What a Decadal Analysis of FDI Reveals About India’s Macro-Investment Outlook

India’s popularity as an FDI destination has played a crucial role in its economic development since the 1990s.

The ten years between 2014 and 2024 were marked by political changes (at the state level), economic reforms and shocks, and global fluctuations that have collectively shaped the FDI landscape in the country.

(Photo: Kamran Akhter/The Quint)

(This analysis is produced by the CNES InfoSphere team. Access the team’s work and edition from here. Special Credits to Aditi Desai, Aryan Govindkrishnan, Shria P, and the rest of the team.) 

As the elections draw to a close, whoever wins, the NDA (National Democratic Alliance) or the INDIA (Indian National Developmental Inclusive Alliance) bloc, the foreign investors' perception of the Indian market will help shape and determine its macro-investment and growth story for the next few years.

India’s popularity as a critical Foreign Direct Investment (FDI) destination has played a crucial role in its economic development since the 1990s. The ten years between 2014 and 2024 were marked by political changes (at the state level), economic reforms and shocks, and global fluctuations that have collectively shaped the FDI landscape in the country.

Political and Global Economic Backdrop

Over the past ten years, numerous reforms have been introduced to liberalise the Indian economy, improve the ease of doing business, and attract foreign investment, critical in altering the perception of India as a favourable investment destination. However, FDI inflows into India saw a constant decline from 2015 to 2017, following which there was a substantial increase in 2020, which again saw a decline in 2021.

FDI Inflows in India from 2015 to 2022.

(Source: CNES Infosphere)

The year 2014 was particularly noteworthy, as it marked the election of Narendra Modi as Prime Minister, a period that saw initial hesitancy among investors.

During the election months of April and May 2014, FDI inflows decreased significantly, with a 52 percent drop in April. However, once the election results were confirmed and Modi's pro-business stance became evident, FDI rebounded strongly in May, reflecting restored investor confidence.

FDI during the 2014 election cycle.

(Source: CNES Infosphere)

In 2016, India's demonetisation policy, which involved the abrupt invalidation of high-denomination currency notes, led to a temporary decline in FDI. Aimed to curb black money, the policy also caused significant economic disruption, resulting in a 26 percent decline in outward foreign direct investment (OFDI) in the following year.

Despite this setback, the long-term effects of demonetisation on FDI were mitigated by subsequent economic reforms and policy adjustments.

The 2019 general elections presented a different scenario, i.e., while FDI inflows dipped during the election months, the decline was less severe compared to 2014. This can be attributed to the continuity in leadership and policies, which provided a sense of stability to investors. Post-election, FDI surged, reaching its highest level in June 2019.

Factors Influencing FDI and Sector-specific Analysis

Global economic slowdowns, such as the one following the Brexit vote in 2016 and the trade tensions between the US and China, created uncertainties that impacted global FDI flows. Geopolitical tensions and regional conflicts also played a role in shaping investor sentiment, affecting the overall investment climate.

On the domestic front, key reforms such as the implementation of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), improved the ease of doing business in India. The GST, a comprehensive indirect tax reform, streamlined the taxation system, reduced the tax burden on businesses and promoted investment. The IBC provided a structured framework for resolving insolvencies, making it easier for companies to restructure and recover.

A sector-specific analysis reveals that in the defence and railways sectors, increased FDI caps attracted substantial investments. The government's decision to allow up to 100 percent FDI in defence manufacturing through the automatic route and the opening up of the railway infrastructure to foreign investments were significant moves that boosted investor interest in these sectors.

The healthcare sector benefitted significantly from liberalisation in policies, attracting substantial foreign investments.

Notable investments, such as the acquisition of the Indira IVF fertility clinic chain by an investment firm, highlighted the sector's attractiveness. The healthcare sector's growth potential, driven by increasing demand for medical services and advancements in medical technology, made it a prime destination for foreign investors.

The digital media sector also saw increased inflows, particularly after the government allowed 26 percent of FDI through the government approval route for digital news and current affairs content. These policy changes spurred investments in digital media, reflecting the growing importance of this sector in the Indian economy. 

Despite these moves, India retained a somewhat protectionist image in certain circles. Initiatives like "Make in India" were seen as competing with FDI inflows, and India's applied tariff rates, around 18 percent, remained higher than those of other Asian economies. Additionally, its trade policy was sometimes criticised as opaque and unpredictable, which could deter potential investors.

The impact of electoral cycles on FDI is evident, with investor confidence often fluctuating during election years. However, the continuity in leadership and clear economic policies have helped mitigate negative impacts, leading to strong rebounds after the elections. This pattern underscores the importance of political stability and consistent policy implementation in maintaining investor confidence.

The newly elected government would need to focus on further liberalising investment caps, improving transparency in trade policies, and fostering a stable political environment by simplifying and digitising the regulatory procedures to reduce bureaucratic delays. This will ensure stability and predictability in the tax regime.

Further simplifying the Goods and Services Tax (GST) and minimising tax disputes can also enhance investor confidence. Strengthening the "Make in India" initiative on the services end too, by aligning reforms on production-and-trade with the needs of global value chains, can lead to increased investor confidence.

Additionally, focusing on sectors with high growth potential, such as healthcare, digital media, and defence, can further help drive sustained FDI inflows and support India's economic development.

(Deepanshu Mohan is a Professor of Economics and Director of the Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, OP Jindal Global University. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)