FDIs may shift to US under Trump 2.0 but it is unlikely to severely impact FDIs inflow to India, says SBI Report

India could see a shift in foreign direct investment (FDI) trends in the second term of Donald Trump (Trump 2.0) as President of the United States, says a research report by the State Bank of India.

The report highlighted that under his first term, Trump 1.0, the Trump administration made sweeping regulatory changes aimed at attracting investments back to the U.S., which impacted FDI inflows globally, including India.

It added that if similar policies are reintroduced in Trump 2.0 also, it could create challenges for emerging markets like India, which rely on FDI as a significant driver of economic growth. Notably, a recent Kotak report highlighted that a complete Republican control over all arms of the US government would mean increased US earnings via corporate tax cuts, higher tariffs on imports into the US and greater US fiscal deficits.

The first two could spell doom for emerging markets like India and China, since foreign investors will make a beeline for investing more money in the US markets, which will come at the cost of intense selloff in emerging markets.

However, higher fiscal deficits will eventually lead to the dollar weakening after the initial euphoria dies down.

"India may see shifts in foreign direct investments (FDIs) during Trump 2.0. The Trump 1.0 administration saw significant regulatory changes aimed at attracting investments back to the US," the SBI report stated.

However, given that India has been gradually diversifying its sources of FDI (foreign direct investments), this trend could serve as a buffer against any potential decline. Moreover, domestic institutional investors have been stepping up big time, maintaining some balance to the massive exodus of FIIs over the past month. So far in November 2024, FIIs have withdrawn Rs 19,849 crores from the cash segment in Indian markets, while DIIs have poured in Rs 14,014.18 crores as of November 10th, 2024.

"India is no longer dependent on the traditional sources of FDI inflows... unlike the recent past, FDI is now coming in many new sectors," noted the SBI report.

Unlike a decade ago, when most FDI inflows came from a limited number of traditional sectors, India is now attracting investment in a wide array of industries, including renewable energy, sea transport, medical devices, and surgical appliances. Data suggests over the last 24 years, i.e., between April 2000 and June 2024, FDIs have poured in $1,013.4 billion in the Indian economy. Out of this, 67%, i.e., $689.88 billion, has come in just the last 10 years.

The report added there are up to 12 emerging sectors showing strong FDI interest, which could help offset any loss of inflows in conventional sectors if there is a shift in global investment patterns under another Trump administration. In the last financial year, the top 5 sectors that have received the highest quantum of FDI inflow include the services sector (finance, banking, insurance, and business) which makes up about 16% of the inflows. This is followed computer software & hardware, which constitute around 15% of total FDI flows. Trading and telecommunications follows with a share of 6% each, and Automobile Industry comes next with a 5% share.

In the short term, the potential for increased U.S. tariffs, more restrictive H-1B visa policies, and a stronger dollar could bring some volatility to India's trade and investment landscape. However, in the long term, these challenges might also encourage India to expand its manufacturing capabilities, diversify export markets, and focus on becoming economically more self-reliant.

Notably, India has maintained a merchandise trade surplus with the U.S. despite tariffs imposed during Trump's first term. This indicates that Indian exports have remained resilient, and there is potential to strengthen this trade relationship further by capitalizing on emerging sectors and reducing dependency on traditional industries.

Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research Limited cautions that in the medium to long term, the trade relationship with the US may see a structural improvement. "Higher tariff and trade restrictions in the US with China should translate into better opportunities for exports of manufactured goods from India", he adds.