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Globally, foreign direct investment (FDI) collapsed in 2020, plummeting 42 per cent from $1.5 trillion in 2019 to around $859 billion. Data show that FDI globally has undergone crests and troughs every 10 years.
In the early 1980s it dropped (-) 16 per cent, followed by a drastic fall during the end of the Cold War in 1991, when FDI fell (-) 25 per cent, and then again around Y2K in 2001 when it experienced a (-) 43 per cent dip. Post the Lehman crisis during 2008-09, the FDI exhibited an average negative growth of almost 20 per cent. And, during the recent pandemic too, it witnessed a similar low of (-) 42 per cent.
The interesting part is that Indian investments abroad remained largely unscathed by such global financial crises till the early 2000s, and it remained so till the first decade of this century.
In fact, Indian companies found an opportunity overseas during the 2008 crisis when they ventured abroad to reap the benefits of low asset prices globally. As a result, while the developed world was reeling under multiple financial turmoil, India, in contrast, experienced a phenomenal surge in overseas direct investments (ODI), which actually had begun in 2006 and peaked during 2008.
However, given the continued sluggish growth and the inability of overseas assets to bounce back, many such firms did burn their fingers. This resulted in a slump in the ODI with many succumbing to the stringent NPA regulations back home. According to RBI data, the average ODI from India during FY12 till FY20 was around $26 billion, with a significant dip being observed since FY16.
Further fall likely
FY21, in all probability, will experience a further fall as is evident from the 11-month cumulative ODI touching $17 billion. This has largely been due to the pandemic-induced uncertainty which is likely to continue till 2022. This may also have been the largest single fall in overseas investments from India in more than a decade.
During the first 11 months of FY21, ODI from India experienced de-growth across sectors ranging from transport, storage and communication services, to construction and manufacturing. The monthly average ODI from India during April-February 2021 stood at $1.5 billion against $2.2 billion during the same period in the previous year.
It remains to be seen how FY22 unfolds as economies recognise the new normal amidst the ongoing pandemic.
Even if asset prices abroad are found to be attractive, it would be worthwhile for Indian entities to look back at the lessons learnt from 2010, when many jumped onto the bandwagon. Countries in Europe which have been in ventilator ever since the global financial crisis continue to grapple with the pandemic and will take many more years to stabilise. In another comparison with 2010, the market in 2021 is poised to recover on the heels of a post-recession rally, and hence calls for further caution in investing overseas.
While Indian companies have been exploring developed markets, it may be worth looking at emerging economies as well, especially under the changing geopolitical situation.
A case in point would be ASEAN countries (sans Singapore), which provide access to wider and growing markets, with some of them being a part of Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) blocs as well. An early-mover advantage in select sectors in some of the African economies, post the African Continental Free Trade Agreement, will be a good and potent choice given the prospects the region provides.
Though Indian Bilateral Investment Promotion Agreement was designed more to attract inward FDI than protect outward FDI, it is an opportune time for the government to give equal weightage as they revisit the various such agreements signed by India.
Expeditions of Indian companies in the future would be interesting as the world embraces a new normal where every country attempts to protect their own interests. There is many a slip between the cup and the lip, and hence learning from past experiences, low hanging assets should be traded with restraint and greater prudence.
The writer is Senior Economist,
EXIM Bank. Views are personal
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