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ON AUGUST 22, 2022, the Central government announced a review of overseas investment framework to bring clarity on direct and portfolio investments abroad. It brought various transactions under automatic route to enhance ease of doing business. Overseas investments rules and regulations superseded the earlier framework governed by Foreign Exchange Management (Transfer Or Issue Of Any Foreign Security) Regulations, 2004, and Foreign Exchange Management (Acquisition And Transfer of Immovable Property Outside India) Regulations, 2015. The government said the framework is aligned with current business and economic dynamics. The changes were projected as important “in view of evolving needs of businesses in India” that needed to become part of global value chains in an increasingly integrated global market.

A year later, in August 2023, India’s outward foreign direct investment (OFDI) was $595 million, the lowest in 17 months since February 2022. The cumulative outflow was $4.2 billion in first five months of FY24. It was $13.3 in FY23 as against $18.1 billion in FY22. The slowdown was a grim reminder that investment decisions are market-driven — poor global economic conditions in this case — and increasing ease of doing business can aid but not trigger overseas investment by Indian companies. “All inbound and outbound investments are a result of economic activity. Considering the buoyancy in Indian economy and wide consumer base, more and more multinationals are setting up offices in India. Indian companies will also invest overseas depending on business opportunities. As global economic situation improves, Indian companies will invest overseas,” says Puneet Gupta, partner–Tax, KPMG in India.

One year is perhaps too early to gauge the impact of a reform but finance ministry data says OFDI has been in the $13 billion to $15 billion range since FY17 with FY22 being an aberration (See: Overseas Direct Investment). Whether India Inc. makes a splash globally or not, the current trend indicates economic resilience and promise of far higher OFDI in the future. But first, let’s see what the numbers say.

Official Data

Monthly data compiled by finance ministry says 40% OFDI during April 2021-August 2023 went to financial, business and insurance services sectors. Manufacturing followed with 24% share. The category of trade, hotels and restaurant, with 17% share, was at third position. The data says Singapore, Mauritius, the U.S., the Netherlands and the U.K. were top destinations for OFDI during the period. In fact, the five have been at the top, in the same order, since April 2000. So, the top sectors have more or less remained the same, as have the destination countries.

But there is a twist. The data doesn’t give the real picture. Data of cumulative overseas investment given by Indian companies in each country will not tally with OFDI figures published by the finance ministry. The reason: while U.S. and U.K. are major destinations for Indian investments, Singapore, Mauritius and Netherlands are mere routes through which investments flow to destination countries. Fluctuations in OFDI to specific countries cannot be seen as a proxy for investment opportunities in those countries as the flows are also driven by a host of factors ranging from the structure of the deal to legal, regulatory and tax structures of the recipient country. The destination of the flows could even be India if money to acquire a local asset from a foreign owner has been routed from abroad.

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