This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.Foreign investment inflows (FDI) into India may be drying up even faster in 2023-24 than in 2022-23, when net FDI inflows declined 27% to a mere $28 billion. It was the biggest decline in a decade. Many global analysts have expressed concern over the unprecedented decline in net FDI inflows in 2022-23. Now, it seems that 2023-24 could be a bigger cause for worry.Speaking on CNBC TV18, a Grant Thornton analyst said there was a 92% decline in cross-border M&A deals in India in the first half of 2023 (they publish monthly data). One assumes that this deep, declining trend is not going to reverse during the rest of the year (both calendar and financial).A 92% decline may reflect serious underlying trends. One, it will curtail overall FDI flows in 2023-24, because cross-border M&As are a big component. During the Covid year of 2020, Reliance Jio alone attracted $20 billion via acquisition of up to a 33% stake in it by Google and Facebook. Two big share acquisitions dominated overall FDI flows into India. Some big pension funds and sovereign wealth funds also invested in Reliance Jio in 2020. Other startups (unicorns) also got equity investments in 2020-2021.The acquisition of technology shares formed a substantial chunk of FDI inflows into India in recent years. This has dried up in 2023, and is clearly showing up in the 92% decline in cross-border mergers and acquisitions, as pointed out by Grant Thornton.Global growth pessimism is an important reason for this big decline in cross-border M&As. Western corporations are cautious about making big investments. A rise of 4-5 percentage points in interest rates in the US and EU, which has sucked easy money out of the system, is another reason. Such moneys have found their way into India to do leveraged buyouts. Geopolitical strategy is also important. India had begun to shun Chinese FDI after the 2020 border clashes with China. China has been a large investor in Asian economies over the last 10 years. In fact, most top tech startups in India had big initial doses of Chinese investments, but are having to look for non-Chinese sources for subsequent rounds of funding. All these factors have come together to create a perfect storm.The last two years of Modi’s tenure may bring in the lowest FDI. The government is trying its best to build a narrative projecting India is the fastest-growing economy post-COVID. But the reality is that there is a general decline in FDI flows globally, and India is not bucking the trend.A lot of hype has been generated to attract FDI in chip manufacturing, with the government offering nearly $10 billion of direct subsidy to the Vedanta-Foxconn combine. This was launched by the PM himself in Gujarat last year. But the joint venture fell apart last week and there is no clarity on how the chip project will be revived. This, and the Micron chip assembly and testing plant announced during the PM’s US visit, are being touted as big potential FDI inflows in this fiscal. But experts in semiconductor manufacturing suggest that such complex foreign technology-led investments will take time to fructify, if at all. Merely throwing large subsidies around is not enough, as the Vedanta-Foxconn experience shows.Meanwhile, Indian startups are also in a tight corner, as funding dries up and the much-touted ‘100 unicorns’ narrative is also becoming difficult to sustain. They are all drastically restructuring their business models, moving away from high burn rates to enforce profitability and unit economics as global liquidity supporting startups dries up. It has not helped that some of the poster boys among unicorns like Byju’s face serious corporate governance problems.It appears that tech startups will also not attract much M&A-linked FDI this year. Overall, it doesn’t seem like a pretty picture for the Modi government, which is projecting itself as a darling of global investors.Former chief economic advisor to the Modi government, Arvind Subramaniam, said in his report that India has not been able to raise FDI inflows from the low annual average of 2% of GDP. In fact, in recent years, it has gone further down to 1.5% of GDP. China, South Korea and Malaysia received 3-4% of their GDP as FDI inflows in their high growth phase, says global investor and author Ruchir Sharma. If India were to achieve FDI inflows of 4% of GDP, it would receive close to $150 billion annually. This is nowhere in sight, though PM Modi has made heavy pitches to Japan, UAE and Saudi Arabia for chunky investments in infrastructure via their sovereign wealth funds. Even Modi’s much-vaunted personal rapport with the heads of Gulf states has not brought in the big-ticket FDI flows promised during his numerous visits since 2014. An honest appraisal of FDI flows during the last nine years of the Modi government would not present a very happy picture. But as is this regime’s wont, this is easily buried under self-congratulatory headlines.
