Investment Decline in FDI Inflows

Context

According to recent data from the Reserve Bank of India (RBI), India has witnessed a sharp decline in net Foreign Direct Investment (FDI) inflows in FY 2024–25, despite a moderate rise in gross inflows.

Key Highlights from RBI Data

1. Gross vs Net FDI Inflows

• Gross FDI Inflows: India attracted $75.1 billion in gross FDI during April–February FY 2024–25, up from $65.2 billion in the previous year.
• Net FDI Inflows: Plummeted by over 96%, reaching only $353 million compared to $10.1 billion in FY 2023–24.
• FDI-to-GDP Ratio:
  • Gross inflows as a share of GDP declined from 3.1% (2020–21) to 2.1% (2024–25).
  • Net FDI as a percentage of GDP fell from 1.6% to virtually zero over the same period.

2. Sectoral and Regional Breakdown

• Top Sectors:
  • Services: 19% of total inflows
  • Computer Software & Hardware: 16%
  • Trading: 8%
• Top States Receiving FDI:
  • Maharashtra: 39% of total equity inflows
  • Karnataka: 13%, Delhi: 12%
• Top Source Countries:
  • Singapore (30%), Mauritius (17%), United States (11%)

3. Rise in Outward FDI

• Outward FDI (OFDI) by Indian firms surged to $29.2 billion, marking a 75% increase from the previous year.
• Major destinations for OFDI include Singapore, US, UAE, Mauritius, and Netherlands.

4. Net FDI Explained

Net FDI = Gross FDI Inflows − (Repatriation by Foreign Companies + Outward FDI by Indian Companies)

Reasons Behind the Decline in Net FDI

1. Increased Repatriation and Disinvestment
   • Repatriations rose by 15.7%, from $44.5 billion to $51.5 billion in FY25.
   • This was driven by profit-taking by foreign investors, especially after major IPOs (e.g., Swiggy).
2. Surge in Outward Investments
   • Indian companies are increasingly investing abroad to tap into global expansion opportunities.
3. Global Economic Headwinds
   • Investor sentiment was shaken by new tariff hikes from the US (April 2025).
   • Weak global demand has made India’s export-driven sectors less appealing.
4. Geopolitical Instability
   • Conflicts in the Middle East and worsening global trade relations have dampened investor confidence.
   • Renewed India-Pakistan tensions in early 2025 added to market uncertainty.
5. Investment Cycle Maturity
   • Many earlier FDI projects are entering the exit phase, with companies repatriating profits after completing their investment horizon.

Implications and Concerns

Positive Interpretation

• The RBI sees the trend of rising outward FDI and repatriation as signs of a mature capital market, where investors enjoy smooth entry and exit mechanisms.

Areas of Concern

1. Declining FDI-to-GDP Ratio
   • A downward trend suggests waning investor interest, which may affect long-term growth.
2. Outflows to Tax Havens
   • Significant OFDI is directed to low-tax jurisdictions like Singapore and Mauritius, raising concerns over illicit capital routing.
3. Treaty Shopping
   • Global financial players exploit tax treaties to shift capital and minimize tax liabilities, often bypassing the real economy.
4. Role of Alternative Investment Funds (AIFs)
   • A large portion of FDI comes through AIFs, which contribute little to productive investment, technology transfer, or capacity building.