Context

• Recently, the World Investment Report 2021 by the UN Conference on Trade and Development (UNCTAD) has been released.

Key Findings World Investment Report 2021

Indian Scenario

• India received USD 64 billion in FDI in 2020, the fifth largest recipient of inflows in the world.
  • FDI increased 27 per cent to USD 64 billion in 2020 from USD 51 billion in 2019, pushed up by acquisitions in the ICT industry.
  • Major project announcements in the ICT industry included a USD 2.8 billion investment by online retail giant Amazon in ICT infrastructure in India.
• Covid-19 second wave in the country weighs heavily on the country’s overall economic activities but its strong fundamentals provide optimism for the medium term.
• Announced greenfield projects in India contracted by 19 per cent to USD 24 billion.
• The second wave in April 2021 severely hit main investment destinations such as Maharashtra, which is home to one of the biggest automotive manufacturing clusters (Mumbai-Pune-Nasik-Aurangabad) and Karnataka (home to the Bengaluru tech hub), exposing the country to production disruption and investment delays.
• FDI to India has been on a long-term growth trend and its market size will continue to attract market-seeking investments. In addition, investment into the ICT industry is expected to keep growing.
• Export-related manufacturing, a priority investment sector, will take longer to recover, but government facilitation can help.
• India’s Production Linkage Incentive scheme, designed to attract manufacturing and export-oriented investments in priority industries including automotive and electronics, can drive a rebound of investment in manufacturing.
• Investments from India are expected to stabilise in 2021, supported by the country’s resumption of Free Trade Agreement (FTA) talks with the European Union (EU) and its strong investment in Africa.

South Asia and India

• FDI in South Asia rose by 20 per cent to USD 71 billion, driven mainly by strong Mergers and Acquisitions (M&As) in India, amid India’s struggle to contain the Covid-19 outbreak, robust investment through acquisitions in ICT (software and hardware) and construction bolstered FDI.
  • Cross-border M&As surged 83 per cent to USD 27 billion, with major deals involving ICT, health, infrastructure and energy.
• FDI outflows from South Asia fell 12 per cent to USD 12 billion, driven by a drop in investment from India.
  • India ranked 18 out of the world’s top 20 economies for FDI outflows, with 12 billion dollars of outflows recorded from the country in 2020 as compared to 13 billion dollars in 2019.
• While the Asian region has managed the health crisis relatively well, the recent second wave of Covid-19 in India shows that significant uncertainties remain,
  • This has major impacts on prospects for South Asia.
  • A wider resurgence of the virus in Asia could significantly lower global FDI in 2021, given that region’s significant contribution to the total.
• FDI inflows to developing Asia grew by 4 per cent to USD 535 billion in 2020, making it the only region to record growth and increasing Asia’s share of global inflows to 54 per cent.
  • Some of the largest economies in developing Asia such as China and India recorded FDI growth in 2020, the rest recorded a contraction.
• The report added that FDI inflows in Asia are expected to increase in 2021, outperforming other developing regions with a projected growth of 5-10 per cent.
  • Signs of trade and industrial production recovering in the second half of 2020 provide a strong foundation for FDI growth in 2021.
  • Yet, substantial downside risks remain for the many economies in the region that struggle to contain successive waves of Covid-19 cases and where fiscal capacity for recovery spending is limited.

Global Scenario

• Global flows of Foreign Direct Investment (FDI) have been severely hit by the Covid-19 pandemic.
• In 2020, FDI fell by one third to USD 1 trillion, well below the low point reached after the global financial crisis of 2007-08.
• Greenfield investments in industry and new infrastructure investment projects in developing countries were hit especially hard.
  • A greenfield investment is a type of FDI in which a parent company creates a subsidiary in a different country, building its operations from the ground up.
  • In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices, and living quarters.
• This is a major concern, because international investment flows are vital for sustainable development in the poorer regions of the world.

  

• Lockdowns caused by Covid-19 around the world slowed down existing investment projects and prospects of a recession led Multinational Enterprises (MNEs) to reassess new projects.
• The pandemic boosted demand for digital infrastructure and services globally. This led to higher values of greenfield FDI project announcements targeting the Information and Communication Technology (ICT) industry, rising by more than 22 per cent to USD 81 billion.

Key Suggestions

• Increasing investment to support a sustainable and inclusive recovery from the pandemic is now a global policy priority.
  • This entails promoting investment in infrastructure and the energy transition, in resilience and in health care.
• The sustainable investment market needs to transition from a niche to a mass market that fully integrates sustainability in business models and culture, leading up to 2030 and beyond.
• The market needs to tackle concerns of greenwashing and SDG-washing, and address its geographical imbalance.
  • Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.
  • It is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
• Much work has been done over the past decade by asset owners, financial institutions, exchanges, regulators and policymakers. Better coordination and effective monitoring of their activities can help accelerate the transition.
• UNCTAD, together with partners, will launch the UN Global Sustainable Finance Observatory, which will address the challenges of fragmentation in standards, proliferation in benchmarking, complexity in disclosure, and self-declaration of sustainability.
  • The observatory will integrate the relevant instruments and outputs to facilitate the assessment, transparency and integrity of sustainable finance products and services.
  • It will work in tandem with the standards-setting processes of the financial industry and regulatory bodies to promote the full and effective integration of sustainable development into all aspects of the global financial ecosystem.

Source: IE

Key Inputs:

https://unctad.org/system/files/official-document/wir2021_en.pdf

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