Despite Covid-19, FDI into India rose by 13% in 2020

Foreign Direct Investment into India rose by 13 per cent in 2020, boosted by interest in the digital sector, and while fund flows "declined most strongly" in major economies such as the UK, the US and Russia due to the Covid-19 pandemic, India and China “bucked the trend”, the UN has said.

Illustration: Uttam Ghosh/Rediff.com.

An 'investment trends monitor' issued by the United Nations Conference on Trade and Development (UNCTAD) on Sunday said that global foreign direct investment (FDI) collapsed in 2020 by 42 per cent to an estimated USD 859 billion from USD 1.5 trillion in 2019.

Such a low level was last seen in the 1990s and is more than 30 per cent below the investment trough that followed the 2008-2009 global financial crisis.

The decline in FDI inflows was concentrated in developed countries, where fund flows fell by 69 per cent to an estimated USD 229 billion.

However, FDI in India rose by 13 per cent, boosted by investments in the digital sector.

"China was the world's largest FDI recipient, with flows to the Asian giant rising by 4 per cent to USD 163 billion. India, another major emerging economy, also recorded positive growth (13 per cent), boosted by investments in the digital sector," the report said.

It added that "in relative terms, FDI flows declined most strongly in the UK, Italy, Russia, Germany, Brazil and the US due to the dramatic impact of Covid-19. India and China bucked the trend".

FDI in South Asia rose by 10 per cent to USD 65 billion. India's 13 per cent rise in FDI saw the total foreign investments for 2020 touching USD 57 billion. The report noted that acquisitions in India's digital economy was the largest contributor to this rise.

Cross-border merger and acquisition (M&A) sales grew 83 per cent to USD 27 billion, the report said, citing social networking giant Facebook's acquisition of 9.9 per cent stake in Reliance Jio platforms, via a new entity, Jaadhu Holdings LLC. Similarly deals in the energy sector propped up M&A values in India, it said.

Further, India and Turkey are attracting record numbers of deals in information consulting and digital sectors, including e-commerce platforms, data processing services and digital payments.

Despite projections for the global economy to recover in 2021, the UNCTAD expects FDI flows to remain weak due to uncertainty over the evolution of the Covid-19 pandemic.

The organisation has projected a 5 per cent to 10 per cent FDI slide in 2021 in last year's World Investment Report.

“The effects of the pandemic on investment will linger,” said James Zhan, director of UNCTAD, investment division.

“Investors are likely to remain cautious in committing capital to new overseas productive assets," Zhan said.

According to the report, the decline in FDI in  2020 was concentrated in developed countries, where flows plummeted by 69 per cent to an estimated USD 229 billion.

Flows to North America declined by 46 per cent to USD 166 billion, with cross-border mergers and acquisitions dropping by 43 per cent. Announced greenfield investment projects also fell by 29 per cent and project finance deals tumbled by 2 per cent.

Greenfield investment is a kind of FDI, in which the parent company creates a subsidiary in the host country and builds its operations from the ground up.

The United States recorded a 49 per cent drop in FDI, falling to an estimated USD 134 billion. The decline took place in wholesale trade, financial services and manufacturing.

Cross-border M&A sales of US assets to foreign investors fell by 41 per cent, mostly in the primary sector.

On the other side of the Atlantic Ocean, investment in Europe dried up as well. In the United Kingdom, FDI fell to zero, and declines were recorded in other major recipients.

Looking ahead, the FDI trend is expected to remain weak in 2021.

Data on an announcement basis, an indicator of forward trends, provides a mixed picture and point at continued downward pressure.

Sharply lower greenfield project announcements (-35 per cent in 2020) suggest a turnaround in industrial sectors. Similarly, the 2020 decline in cross-border M&As (-10 per cent) was cushioned by higher values in the last part of the year.

Looking at M&A announcements, strong deal activity in technology and pharmaceutical industries is expected to push M&A-driven FDI flows higher.

For developing countries, the trends in greenfield and project finance announcements are a major concern, the report said.

Although overall FDI flows in developing economies appear relatively resilient, greenfield announcements fell by 46 per cent and international project finance by 7 per cent.

These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.

Risks related to the latest wave of the pandemic, the pace of the roll-out of vaccination programmes and economic support packages, fragile macroeconomic situations in major emerging markets, and uncertainty about the global policy environment for investment will all continue to affect FDI in 2021, the report said.

The coronavirus has killed over 2.1 million people, along with over 99 million confirmed cases, across the world so far.