacturing hub.

The Great Digital Drive

An increase in the number of smartphone users, internet users and real-time payment transactions is expanding digitization in India and forming new consumption patterns. The value of India’s digital economy will reach USD 1 trillion by 2025, directed by digital transformation and technology adoption, which presents attractive investment opportunities for MNCs. The growth in e-commerce has positive implications for MNCs.

The Infrastructure Push

Indian infrastructure spending pipeline of USD 1.3 trillion in 5 years, public CAPEX increase from 1.6% of GDP in 2018-19 to 2.9% in 2022-23, the National Monetization Pipeline (NMP) with aggregate monetization potential of INR 6.0 lakh crore through the sale of a core of assets of the Central Government, and Gati Shakti offers immense potential for investments by the private sector.

Geopolitical Stability and Constructive Engagement with The World

While the world is undergoing turbulent geopolitical and economic period, India offers relative stability compared to other emerging market economies across a range of parameters like, macroeconomic stability and robustness to geopolitical shocks. Indian political stability and relentless economic policy reforms add to its attractiveness.

Building with sustainability

Indian sustainability goals offer MNCs opportunities for investments related to sustainability, particularly in renewable energy, real estate, and transportation. Global green bond issuances have seen capital inflows of USD 18 billion into India. The Indian Green Hydrogen Mission will also turn the nation into a centre for the manufacturing and export of green hydrogen, where demand is anticipated to reach 15-20 MT by 2030.

The Path Ahead

Going forward, government focus on implementing infrastructure projects and project preparation timelines, especially for Public-Private Partnership (PPP projects), will be critical. Developing competitive business clusters and continuation of financial sector and power sector reforms would be essential for Indian growth story, in addition to continuing the path to NetZero and achieving environmental, social and governance (ESG) targets.

To know more, read the full CII-EY report on “Vision – Developed India: Opportunities and expectations of MNCs”.

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