Declining Quality of Foreign Direct Investment in India
Foreign direct investment (FDI) remains a key element of India’s economic growth. However, recent trends reveal a complex scenario where gross inflows appear strong but net inflows are sharply declining. This shift reflects short-term profit motives over long-term industrial development. At the same time, Indian firms are increasingly investing abroad, denoting challenges in the domestic investment climate.
Recent Trends in FDI Inflows and Outflows
- Gross FDI inflows reached $81 billion in FY 2024-25, up 13.7% from the previous year.
- Despite this, net inflows, which account for disinvestments and repatriations, have fallen drastically.
- From FY 2021-22 to FY 2024-25, net retained capital dropped to just $0.4 billion.
- Foreign investors are withdrawing funds at a growing rate, with disinvestments rising by over 50% in recent years.
- This suggests capital is not staying long enough to fuel sustainable growth.
Shift from Long-Term to Short-Term Investments
Investor behaviour is shifting from strategic commitments to short-term financial gains. Investments increasingly aim at rapid profit through tax arbitrage and treaty-based routing. Manufacturing, once a major FDI recipient, now accounts for only 12% of inflows. Capital is flowing more into financial services, energy, and hospitality sectors. These sectors contribute less to industrial innovation and job creation, weakening long-term economic resilience.
Rising Outward Investment by Indian Firms
FDI outflows from India have more than doubled since 2011-12, reaching $29.2 billion in FY 2024-25. Indian companies cite regulatory hurdles, infrastructure gaps, and policy unpredictability as reasons for investing abroad. This outward flow drains domestic capital needed for job creation and technological advancement. It also reflects systemic issues discouraging both foreign and domestic investors.
Structural Barriers Affecting Investment Climate
Despite government reforms, regulatory opacity and inconsistent governance persist. Legal unpredictability adds to investor caution. The dominance of financial hubs like Singapore and Mauritius in FDI inflows indicates many investments are driven by tax strategies rather than productive activity. Traditional industrial investors from the US, Germany, and the UK have reduced their stakes.
Impact on India’s Economic Growth and Stability
Declining net FDI inflows affect macroeconomic stability. FDI supports the balance of payments and currency stability. Reduced net inflows constrain monetary policy flexibility. The Reserve Bank of India recognises these risks and the need for careful management. Maharashtra and Karnataka attract over half of India’s FDI, mainly in services and rent-seeking sectors, which have limited multiplier effects.
Measures to Improve FDI Quality and Retention
India must prioritise reforms to attract long-term, committed capital. Simplifying regulations and ensuring policy consistency are vital. Infrastructure development and investment in human capital will support high-value sectors like advanced manufacturing and clean energy. Focusing on the quality and strategic alignment of FDI is essential to build domestic capabilities and strengthen economic resilience.
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