Foreigners are withdrawing investment and sending it abroad; then how will the economy recover?
#News Bureau, January 7,2025
The condition of the country’s economy is terrible! FDI has reached a 12-year low. And the investment of Indian companies abroad is also at a 12-year high. That is, money is going out of the country from both sides. Foreign investors who had invested in India are running away with the money, Indian investors are also investing more money abroad than in India. How strong will the economy be with insufficient money? This can also be understood in this way that what can be the condition of a body with lack of blood?
After the news of a record decline in foreign portfolio investment i.e. FPI, now the news of a record decline in foreign direct investment i.e. FDI has come. In comparison to the same period of previous years, the net foreign direct investment i.e. FDI flow in India in the April to October period of this financial year has come to a 12-year low. Apart from this, the investment made by Indian companies abroad so far in this financial year has also increased rapidly. By the way, both these situations are not good for the country’s economy.
Before knowing the status of investment and what impact it may have, let us know what exactly is meant by investment. Foreign direct investment is money invested by a firm or individual based in one country in business interests located in another country. Foreign portfolio investment i.e. FPI shows investments made in securities i.e. stock market and other financial assets in another country.
RBI data shows that net FDI inflows into India declined to $14.5 billion in April-October 2024, the lowest since 2012-13. Then it was $13.8 billion. Net FDI from 2012-13 to 2023-24 has been slowing down year after year since the pandemic. Net FDI was $34 billion during the April to October period of 2020-21, which declined to $32.8 billion in 2021-22, $27.5 billion in 2022-23 and $15.7 billion in 2023-24.
There is a huge difference between net FDI and gross FDI and it is very important to understand this. Even if gross FDI is not less than before, net FDI can be very low, which is not good for the country’s economy.
In the April-October 2024 period, gross FDI inflows into the country were $48.6 billion, which is the joint highest since at least 2011-12. So the question is why did net FDI decline?
Senior journalist Rajesh Mahapatra, who reports on economic matters, told that the reason for the decline in net FDI is that investment going out of the country increases. During the same period when foreign companies invest, the money invested earlier by them is also withdrawn (repatriated). Apart from this, investments are also made abroad by Indian companies. This means that the money from this investment is also going out of the country. In this way, if we subtract the investment going out of the country from the gross FDI, then we get the net FDI investment.
While foreign companies seem to be shying away from India for investment, it seems Indian companies are doing the same. Foreign investment by Indian companies rose to $12.4 billion in April-October 2024, the highest since at least 2011-12. This is a 55 per cent increase over the same period last year.
Thus, even though the gross FDI inflow remained at $48.6 billion, the money going out of the country in the form of repatriation and disinvestment increased to $34.1 billion in the April-October period of this financial year.
According to a report by ThePrint, it was $26.4 billion in the same period last year. This figure has been increasing since 2017-18.
Foreign investment in the stock market is 99% less than last year
What happened in India’s domestic stock market that foreign investors got disillusioned? In 2024, only Rs 1600 crore came through FPI i.e. foreign portfolio investment. Last year it was Rs 1.71 lakh crore. That is, there was a decline of 99 percent.
According to National Securities Depository Limited i.e. NSDL, till December 27, 2024, FPIs invested a net of Rs 1656 crore in Indian equities. Although foreign investors were major sellers in the stock market, they remained buyers in the primary market.
So the question is, what is the problem of foreign portfolio investors with the domestic stock market? Many reasons are being given behind this. Stock market experts say that concerns about the valuation of shares in the Indian stock market include lower than expected GDP growth in the second quarter of FY 2025, weak corporate earnings and rising US bond yields.
It is being said that the biggest concern about the Indian stock market among foreign portfolio investors is the valuation of shares and Indian shares are trading at prices much higher than their actual value. The stock market has fallen significantly recently. Sensex and Nifty have fallen by about 11 percent from their peak. Despite the recent correction, experts do not see any special relief on the valuation front. Experts say that the recent correction has not made any major change in the multiples of the broad market.
The second major cause of concern is the weak quarterly results. Earning growth of companies has become a big problem. So far, the September quarter results of most companies have been less than expected.
Rajesh Mahapatra also cites the falling value of the rupee as a major cause of concern. He says that if the current trend of FDI continues, the rupee will weaken further against the dollar. He is expressing the fear that the rupee may touch the figure of 100. He says that many things will be affected by the fall of the rupee and there are chances of inflation rising. Rising inflation means that there is no possibility of the interest rate coming down and it may increase. That is, in a way, the Indian economy is trapped in a chakravyuh.
