In South Asia, FDI is expected to contract sharply in 2020
India received $51 billion in foreign direct investment in 2019, making it the world’s 9th largest recipient in 2019, according to a report by the United Nations’ trade body, the UN Conference on Trade and Development (UNCTAD). A lower but positive economic growth in India in the post-COVID19 pandemic period and the country’s large market will continue to attract market-seeking investments, the UNCTAD said in its World Investment Report 2020 report on Monday.
FDI inflows into the country rose to $51 billion in 2019, from $42 billion in 2018 when India the twelfth position among top 20 host economies in the world, according to the report.
India was among the top five host economies for FDI in the developing Asia region. Global FDI flows are forecast to decrease by up to 40 per cent in 2020, from $1.54 trillion in 2019, the report said. This would be for the first time since 2005 that global FDI falls below the $1 trillion mark.
Foreign direct investment to developing economies in Asia – hit hard by the economic downturn caused by the coronavirus pandemic – are projected to decline by up to 45 per cent in 2020.
In South Asia, FDI is expected to contract sharply in 2020.
“In India, the biggest FDI host in the sub-region, with more than 70 per cent of inward stock, the number of greenfield investment announcements declined by four per cent in the first quarter, and Merger & Acquisitions contracted by 58.”
“However, the country’s economy could prove the most resilient in the region. FDI to India has been on a long-term growth trend. Positive, albeit lower, economic growth in the post-pandemic period and India’s large market will continue to attract market-seeking investments to the country,” the report said.
The magnitude of the logistical challenges during both the lockdown and the recovery remain a big downside risk for FDI in the medium term for India, it added.
“The digital economy and real estate and property development, two industries that attracted growing FDI before the pandemic, could evolve in different directions,” the report said, adding that the digital economy will likely see continued investments, real estate and property development will face “significant pressures” from slowing demand and financing constraints.
“India’s most sought-after industries, which include professional services and the digital economy, could see a faster rebound as global venture capital firms and technology companies continue to show interest in India’s market through acquisitions,” the report said.
The report noted that investors concluded deals worth over $650 million in the first quarter of 2020, mostly in the digital sector in India.
Large deals in energy were also concluded, such as the acquisition by Total (France) of Adani Gas (India), valued at $800 million.
FDI flows to South Asia increased by 10 per cent to $57 billion in 2019, the growth driven largely by a rise in investment in India, which further relaxed investment barriers in mid-2019 (including in retail, insurance and downstream coal processing).
FDI to India, the largest South Asian recipient, increased 20 per cent to $51 billion, sustaining the country’s upward FDI trend, the report said.
Most of the investments were in the information and communication technology and the construction industry.
ICT investments into India have evolved from information technology services for global companies to the rapidly growing local digital ecosystem, with many local and regional digital champions, particularly in e-commerce (such as Flipkart and Zomato), attracting international investment, the report said.
A number of mega deals also contributed to M&A activity. These included investments in internet companies, which amounted to $2.7 billion,14 as well as the $7 billion acquisition of Essar Steel (India) by a Japanese-Indian joint venture.
Outflows from South Asia grew 6 per cent, driven by investment from India. Yet they remained small, representing only one per cent of global outflows.
Companies in India are the sub-region’s largest investors, with more than 90 per cent of outflows in 2019.
Investments from India are expected to decline in 2020, with the largest MNEs revising their earnings down by 25 per cent in early 2020 due to the impact of the pandemic, it added.
The report said that flows to developing Asia will be severely affected due to their vulnerability to supply chain disruptions, the weight of global value chains-intensive FDI in the region and global pressures to diversify production locations.
In 2019, FDI flows to the region declined 5 per cent to $474 billion, despite gains in South- East Asia, China and India.
The report stressed that global FDI flows will be under severe pressure this year as a result of the COVID-19 pandemic, dropping well below the trough reached during the global financial crisis and undoing the already lackluster growth in international investment over the past decade.
Flows to developing countries will be hit especially hard, as export-oriented and commodity-linked investments are among the most seriously affected.
“The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects,” said UNCTAD Secretary-General Mukhisa Kituyi.
