Fragile Attractiveness: India’s FDI Vulnerability Exposed

Context:
The editorial highlights growing concerns over India’s investment attractiveness, as foreign direct investment (FDI) flows turned negative for the third consecutive month in October 2025. Despite policy measures such as corporate tax cuts and Production Linked Incentives (PLI), India’s FDI performance appears highly sensitive to external shocks, particularly U.S. trade policies, raising questions about the depth and resilience of investor confidence.

Key Highlights:

FDI Trends in 2025

• Net FDI turned negative for the third straight month in October 2025.

• Net FDI inflows:

  • April–July 2025: $10.7 billion, more than three times the inflows during the same period last year.

  • By end-October 2025: Cumulative net FDI fell sharply to $6.2 billion.

• Following U.S. tariff announcements:

  • August: $622 million outflow

  • September: $1.7 billion outflow

  • October: $1.5 billion outflow

Impact of U.S. Tariffs

• The U.S. announced tariffs beginning at 25%, later raised to 50% in July 2025.

• These measures triggered a sudden reversal in FDI sentiment.

• Highlighted India’s vulnerability to global trade policy shifts.

Gross vs Net FDI Dynamics

• Gross FDI inflows in August and October 2025 declined on a year-on-year basis.

• This contrasted with a 33% growth rate recorded during April–July 2025.

• Indicates weakening momentum despite earlier optimism.

Outward Investment by Indian Firms

• Rising FDI outflows partly reflect Indian companies investing abroad.

• While this signals increasing global competitiveness, it also raises concerns about:

  • Domestic investment climate

  • Adequacy of incentives for reinvestment within India

Limits of Policy Measures

• Measures such as:

  • Corporate tax rate cuts

  • PLI schemes

  • Tax reductions
    have not ensured durable investor confidence.

• The editorial argues that India’s attractiveness remains fragile and externally driven, rather than structurally robust.

RBI’s Assessment

• The Reserve Bank of India (RBI) noted that:

  • Uncertainty surrounding the India–U.S. trade deal

  • Prompted foreign portfolio investors (FPIs) to exit Indian equities.

• Highlights linkages between FDI, portfolio flows, and trade diplomacy.

Relevant Prelims Points:

• Issue: Declining and volatile FDI inflows.

• Key Data:

  • Net FDI negative for three months (Aug–Oct 2025)

  • Cumulative net FDI: $6.2 billion

• Key Terms:

  • Foreign Direct Investment (FDI)

  • Production Linked Incentives (PLI)

  • Tariff

• Institutions:

  • Reserve Bank of India

• Impact:

  • Investment uncertainty

  • Capital flow volatility

Relevant Mains Points:

• Economic Dimensions:

  • Dependence on global trade conditions undermines investment stability.

  • Difference between policy-led attractiveness and structural competitiveness.

• International Relations Linkages:

  • Trade tensions with major economies affect capital flows.

  • Importance of predictable trade diplomacy.

• Governance and Policy Issues:

  • Incentive-driven investment may not substitute for:

    • Regulatory certainty

    • Contract enforcement

    • Stable trade regimes

• Way Forward:

  • Strengthen institutional and regulatory frameworks.

  • Diversify FDI sources beyond a few major economies.

  • Improve ease of doing business beyond fiscal incentives.

  • Align trade, tax, and investment policies for consistency.

  • Enhance domestic demand and infrastructure to retain capital.

UPSC Relevance (GS-wise):

• GS Paper III – Economy: FDI trends, investment climate, capital flows.

• GS Paper II – International Relations: Trade tensions, tariff impacts on economy.