Syllabus

GS-3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Context: 

The recently released World Investment Report 2025 has flagged a weakening global investment flow amid geopolitical tensions and trade disputes. 

More on the News

• The World Investment Report focuses on trends in foreign direct investment (FDI) worldwide, at the regional and country levels and emerging measures to improve its contribution to development.

• It is published by the United Nations Conference on Trade and Development (UNCTAD).

Key Highlights of the Report

Global Context

• Falling Global FDI: It fell by 11% to USD 1.5 trillion in 2024 on account of escalating trade tensions, geopolitical fragmentation and economic volatility.

• US Dominance: The US remains both the top source and destination for foreign direct investment (FDI).

• Regional FDI Growth: Africa saw a record 75% rise in FDI, with a mega infrastructure project in Egypt a major contributor. Asia remained the top recipient region, led by ASEAN countries and India. 

• China Slowdown: FDI inflows dropped by 29% for China, reflecting trade tensions and geopolitical risk surrounding its market. 

• Shifting Supply Chain: Multinationals are restructuring supply chains towards South-East Asia, Eastern Europe and Central America at an accelerated rate.

• Nearshoring: Cross-border mergers and acquisitions (M&As) deals are increasingly shifting to regional markets amid tighter regulations and geopolitical tensions.

• Slump in Infrastructure Financing: International project finance (IPF) – a key source of funding for infrastructure – dropped 26%. Least developed countries were hit hardest.

• FDI Growth in Tech Sectors: IPF rose in semiconductors (+140%) and the digital economy (+107%).

• Declining SDG Investments: Sectors critical to the Sustainable Development Goals (SDGs) witnesses declining investments. This includes infrastructure (-35%), renewable energy (-31%), water and sanitation (-30%) and agrifood systems (-19%).

Indian Context

• FDI Inflow: India saw an FDI inflow of USD 28 billion in 2024, ranking 15th among the top FDI destinations.

• This was despite the 2% decline compared to the previous year.

• Digital Economy: India attracts 22% of the greenfield investment in digital services in the Global South 2020-24, making it the largest recipient within the group.

• Leading Sectors: There has been strong growth in semiconductors, EV components, basic metals projects, and digital infrastructure.

• Leading Investor: Indian investors also climbed to in FDI outflows, with a 20% increase in greenfield announcements, placing India among the world’s top 10 investor countries.

• Carbon Market: India is the largest carbon credit issuer in the Verra Registry (Verra is a standard-setter and certifier of voluntary carbon offsets), having issued 28 million carbon credits (measured in tons of CO2 equivalent).

The Report’s Recommendations 

• Sustainable Finance: This should be scaled through measures like blended finance and guarantees to unlock private capital, and cross-border cooperation to align standards and build trust.

• Digital Economy: Strengthening regulatory frameworks, building digital skills, and encouraging technology transfers can help harness the potential of international investment for this sector.

• Development-Oriented Investment: Capital flows should be steered towards sustainable infrastructure, digital inclusion, renewable energy and productive sectors.

• Governance Framework: Improve global investment governance by updating international rules to protect public interests, ensure fair treatment for investors and preserve national policy space.

Question

Analyse the challenges and opportunities for the Indian economy posed by the recent shifts in global investment trends. What should the government do to leverage the potential benefits of this shift? 

PYQ Linkage

Discuss the impact of FDI entry into multi-trade retail sector on supply chain management in commodity trade pattern of the economy. (GS-3; 2013)