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.
India’s popularity as an FDI destination has played a crucial role in its economic development since the 1990s.
FDI Inflows in India from 2015 to 2022.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.
India’s popularity as an FDI destination has played a crucial role in its economic development since the 1990s.
FDI during the 2014 election cycle.
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.
