Karnataka sees 46 per cent dip in FDI in first half of current fiscal

Karnataka witnessed a 46 per cent dip in foreign direct investment from USD 5.3 billion in the first-half of 2022-23 to about 2.8 billion in the first six months of the current fiscal, due to reduced funding for start-ups and a drop in FDI inflow in the IT/software sector, the Mid-Year Review of State Finances tabled in the Assembly on Thursday said. Karnataka has seen a sharp decline in funding for startups, especially in Bengaluru, it said.

”Due to slowdown in advanced economies, Karnataka witnessed a 46 per cent decrease in FDI, dropping by USD 2.5 billion from USD 5.3 billion in the first half of FY23 to about USD 2.8 billion in the first half of FY24, mainly due to reduced funding for start-ups and a drop in FDI inflow in the IT/Software sector,” the review said.

Noting that the Private Equity/Venture Capital (PE/VC) sector has experienced a downturn, attributed to amplified uncertainty caused by macroeconomic challenges and geopolitical conditions, influencing the global VC funding scene, it said, ”the Indian start-up ecosystem grapples with heightened investor caution and valuation concerns.” Start-up funding activity in India decreased by approximately 70 per cent (USD 4.7 billion), dropping from USD 6.6 billion in Q1 FY23 to USD 1.9 billion in Q1 FY24, the review said. Bengaluru, renowned as India’s start-up capital and home to 40 per cent of India’s unicorns, is facing the impact of these challenges, it said. Start-up funding activity in Karnataka dropped by approximately 80 per cent (USD 2.8 billion), decreasing from USD 3.4 billion in Q1 FY23 to USD 0.6 billion in Q1 FY24. Another significant factor contributing to the 23.9 per cent drop in FDI in India is the services and computer software market, witnessing a substantial 60 per cent decline (USD four billion), the review said.

Karnataka, being the IT hub of India with a majority of global IT companies headquartered in Bengaluru, amplifies the impact for the state. Monetary policy tightening has squeezed the aggregated demand resulting in a downturn in foreign direct investment, the review, while analysing the global economic scenario, said. Due to ongoing Russia-Ukraine conflict and the outbreak of war between Israel and Palestine, the global supply chain, and trade outlook is adversely impacted.

Sounding upbeat about Karnataka, it said the state is one of the fastest growing economies in the country, and its economic growth is steady, stable and resilient, compared to other States. The economic outlook for Karnataka in September 2023 is positive. The State economy is expected to continue to grow at a strong pace, driven by the services sector. The industrial sector is also expected to perform well. The State displays strong revenue collection in the country, and it now ranks second in the nation for GST collections, it added. However, monsoon failure has had adverse impact on agricultural production and hydroelectricity generation, which in turn poses adverse risk to the state’s economic growth, it cautioned. It is expected that the five Guarantee schemes would not only lead to distributive justice but also would boost the economic growth of the state in the short run by increasing consumption.

The review said with necessary structural reforms and enhanced ”Ease of Doing Business” coupled with higher Capital Expenditure is expected to maintain the high growth trajectory of the State in the long run.