Foreign direct investment into India may have sharply slowed over the last year, but accelerating investment intentions in “futuristic sectors” could usher in a new wave of FDI, taking gross inflows back to COVID-era peak levels of $55 billion in two years, HSBC’s economists said.
“While inflows into the pandemic-period sectors such as computers and chemicals have slowed, investment intentions in futuristic sectors like renewables, data centres, EVs, green hydrogen, AI, and semiconductors, are rising sharply,” HSBC economists Pranjul Bhandari, Aayushi Chaudhary and Priya Mehrishi wrote in a January 11 note.
In the five years before the onset of the pandemic, net FDI into India rose sharply – from $22 billion in FY14 to $31 billion in FY19. The flows picked up further during the pandemic, rising to $44 billion as global liquidity found its way to tech start-ups. However, in the last four quarters, net FDI has more than halved to $13 billion, the economists wrote.
They pointed out the evolution of sectors over time, saying that areas which attracted large flows 10 years ago such as metals, conventional power, tourism and construction were no longer as appealing. Meanwhile, smaller sectors such as computers, renewables and pharmaceuticals have gained.
Within the futuristic sectors which HSBC’s economists listed out, they noted the rise in players such as sovereign wealth funds, the Middle East, and the US.
“Being new, these sectors may take more time to settle, but as they do, a new wave of FDI could come in, taking gross FDI inflows back to pandemic-time peak-levels of USD55 bn/ year in a couple of years, and over time, even higher.”
Over the past five years, flows into automobiles, computers, construction, and services have dropped below 2019 levels, an occurrence that could be explained as “a period of payback” after a very sharp rise in FDI in these sectors in 2021 at the height of the pandemic, the economists wrote.
Terming the weak FDI data as being at odds with firm investment intentions, HSBC’s economists said that the phenomenon could have much to do with tech start-ups, which saw a funding freeze over the past year.
The clean-up and consolidation in the start-up space bodes well for medium-term growth prospects, they said.
“In fact, IPOs in India have picked up in recent quarters, and it is likely that many start-up investors have got their ‘exit’ after a wait. This, along with more reasonable valuations now , could mean a somewhat better 2024 for the start-up ecosystem.”