Foreign investors continue to hunt for ‘less complicated’ services sector: report

Bombay:

Despite strong push from Narendra Modi’s government to boost production through the ‘Make in India’ initiative, foreign investors continue to chase bets in the services sector, a domestic credit rating agency said today.

India Ratings and Research also said that a large portion of foreign direct investment (FDI) in manufacturing is not greenfield or new investment, which should otherwise be the ambitious aspect.

“…despite the government’s efforts to attract more investment in the manufacturing sector through the ‘Make in India’ campaign, FDI inflows continue to favor the services sector,” the rating agency said.

“… this could be because doing business in the services sector is less complicated than doing business in the manufacturing sector in India,” said the agency, a branch of Fitch Ratings.

It said that between April 2014 and March 2022, foreign direct investment in the services sector increased to $153.01 billion in the services sector from $80.51 billion between April 2000 and March 2014, while the increase in output was less rapid with $94.32 billion instead of $77.11 billion.

The agency recalled that India launched a flagship program called ‘Make in India’ in 2014 to facilitate investment in various sectors, but with a special focus on building a world-class manufacturing sector, followed by the PLI program in 14 manufacturing sectors .

The services sector also accounted for the largest share of FDI between 2000 and 2014, the agency said, adding that within services trade, telecommunications, banking/insurance, IT/business outsourcing and hotels/tourism are the favourites.

In manufacturing, the FDI are concentrated in segments such as automotive, chemicals, medicine and pharmaceuticals, metallurgical and food processing.

Computer software and hardware have done well, with foreign direct investment rising to $72.7 billion between April 2014 and March 2022, from just $12.8 billion in April 2000 to March 2014, the bureau said, adding that this sector witnessed further growth after the roll-out of PLI (production linked incentive) scheme where major global brands such as Apple, Samsung, Flextronics and Nokia are announcing major investments in India.

The agency said the country has done well among emerging market economies in attracting FDI, with its share rising to 6.65 percent in 2020 and falling to 2.83 percent in 2021 due to the impact of Covid .

From a regional perspective, FDI are “highly clustered around a few states,” the bureau noted, pointing out that foreign cash flows may not be helping the cause of broad-based development across the country.

Four states – Maharashtra (27.5 percent), Karnataka (23.9 percent), Gujarat (19.1 percent) and (Delhi 12.4 percent) – together accounted for 83 percent of FDI between October 2019 and March 2022 , it said.

“…there is no specific reason for clustering FDIs around only a few states, Ind-Ra believes it may be due to the favorable conditions in these states,” the report said.

As a result, three corridors of FDI have emerged, including NCR of Delhi in the north, Maharashtra-Gujarat in the west and Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the south, it said.

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