FDI in India rose by 13% in 2020, as inflows declined in major economies due to pandemic: UN

An 'investment trends monitor' issued by the United Nations Conference on Trade and Development (UNCTAD) has highlighted that Foreign Direct Investment (FDI) into India rose by 13% in 2020, boosted by interest in the digital sector, and while fund flows declined most strongly in major economies such as the UK, the US and Russia due to the pandemic. The report reveals that India and China has bucked the trend.

The report states that global FDI collapsed in 2020 by 42% to an estimated US$ 859 billion from US$ 1.5 trillion in 2019 which was the lowest level witnessed since the 1990s. The decline in FDI infows was concentrated in developed countries, where fund flows fell by 69% to an estimated US$ 229 billion. However, FDI in India rose by 13%, boosted by investments in the digital sector. "China was the world's largest FDI recipient, with flows to the Asian giant rising by 4% to US$ 163 billion," the report said. It added that "in relative terms, FDI flows declined most strongly in the UK, Italy, Russia, Germany, Brazil and the US due to the dramatic impact of Covid19. India and China bucked the trend".

The report noted that acquisitions in India's digital economy was the largest contributor to this rise. Cross-border merger and acquisition (M&A) sales grew 83% to US$ 27 billion, the report said, citing Facebook's acquisition of 9.9% stake in Reliance Jio platforms, via a new entity, Jaadhu Holdings LLC. Similarly deals in the energy sector propped up M&A values in India, it said. Further, India and Turkey are attracting record numbers of deals in information consulting and digital sectors, including e-commerce platforms, data processing services and digital payments.

Despite projections for the global economy to recover in 2021, the UNCTAD expects FDI flows to remain weak due to uncertainty over the evolution of the Covid-19 pandemic. The organisation has projected a 5% to 10% FDI slide in 2021 in last year's World Investment Report. "The effects of the pandemic on investment will linger," said Mr. James Zhan, Director of UNCTAD, investment division. "Investors are likely to remain cautious in committing capital to new overseas productive assets," Zhan said. According to the report, the decline in FDI in 2020 was concentrated in developed countries, where flows plummeted by 69% to an estimated US$ 229 billion. Flows to North America declined by 46% to US$166 billion, with crossborder mergers and acquisitions dropping by 43%. Announced greenfield investment projects also fell by 29% and project finance deals tumbled by 2%. Greenfield investment is a kind of FDI, in which the parent company creates a subsidiary in the host country and builds its operations from the ground up. The US recorded a 49% drop in FDI, falling to an estimated US$ 134 billion. On the other side of the Atlantic Ocean, investment in Europe dried up as well. In the UK, FDI fell to zero, and declines were recorded in other major recipients.

Looking ahead, the FDI trend is expected to remain weak in 2021. Data on an announcement basis, an indicator of forward trends, provides a mixed picture and point at continued downward pressure. Sharply lower greenfield project announcements (-35% in 2020) suggest a turnaround in industrial sectors. Similarly, the 2020 decline in cross-border M&As (-10%) was cushioned by higher values in the last part of the year. Looking at M&A announcements, strong deal activity in technology and pharmaceutical industries is expected to push M&A-driven FDI flows higher. For developing countries, the trends in greenfield and project finance announcements are a major concern, the report said. Although overall FDI flows in developing economies appear relatively resilient, greenfield announcements fell by 46% and international project finance by 7%. These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.

Risks related to the latest wave of the pandemic, the pace of the roll-out of vaccination programmes and economic support packages, fragile macroeconomic situations in major emerging markets, and uncertainty about the global policy environment for investment will all continue to affect FDI in 2021, the report said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.