FDI in India: A Story of Rising Inflows and Falling Returns

Context: 

The RBI Annual Report 2024–25 presents a puzzling picture of Foreign Direct Investment (FDI) in India. While gross FDI inflows rose by 13.7%, net inflows declined drastically due to increased repatriations and disinvestments. India’s net FDI plunged to just $0.4 billion in 2024–25, compared to $44 billion in 2020–21, raising concerns over the quality and stability of foreign investments.

What is FDI and Why is it Important?

• Definition: Foreign Direct Investment (FDI) refers to capital investments made by foreign entities in Indian enterprises, typically through equity or joint ventures.

FDI’s Role in the Indian Economy:

• Capital Infusion for infrastructure, startups, and industrial expansion.

• Technology Transfer with advanced know-how, R&D, and managerial practices.

• Employment Generation through both direct and indirect jobs.

• BoP Support: Helps reduce current account deficits and boost foreign exchange reserves.

Recent Trends in FDI (As per RBI 2024–25)

• Gross FDI Inflows increased by 13.7% in 2024–25.

• Yet, average annual FDI growth was only 0.3% over the last four years.

• Repatriation and disinvestments surged, leading to net FDI dropping to $29.6 billion.

• India’s net FDI stood at just $0.4 billion, a sharp fall from $44 billion in 2020–21.

• Major inflows came from Singapore (15%) and Mauritius (~10%), indicating financial flows over productive investment.

• The manufacturing sector’s share in FDI fell to 12%, showing declining foreign interest.

• Outward FDI from India rose to $29.2 billion, nearly three times higher than five years ago.

Key Issues in India's FDI Scenario

• Disinvestments now account for 63.5% of gross FDI, compared to less than 1% in the early 2000s.

• Rise in private equity and venture capital inflows—focused on short-term profits.

• Withdrawal from productive sectors such as manufacturing and IT services.

• Decline in investments from technologically advanced countries like the US, UK, and Germany.

• UNCTAD estimates are 60% lower than RBI figures, suggesting possible overestimation in official data.

Way Forward: Policy Reforms for Sustainable FDI

• Ensure policy stability and transparency to attract long-term investors.

• Promote quality FDI in sectors like manufacturing, green energy, and R&D.

• Accelerate land, labour, and business reforms to align with investor expectations.

• Reform tax treaties to prevent round-tripping via tax havens.

• Build a system to track the real economic impact of FDI at sectoral levels.

Conclusion

While headline FDI inflows appear promising, India faces a deep structural challenge. The sharp decline in net FDI, high disinvestments, and dominance of short-term financial flows threaten long-term economic resilience. It is critical for India to shift focus from quantity to quality in FDI to sustain its growth and development objectives.