GS 3 – Economy
Highlights
- Gross FDI inflows in FY 2024-25 rose to $81 billion, a 13.7% increase from the previous year.
- However, disinvestments and repatriations by foreign investors have surged at an annual rate of 18.9% since COVID-19.
- Net retained capital fell sharply to $0.4 billion in FY 2024-25, reducing the long-term development impact.
- FDI outflows by Indian firms increased from $13 billion (2011-12) to $29.2 billion (2024-25), largely due to regulatory inefficiencies and infrastructure bottlenecks.
Detailed Insights
- The gap between inflows and outflows is widening, with disinvestments spiking by 51% in FY 2023-24, signaling a preference for short-term profits.
- The manufacturing sector’s FDI share has dwindled to just 12%, pointing to weak investments in manufacturing, infrastructure, and innovation.
- Structural challenges like regulatory opacity, legal uncertainty, and inconsistent governance hinder sustained investment.
- The dominance of Singapore and Mauritius in FDI flows suggests that much of the investment is driven by tax arbitrage rather than real productive activity.
- Declining net FDI inflows pose risks for external account stability and RBI’s monetary policy flexibility.
- Policy priorities: India must attract long-term investors by simplifying regulations, ensuring policy predictability, improving infrastructure, and investing in skills development.
Key Concepts
- Foreign Direct Investment (FDI): Cross-border investment where an entity in one country establishes or expands business interests in another.
- Disinvestment: Selling or liquidating an asset or subsidiary.
- Tax Arbitrage: Exploiting differences in tax regimes to minimize tax burden.