India ranks among the top three in greenfield FDI announcements, indicating potential global capacity expansion for supply chain diversification. A senior finance ministry official anticipates these developments to result in increased investment flows by 2024.
In contrast, China has reported its first quarterly FDI deficit in the July-September period, coinciding with a global initiative to reduce reliance on Chinese-dominated supply chains. Policymakers emphasize that while India may not be the sole alternative for FDI shifting from China, there are signs of India integrating into global supply chains.
Bibek Debroy, Chairman of the Economic Advisory Council to PM, notes India’s recent involvement in global supply chains, driven by efforts to create an FDI-friendly environment and reduce dependence on China post-Covid.
China FDI Inflow Crashes
Former Chief Economic Adviser KV Subramanian sees an opportunity for India as investors seek alternatives due to challenges faced by China. He emphasizes the importance of continued structural reforms to benefit from this trend. “To ensure that we avail this opportunity, we must continue to undertake structural reforms and complete the several reforms that were initiated post Covid. The window of opportunity for India to benefit from this negative trend is finite!” he said.
He pointed out that China’s negative FDI reflects the structural challenges in its economy, exacerbated by notable demographic challenges. China, which once benefited from a positive demographic dividend fueling significant growth since the 1980s, now contends with a demographic shift turning unfavorable. Additionally, the country grapples with substantial challenges in its financial sector, marked by the accumulation of significant bad loans. The real estate sector faces difficulties characterized by considerable oversupply and overinvestment, according to Subramanian.
In contrast, India has taken proactive measures to stimulate new investments in manufacturing, including reducing the corporate tax rate to 15%. Furthermore, the country has implemented production-linked incentive (PLI) schemes across multiple sectors as part of efforts to attract funds.
Why India’s Credit Rating Should Be Upgraded | Fastest Growing Economy But Lowest Investment Grade
India’s FDI equity inflows fell by 34% to $10.9 billion in the June quarter, which economists attribute to high interest rates and global economic uncertainty impacting worldwide mergers and acquisitions.
Economists, however, express a positive outlook for India, distinguishing the challenging short-term outlook from a more favorable view over the next three years. Rahul Bajoria, Managing Director at Barclays, acknowledged India’s high FDI intentions but notes that higher interest rates are affecting FDI investments, both in India and globally.