India major destination for investments; must attract FDI to become $5 trillion economy by FY27: Deloitte

Even during the pandemic, foreign direct investment (FDI) poured into India at record levels, a report titled 'India's FDI opportunity through an investor's lens' by Deloitte has said.

A survey by Deloitte, which questioned 1,200 business leaders of multinational corporations in the US, UK, Japan and Singapore, found that India remains an attractive destination for investments. The country scored highly for its skilled workforce and prospects for economic growth, as per the survey.

The report identified seven capital-intensive sectors which India can target to attract greater FDI -- textile and apparel, food processing, electronics, pharmaceuticals, vehicles and parts, chemicals and capital goods. These sectors collectively contributed $181 billion of merchandise exports in 2020-21.

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The survey found that these seven sectors have the necessary potential, opportunity, and capability to show quick results and set a global precedent. It said more business leaders, especially in Japan, are making investments in India for access to the domestic market, rather than using India as a springboard for exports.

The survey also said that India has the strongest positive perception in the US when compared to markets such as China, Brazil, Mexico, and Vietnam. "The US and UK business leaders expressed greater confidence in India's stability," it added.

In FY21, FDI inflows, including equity, re-invested earnings, and capital, amounted to a record $81.72 billion, 10 per cent higher than the previous financial year. According to the United Nations Conference on Trade and Development (UNCTAD), the Indian information and communication technology and construction sectors were large recipients of FDI. It made India the fifth-largest recipient in the world in the past year.

The report, however, flagged that the record FDI has not contributed proportionately to India's capital formation and GDP. "While foreign investment inflows into India have been consistently rising over the past five years, they have not contributed proportionately to the country's capital formation and GDP."

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It said only a fraction of total foreign capital inflows was creating fresh assets in India. "Over the last five years, net capital inflows contributed about 4 per cent to the total gross capital formation, which suggests domestic investments, funded by domestic savings, accounted for the remaining 96 per cent."

The report added that despite recent reforms to improve the ease of doing business in India, awareness among investors remains low. Business leaders in Japan (16 per cent) and Singapore (9 per cent) were least aware of initiatives such as the digitisation of customs clearance and production linked incentives for manufacturers.

Accordingly, India was perceived to have a more challenging environment to do business in comparison to China and Vietnam, it said. It also said that India scored lower on regulatory clarity and efficient judicial redress and mechanisms.

Inadequate infrastructure was another negative factor cited by existing and potential investors, it said. The report concluded that to grow into a $5 trillion economy by FY27, India needs to attract FDI in capital-intensive sectors that add to the country's gross capital formation.

India's competitive advantage, such as a large and growing domestic market and skilled technical workforce, makes it an unmatched magnet for investors, the report said.  It said start-ups will also play a progressively important role in India's journey to a $5 trillion economy.

"The government must showcase to the world India's dazzling potential as an attractive manufacturing destination, while also aspiring for a greater share of global investments and trade flows," it added.