The whys and wherefores of India’s rising outward foreign direct investments (OFDI) warrant closer examination. At one level, they reflect the fact that “in order to sell in those markets, you have to be present there”, as was noted by Chief Economic Advisor V Anantha Nageswaran. But he added that it was paradoxical that uncertainties abroad were not coming in the way of higher OFDI while there were untapped opportunities at home. The global expansion of India’s conglomerates, however, is not of recent provenance as in the late 1960s and 1970s the Aditya Birla Group made pioneering forays into Thailand and other economies of the Association of Southeast Asian Nations (ASEAN), the first pre-liberalisation wave of OFDI. Post-liberalisation, the Tata Group acquired Tetley Tea in 2000, Anglo-Dutch steel manufacturer Corus in 2007, Jaguar and Land Rover in 2008.
Knowledge Pivot
The big factor of change is that the composition of OFDI has shifted from manufacturing to financial services from FY21 to FY26, according to a business daily. Over a longer period as well, this shift is borne out in a report of the Centre for WTO Studies and Confederation of Indian Industry on “India’s outward foreign direct investment”. The manufacturing-led OFDI phase noted earlier petered out due to tighter financing conditions in the post-global financial crisis period. There was a rapid rise thereafter of OFDI in financial, insurance, business, and professional services, reflecting India’s structural evolution to a knowledge-based economy. While manufacturing’s share fell to 23.2% of OFDI in 2023 from a high of 51.9% in 2009, financial and business services have driven India’s OFDI, accounting for 37.4% of total outflows from 15.5% in 2009.
Singapore Nexus
India’s rising OFDI is also highly concentrated in a few low-tax jurisdictions like Singapore and Mauritius. As for the city-State, it would be tempting to infer that India’s investments are a base to foray into the rest of ASEAN. But that does not seem to be the case as the bulk of foreign investments into India from ASEAN are also from Singapore. The two-way flows of investments between India and Singapore have in fact led researchers to investigate whether there is round-tripping. India Inc has not followed the footsteps of the Aditya Birla Group with the Tata Group even exiting from its manufacturing presence in the region. India’s OFDI in Singapore shows a receding manufacturing footprint while it is sharply rising in finance and insurance through mergers and acquisitions to harness the bustling business opportunities of the city-State that is a leading global hub of technology and financial services.
Policy intervention is certainly needed to ensure that rising OFDI is more broad-based than being driven by conglomerates and concentrated in low-tax jurisdictions. Top officials earlier indicated to FE that the government wants to create more multinational corporations (MNCs). India Inc is being encouraged to set up permanent rather than camp offices to pursue tenders in countries where they see opportunities. While a presence is necessary to sell more in markets, OFDI need not be at the expense of investing domestically. When companies invest overseas, they keep a buffer, as a result of which their domestic investments are bound to remain stagnant. The rationale behind the creation of MNCs is not only that they would see returns in terms of dividends and royalties coming in by the 2030s, but also create more two-way trade flows.