Hindustan Times ST (Mumbai) - Live
FDI hit by rate hike in rich nations, Ukraine war
NEW DELHI: High-interest rates in developed countries, alongside the Ukraine war and a global shortage of semiconductors, have caused a 15% decline in foreign direct investment (FDI) in equity during the first three quarters of the ongoing fiscal year, two officials from the Department for Promotion of Industry and Internal Trade (DPIIT) said on Friday.
Driven by a decline in FDI into automobile and IT hardware, FDI inflows in equity during this period declined to $36.75 billion from a year ago.
However, FDI in sectors such as drugs and pharma, food processing and medical appliances that have been selected for the production-linked incentive scheme has picked up.
The supply chain break caused by the covid-19 pandemic and the energy crisis sparked by Russia’s invasion of Ukraine drove up prices, prompting central banks to hike interest rates in an attempt to control inflation.
“Interest rates have been rising across the globe. Rates are up 3-4% in the US, UK, Netherlands, Mauritius and Singapore, and these are the major countries where we get our FDI. These countries form about 75% of all FDI inflows into India. About 60% of our FDI inflow comes from sectors such as computer hardware, services, construction and automobiles. And many of these sectors have been affected due to semiconductor issues that globally every country is facing,” one of the officials stated.
According to DPIIT data, Singapore was the top source of equity inflows with an investment of over $13 billion during April-December, followed by the US ($4.95 billion), Mauritius ($4.73 billion), the United Arab Emirates ($3.1 billion), the Netherlands ($2.16 billion), and the UK ($1.61 billion).
Sector-wise, computer software and hardware manufacturing were the top recipients of FDI, with inflows of over $8 billion. Services, telecoms and trading sectors are other top recipients.
“During covid, there were a lot of startups that came up. There was a lot of investment in the software. Covid-19 also gave hype to the software part of IT. That bubble had to be reorganized in real-time. There were a lot of startups that came up during the time and also shrank over a period of time,” the official added.
The official said agricultural machinery, vegetable oils, scientific instruments and rubber, tea and coffee, which would traditionally not attract FDI, have begun receiving foreign investments.
The Economic Survey pointed out that FDI equity inflow in manufacturing in the first half of FY23 fell below the level in the first half of FY22 due to rising global uncertainty in the wake of the Russia-Ukraine conflict.
“A rebound in FDI inflows is, however, expected as the Indian economy sustains its high growth while monetary tightening the world over eventually eases with the weakening of inflationary pressures,” the survey stated.
According to a United Nations Conference on Trade and Development (UNCTAD) report, global FDI flows in the second quarter of 2022 reached an estimated $357 billion, down 31% from the first quarter and 7% less than the quarterly average of 2021, reflecting a shift in investor sentiment due to the war in Ukraine, rising inflation and interest rates, and fears of a recession.