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FDI flows into India shot up 27% in 2020 despite Covid, making it 5th largest recipient

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FDI flows into India shot up 27% in 2020 despite Covid, making it 5th largest recipient

Foreign Direct Investment flows into India shot up 27 per cent from USD 51 billion to USD 64 billion in 2020 despite the Covid-19 outbreak, making the country the fifth largest recipient of capital inflows in the world, according to a UN report released on Monday.

The report said FDI flows into were pushed up by investments in the information and communication technology (ICT) industry. Large investments made in Reliance Jio Platforms by companies such as Facebook, ICT infrastructure investments by Amazon and the Unilever India merger with GlaxoSmithKline Consumer Healthcare India were listed among the mega deals accounting for the FDI inflows into India.

According to the World Investment Report 2021 by the UN Conference on Trade and Development (UNCTAD), FDI flows have been severely hit by the pandemic and they plunged by 35 per cent in 2020 to USD 1 trillion from USD 1.5 trillion the previous year.

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Lockdowns caused by COVID-19 around the world slowed down existing investment projects, and prospects of a recession led multinational enterprises (MNEs) to reassess new projects.

The pandemic boosted demand for digital infrastructure and services globally. This led to higher values of greenfield FDI project announcements targeting the ICT industry, rising by more than 22 per cent to USD 81 billion.

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Major project announcements in the ICT industry included a USD 2.8 billion investment by online retail giant Amazon in ICT infrastructure in India.

However, the report pointed out that announced greenfield projects in India contracted by 19 per cent to USD 24 billion, and the second wave in April 2021 is affecting economic activities, which could lead to a larger contraction in 2021. The Covid outbreak  in India severely hit main investment destinations such as Maharashtra, which is home to one of the biggest automotive manufacturing clusters and Karnataka where the Bengaluru tech hub is located.

Yet India's strong fundamentals provide optimism for the medium term. FDI to India has been on a long-term growth trend and its market size will continue to attract market-seeking  nvestments. In addition, investment into the ICT industry is expected to keep growing, the report said.

The country's export-related manufacturing, a priority investment sector, will take longer to recover, but government facilitation can help. India's Production Linkage Incentive scheme, designed to attract manufacturing and export-oriented investments in priority industries including automotive and electronics can drive a rebound of investment in manufacturing.

The report said FDI in South Asia rose by 20 per cent to USD 71 billion, driven mainly by strong M&As in India. Amid India's struggle to contain the COVID-19 outbreak, robust investment through acquisitions in ICT (software and hardware) and construction bolstered FDI, it said adding that cross-border M&As surged 83 per cent to USD 27 billion, with major deals involving ICT, health, infrastructure and energy. Large transactions included the investments of Jio Platforms by Jaadhu, a subsidiary of Facebook for USD 5.7 billion, the investment of USD 3.7 billion in Tower Infrastructure Trust by Canada's Brookfield Infrastructure and GIC (Singapore) and the sale of the electrical and automation division of Larsen & Toubro India for USD 2.1 billion. Another megadeal Unilever India's merger with GlaxoSmithKline Consumer Healthcare India, a subsidiary of GSK United Kingdom) for USD 4.6 billion also contributed, it said. 

FDI outflows from South Asia fell 12 per cent to USD 12 billion, driven by a drop in investment from India. India ranked 18 out of the world's top 20 economies for FDI outflows, with 12 billion dollars of outflows recorded from the country in 2020 as compared to 13 billion dollars in 2019.

Investments from India are expected to stabilise in 2021, supported by the country's resumption of free trade agreement (FTA) talks with the European Union (EU) and its strong investment in Africa, the report said.

The report cautioned that while the Asian region has managed the health crisis relatively well, the recent second wave of COVID-19 in India shows that significant uncertainties remain.