FDI inflows into India rocket in the first quarter but there is a catch

India recorded a sharp spike in inflows of long-term patient capital with total foreign direct investment (FDI) almost doubling in the first quarter of the current fiscal year thanks to a low base of last year at the onset of the coronavirus pandemic, even as foreign portfolio investors (FPIs) turned cautious.

India attracted total FDI inflow of $22.53 billion during the first three months of 2021-22, up 90% from $11.84 billion during April-June 2020, as per data released by the Ministry of Commerce and Industry.

This was powered by even sharper growth in total FDI equity inflows, which jumped 168% in the first three months to $17.57 billion from $6.56 billion in Q1 2020-21.

Total FDI inflows include not just fresh equity inflows but also reinvested earnings and other capital. In particular, reinvested earnings represent the Indian arms of multinational companies with operations in the country which redeploy their earnings and surplus back into the business.

The automobile industry was the top sector during the first three months of 2021-22 with a 27% share of total FDI equity inflows. It was followed by computer software and hardware (17%) and services sector (11%), respectively.

Karnataka accounted for nearly half of the total foreign equity inflows, ahead of Maharashtra (23%) and Delhi (11%).

The flip side

On the flip side, the real reason for the year-on-year jump in inflows is the low base of Q1 of 2020-21 when the hard countrywide lockdown had put business activity on hold and investors turned cautious. While there were some lockdowns in the country this year too, these were not as strictly imposed as last year.

Indeed, the total FDI inflow as well as equity FDI in Q1 this year have been just marginally up compared to the numbers in April-June 2019. Total FDI inflow was $21.3 billion in Q1 2019-20 while equity FDI was $16.3 billion. This means, total FDI has risen just 6% and equity inflow has grown by an equally modest 7.8% over a two-year period.

Foreign portfolio investors

Meanwhile, the spike in FDI inflow is in contrast to the behaviour of offshore portfolio investors, who tend to make decisions based on short-term triggers.

The fast spread and the devastating impact of the second wave of the pandemic had led hot money to flee the Indian capital markets. Net FPI inflow in the country dived to just Rs 2,180 crore in the first quarter of 2021-22, all thanks to a rebound in June after hot money flow receded from the Indian market in the previous two months.

Earlier this year, FPIs had been super bullish on India having pumped in over Rs 55,000 crore in net terms in January-March 2021. While the flight of foreign capital thereafter has been counterbalanced by the rise in domestic capital moving into the markets that has helped the benchmark indices to scale new heights, the faith shown by long-term offshore investors lends credence to the underlying fundamentals of the economy.