India’s Futuristic Sectors May Trigger New Wave of FDI, Surpassing Pre-Covid Levels
According to economists at HSBC, India’s foreign direct investment (FDI) may experience a significant boost in the coming years despite a recent slowdown. The analysts predict a new wave of FDI, driven by accelerating investment intentions in futuristic sectors, which could lead to gross inflows reaching peak Covid-era levels of USD 55 billion within two years.
While sectors like computers and chemicals, which were heavily impacted by the pandemic, have seen a decline in investment, there has been a remarkable increase in investment plans in futuristic sectors such as data centers, renewable energy, electric vehicles, green hydrogen, artificial intelligence, and semiconductors.
Before the pandemic, India witnessed a noteworthy rise in net FDI over a five-year period, increasing from USD 22 billion in FY14 to USD 31 billion in FY19. Amid the global liquidity influx into tech startups during the pandemic, FDI flows further surged to USD 44 billion. However, in the past four quarters, net FDI has decreased to USD 13 billion, less than half of the previous amount.
The economists highlighted the evolving nature of different sectors, with traditionally popular areas like metals, conventional power, tourism, and construction losing their attractiveness. Conversely, smaller sectors like computers, renewables, and pharmaceuticals have gained more appeal.
HSBC’s economists have identified some futuristic sectors and emphasized the growing importance of players such as the Middle East, the US, and sovereign wealth funds in these areas. Although it may take some time for these sectors to establish themselves, the economists anticipate a new wave of FDI that could return gross FDI inflows to pre-pandemic levels of USD 55 billion annually within a couple of years, potentially exceeding those levels over time.
While flows into sectors like automobiles, computers, construction, and services have dropped below 2019 levels, the economists suggest that this could be a temporary payback following a surge in FDI during the pandemic.
The analysts at HSBC consider the recent weak FDI data contradictory to the strong investment intentions. They speculate that the funding freeze experienced by tech startups over the past year may be responsible for this divergence. However, they view the clean-up and consolidation in the startup space as a positive sign for medium-term growth prospects. Additionally, the increase in IPOs in India indicates that many startup investors have finally achieved their desired exit. With reasonable valuations currently available, the startup ecosystem is expected to have a promising 2024.
In conclusion, despite a recent slowdown in FDI, economists at HSBC remain optimistic about the future of foreign direct investment in India. They anticipate a surge in FDI driven by investment plans in futuristic sectors, potentially surpassing pre-Covid levels. While some sectors have lost their attractiveness, others have gained prominence, signaling a shift in investment patterns. The analysts believe that the funding freeze experienced by tech startups may be the reason behind the contradiction between weak FDI data and strong investment intentions. However, with the cleanup and consolidation in the startup space, along with increased IPO activity, India’s startup ecosystem is set for a brighter future.
