A complex turn in India’s FDI story

Foreign direct investment (FDI) has remained a major contributory factor in India’s economic landscape since the first wave of investments began in the wake of the 1991 reforms. FDI has played a crucial part in the modernisation of India’s industrial base, leading to technological innovation and linking the country more deeply with global markets. E-commerce and the computer hardware and software sectors are two areas that saw a massive influx of FDI, changing these sectors profoundly. However, recent trends suggest a complex turn as investments go downhill. While India is still able to attract foreign capital, the central part of these investments has been aimed at short-term profit gains rather than long-term industrial development. At the same time, Indian firms are investing heavily abroad, raising questions about the health of the domestic investment climate.

Also read | Why has net FDI inflow plummeted?

Divergence between inflows and outflows

Recent numbers may seem encouraging. Gross FDI inflows reached $81 billion in FY 2024-25, up 13.7% from the previous year. Between 2011 and 2021, FDI climbed from $46.6 billion to $84.8 billion, highlighting India’s investor appeal. After peaking in FY 2021-22, FDI inflows fell to $71 billion in FY 2023-24 before recovering slightly. In the four years after the COVID-19 pandemic, gross inflows recovered at an annual rate of 0.3%, while disinvestments and repatriations by foreign investors grew at 18.9% annually.

This divergence between inflows and outflows is profound. Though India saw $308.5 billion in gross FDI inflows during the post-pandemic period, foreign investors also withdrew or repatriated $153.9 billion. More telling is the decline in FDI net inflows — gross inflows minus repatriations and loan repayments — which sharply declined from FY 2021-22 to FY 2024-25. After adjusting for outward FDI by Indian companies, the net retained capital within India fell to an alarming $0.4 billion. Thus, a large outflow limits FDI’s long term development impact. These figures indicate that the capital does not stay long enough, limiting its long-term developmental impact.

The sharp rise in disinvestments has significantly contributed to this deterioration. In FY 2023-24, this surged by 51% to $44.4 billion and rose again in FY 2024-25 to $51.4 billion. They now represent over 63%, signalling a marked shift in investor behaviour — from long-term strategic commitments to short-term profit-seeking, often through tax arbitrage and treaty-based routing. Short-term investments aimed at rapid financial returns replace those contributing to sustained industrial or technological development. For instance, what was once a primary sector to attract FDI, the manufacturing sector saw incredible outflows, with its share dropping to a meagre 12% of total FDI.

The declining FDI net inflow suggests that capital is not staying long enough to contribute meaningfully to the country’s economic landscape. A lack of sustained investment in manufacturing, infrastructure and innovation hampers India’s growth trajectory. The surge in outward investment by Indian firms is another cause for concern. FDI outflows have grown from $13 billion in FY 2011-12 to $29.2 billion in FY 2024-25. Many firms blame regulatory inefficiencies, infrastructure gaps and unpredictable policy frameworks for looking beyond India’s borders. This outflow of capital weakens the domestic economy, hampering job creation, arresting innovation and stifling industrial growth.

Despite improving rankings and government reforms, structural barriers such as regulatory opacity, legal unpredictability and inconsistent governance continue to discourage foreign and domestic investors. The growing parity in behaviour between foreign firms withdrawing funds and Indian firms investing abroad highlights deeper systemic lacunae that must be addressed if India hopes to reverse the trend.

The long term is what matters

Short-term capital inflows lack potential to support long-term growth. India must prioritise reforms that reward long-term commitments to build a more resilient investment ecosystem. This includes simplifying regulations, ensuring policy consistency, investing in infrastructure, and expanding educational and skill-building initiatives to meet evolving industry demands. India needs to proactively work to attract and retain investment aligned with its developmental goals in a global economic environment, especially those that help technological change.

The gross FDI figures may appear promising but they seem to hide more than they reveal. Rising disinvestments, shifting investment patterns and growing capital outflows reflect a deeper erosion of confidence in India’s economic outlook. Further, the dominance of financial centres such as Singapore and Mauritius in India’s FDI inflows suggests that much of this capital may be driven by tax strategies rather than productive investment. Moreover, traditional sources of industrial FDI such as the United States, Germany, and the United Kingdom have pulled back on their involvement.

Services and rent-seeking sectors such as financial services, energy distribution and hospitality saw increased capital flow. Despite their contribution to GDP, such investments lack the broader multiplier effects typically associated with manufacturing, infrastructure or advanced technology. This shift is contributing to weaker long-term growth potential and reduced economic resilience.

India’s macroeconomic stability is also closely tied to the health of its FDI ecosystem. FDI inflows serve as a source of capital, support the balance of payments and provide a cushion for the currency. As FDI net inflows decline, the implications for external account management and monetary policy flexibility become more concerning. The Reserve Bank of India has acknowledged this trend, noting that while rising outflows are in line with trends in other emerging economies, they also present risks that need to be managed carefully. Around half of India’s FDI outflows are directed toward developed economies, attracted by favourable tax regimes, market stability, and access to strategic resources.

What needs to be done

If India seeks to lead as a global investment hub, it must look beyond headline FDI figures and focus on the quality, durability and strategic alignment of capital inflows. An overemphasis on gross figures neglecting their origin or economic impact risks masking deeper vulnerabilities. What the country truly needs is committed capital investment that builds domestic capability and furthers national priorities. Streamlined regulations, infrastructure upgrades, policy stability and renewed trust in institutions may help fulfil these priorities. Equally crucial is investing in human capital to attract high-value sectors such as advanced manufacturing, clean energy, and technology. India stands at the crossroads in the FDI conundrum.

Amarbahadur Yadav is Assistant Professor of Economics, Zakir Husain Delhi College (Evening), University of Delhi

Published – September 08, 2025 12:08 am IST

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