Context:

• Foreign direct investment (FDI) has been a key driver of India’s growth since the 1991 reforms, modernising industries, fostering innovation, and integrating India with global markets. Sectors like e-commerce and IT saw transformative FDI inflows.
• However, recent trends show a decline, with much of the capital now geared toward short-term profit rather than long-term industrial development.
• Meanwhile, rising overseas investments by Indian firms raise concerns about the strength of the domestic investment climate.
• This article highlights the evolving trajectory of FDI in India — from its historic role in driving growth and modernization, to emerging concerns over declining net inflows, rising outflows, and structural challenges that undermine long-term developmental impact.

Rising FDI Inflows but Sharper Outflows

• India’s gross FDI inflows rose to $81 billion in FY 2024-25, up 13.7% from the previous year, reflecting continued investor interest.
• However, alongside inflows, foreign investors are increasingly withdrawing capital.
• Between 2021-25, India received $308.5 billion in FDI, but $153.9 billion was repatriated or disinvested, reducing the net inflow sharply.
• FDI net inflows — gross inflows minus repatriations and repayments — have fallen drastically since FY 2021-22.
• After adjusting for outward FDI by Indian firms, India retained only $0.4 billion in FY 2024-25. This limited retention undermines FDI’s developmental impact.

Shift to Short-Term Investments

• Investor behaviour shows a move from long-term industrial commitments to short-term profit-driven flows.
• Disinvestments rose by 51% to $44.4 billion in FY 2023-24 and further to $51.4 billion in FY 2024-25, accounting for over 63% of inflows.
• Manufacturing, once a major FDI sector, now makes up just 12% of inflows, reflecting declining long-term commitments.

Surge in Outward Indian Investments

• FDI outflows by Indian firms rose from $13 billion in FY 2011-12 to $29.2 billion in FY 2024-25.
• Companies cite regulatory inefficiencies, infrastructure gaps, and policy uncertainty as reasons to invest abroad.
• This capital flight weakens domestic growth, jobs, and innovation.
• Systemic Barriers Remain
  • Despite reforms and better global rankings, India still faces structural barriers like regulatory opacity, inconsistent governance, and legal unpredictability.
  • These issues discourage both foreign investors and domestic firms, reinforcing a cycle of weak capital retention and outward flows.

FDI and India’s Long-Term Growth Challenges

• While gross FDI inflows appear strong, underlying trends reveal weakening confidence in India’s economy.
• Rising disinvestments, capital outflows, and reliance on tax-haven hubs like Singapore and Mauritius suggest much of the inflow is short-term and profit-driven rather than developmental.
• Traditional industrial investors from the U.S., Germany, and the U.K. have reduced their role, while funds now flow into services and rent-seeking sectors with limited multiplier effects compared to manufacturing or technology.
• This shift erodes long-term growth potential and economic resilience.
• Declining FDI net inflows also threaten India’s macroeconomic stability, affecting balance of payments and monetary flexibility.
• The RBI has warned that while outward flows mirror trends in other emerging economies, they carry risks, as nearly half of Indian FDI outflows head to developed nations offering better tax regimes, stability, and resources.
• To reverse this, India must simplify regulations, ensure policy consistency, and focus on infrastructure, skills, and technology to attract and retain long-term, productive investments.

Building a Stronger FDI Framework for India

• For India to emerge as a global investment hub, it must prioritise the quality and sustainability of FDI over headline figures.
• Mere inflows without alignment to national priorities risk masking economic weaknesses.
• What India needs is long-term, committed capital that strengthens domestic capabilities.
• Achieving this requires streamlined regulations, reliable policies, upgraded infrastructure, and institutional trust.
• Equally important is investment in human capital to attract high-value sectors like advanced manufacturing, clean energy, and technology.
• India now faces a decisive moment in shaping its FDI ecosystem for durable growth.