Mentor’s Comment

Foreign Direct Investment (FDI) has long been celebrated as one of the most powerful engines of India’s growth since the reforms of 1991. It brought in capital, technology, and global linkages. Yet, beneath the shining surface of record inflows lies a disquieting reality, unprecedented outflows, disinvestments, and a shift away from long-term industrial commitments. This article explores the nuanced challenges in India’s FDI ecosystem, the divergence between inflows and outflows, and the urgent need for reforms.

Introduction

FDI has been central to India’s growth story, particularly after liberalisation in 1991, modernising industries and integrating India into global markets. While e-commerce and IT saw transformative capital inflows, recent years mark a complex shift. Despite India recording $81 billion in gross FDI inflows in FY 2024–25, net retained capital fell drastically due to massive repatriations and rising outward investments by Indian firms. This has profound implications for industrial growth, job creation, and long-term economic resilience.

Divergence Between Inflows and Outflows

1. Gross inflows: $81 billion in FY 2024–25, up 13.7% from last year.
2. Sharp withdrawals: Disinvestments surged by 51% in FY 2023–24 to $44.4 billion and further to $51.4 billion in FY 2024–25.
3. Net retained capital: Fell to just $0.4 billion after accounting for outflows, a stark erosion of confidence.
4. Investor behaviour shift: From long-term commitments to short-term tax arbitrage and profit-seeking.

The Decline of Manufacturing in FDI Trends

1. Declining share: Manufacturing’s share in FDI dropped to a mere 12% of total inflows.
2. Short-term focus: Preference for rent-seeking sectors such as financial services, hospitality, and energy distribution.
3. Weak multiplier effects: Unlike manufacturing or infrastructure, these sectors do not create broad-based industrial or technological growth.

The Surge of Indian Capital Abroad

1. Outward FDI: Rose from $13 billion in FY 2011–12 to $29.2 billion in FY 2024–25.
2. Reasons cited: Regulatory inefficiencies, infrastructure gaps, and unpredictable policies.
3. Destinations: Nearly half of outflows directed toward developed economies with stable tax regimes and strategic resources.

Structural Barriers in India’s Investment Climate

1. Regulatory opacity: Complex compliance requirements discourage investors.
2. Legal unpredictability: Frequent policy shifts undermine confidence.
3. Governance inconsistencies: Contrast between reforms on paper and actual execution.
4. Dominance of tax havens: Mauritius and Singapore continue to account for bulk inflows, driven by treaty-based tax strategies.

Why the Long Term Matters

1. FDI as stability cushion: Supports balance of payments, currency stability, and external accounts.
2. Declining net inflows: Curtails India’s monetary policy flexibility.
3. RBI’s concern: Outflows align with global emerging market trends but pose systemic risks if unchecked.
4. Need for committed capital: Advanced manufacturing, clean energy, and technology sectors require sustained inflows.

What Needs to Be Done

1. Simplify regulations: Reduce compliance burden and procedural delays.
2. Ensure policy consistency: Long-term clarity to build investor trust.
3. Upgrade infrastructure: Logistics, energy, and digital backbones to attract manufacturing FDI.
4. Strengthen institutions: Predictable legal frameworks and efficient governance.
5. Invest in human capital: Education and skilling to meet industry demands.

Conclusion

India’s FDI story is at a crossroads. Gross inflows remain high, but capital is no longer staying long enough to catalyse industrial growth. The rising tide of disinvestment by foreign firms and outward FDI by Indian companies reflects systemic inefficiencies, weak confidence, and policy unpredictability. If India aspires to be a global investment hub, reforms must focus on quality, durability, and alignment of capital with national developmental goals.

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