As manufacturing sector disappoints, FDIs chase services sector: Ind-Ra

Despite the Narendra Modi government’s high-octane push to boost manufacturing through the ‘Make in India’ initiative, foreign investors continue to chase bets in the services sector, a domestic rating agency said on Wednesday.

India Ratings and Research also said a bulk of the foreign direct investment (FDI) in manufacturing is not greenfield or fresh investments which should otherwise be the aspirational aspect.

despite the government’s effort to attract more investments in the manufacturing sector through ‘Make in India’ campaign, the FDI inflow is still tilted in favour of 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, the agency, an arm of Fitch Ratings, said.

It said services sector FDI increased to USD 153.01 billion in the services sector during April 2014 to March 2022 from USD 80.51 billion during to April 2000 to March 2014, while the increase in manufacturing was less fast at USD 94.32 billion as against USD 77.11 billion.

The agency reminded that in 2014, India launched a flagship programme called ‘Make in India’ to facilitate investments across sectors, but with a special focus to build a world-class manufacturing sector and followed it up with the PLI scheme across 14 manufacturing sectors.

The services sector accounted for the highest share in FDI between 2000-2014 as well, the agency said, adding that within services, trading, telecommunications, banking/insurance, IT/business outsourcing and hotels/tourism are the favourites.

In manufacturing, the FDI has been concentrated in segments such as auto, chemicals, drugs and pharmaceuticals, metallurgical and food processing.

Computer software and hardware have done well, where the FDI increased to USD 72.7 billion during April 2014 to March 2022, from just USD 12.8 billion during April 2000 to March 2014, the agency said, adding that this sector witnessed further traction after the roll out of PLI (production linked incentive) scheme with major global brands such as Apple, Samsung, Flextronics, and Nokia announcing big investments in India.

The agency said the country has done well among emerging market economies in terms of attracting FDI, with its share increasing to 6.65 per cent in 2020 and declining due to COVID impact to 2.83 per cent in 2021.

From a region perspective, FDI is highly clustered around few states, the agency noted, hinting that the foreign fund flows may not be helping the cause of broadbased development across the country.

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

there is no specific reason for clustering of FDIs around only few states, Ind-Ra believes perhaps it is due to the enabling conditions in these states, the report said.

As a result of this, three corridors of FDI have come up which include 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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