India can expect to attract $120-160 billion of foreign direct investment (FDI) annually by 2025 if it manages to increase the FDI to Gross Domestic Product (GDP) ratio between 3-4 per cent from less than two per cent now, Confederation of Indian Industry and EY said in a report released Monday. “This can aid in bringing back India’s GDP growth rate to 7-8 per cent range,” they said in the report titled ‘FDI in India: Now, Next and Beyond.’
As per the report, India has observed a GDP growth of 6.8 per cent in the current decade, with FDI to GDP at around 1.8 per cent. Adopting an approach of reshoring in manufacturing of electric vehicles and high-end machinery, regionalization of some of the global value chains in cotton textiles and mining, coupled with diversification of services are the factors that will determine FDI inflows post Covid-19, it said.
India received $35.37 billion FDI during April-August 2020, the highest so far for the first five months of a financial year, according to official data. The report highlighted that a large untapped opportunity beyond four major states remains to be explored.
Four Indian states— Maharashtra (28%), Karnataka (19%), Delhi (16%) and Gujarat (10%)— attracted around 75% of the FDI inflows in the country from October 2019 to June 2020. The top 10 states attract 97 per cent of total FDI inflows coming into India.
These highlight areas of opportunity going forward, as rest of the Indian states are larger – in terms of population and GDP—than many large countries in the world. While India has been able to attract FDI in its services sector and high- skill manufacturing sectors like automobile manufacturing, chemicals, drugs and pharmaceuticals – constituting 89 per cent of FDI inflow, it has had limited success, in comparison to its peers, in attracting FDI in low-skill manufacturing sectors- textiles and apparel, leather, footwear and furniture. “This has been reflected in India’s exports performance as well.
This correlation again alludes to a possible strategy going forward where India may have to take steps to attract FDI in low-skill labour intensive sectors to become part of the global value chains and provide employment to its large labour force,” CII and EY said in the report. The CII-EY FDI survey had earlier revealed an optimistic picture in the mind of the investors as roughly 80 per cent of them confirm their plan of investing in the next 2-3 years.
They had also ranked India among the top three countries confirming the point that the investors find India an attractive destination in terms of the capacity expansion, digital transformation and research and development. Almost a quarter of respondents are planning to invest more than $500 million.
The initiatives by the government and factors like attractive Indian markets, presence of skilled workforce, stable political environment have been favourable to the investors, inclining them towards investing in India.
Cheap labour availability and policy reforms in India help the firms in cutting their financial costs, thereby making the Indian markets attractive. Most respondents believe that attractive market, skilled workforce and the political stability have influenced the decisions of their firms to enter and invest in India.