Indian FDI Inflow Rises But Fails to Aid Capital Formation

According to a newly released report by Deloitte, India needs an annual average of $55 to $65 billion in foreign investment towards capital formation over the upcoming years to reach the government’s goal of creating a $5 trillion economy. The report estimates that at an annual GDP growth of 7 percent and inflation approaching 6 percent, the goal would be reached by FY 2026/27. At GDP growth of 6 percent and inflation at around 4 percent, the target would come into reach two years later.

Based on government data, Deloitte estimates that the net capital inflow that is actually contributing to capital formation in India was only at $24 billion in India last fiscal year, despite foreign direct investment reaching a new high of almost $82 billion. Looking at both figures side by side it becomes apparent that capital forming inflow hasn’t experienced the same consistent growth as FDI in general. In FY 2020/21, capital inflow was only responsible for 3 percent of gross capital formation in the country, leaving the rest to domestic investment.

Because of the declining savings rate in the country that was lowered even more by the coronavirus pandemic, Deloitte believed that capital formation cannot in the future be achieved sufficiently by domestic means, especially with regards to the ambitious government target. The report recommends to channel FDI into capital-intensive as well as more diverse sectors and to raise capital productivity to ensure foreign funds are actually building assets.