India’s net Foreign Direct Investment (FDI)

The Reserve Bank of India (RBI) Bulletin (May 2025) revealed a sharp decline in India’s net Foreign Direct Investment (FDI) inflow for FY 2024-25, which has raised concerns over the country’s investment climate and its implications for economic growth and industrial development. While gross FDI inflows touched a record $81 billion, net FDI plummeted to a mere $353 million, indicating significant disinvestment and outward FDI trends.

Key Facts:

1. Net FDI Trends:

   • Net FDI-to-GDP ratio dropped from 1.6% (2020-21) to almost zero (2024-25).

   • Outward FDI and disinvestment have risen sharply, contributing to the decline in net FDI.

2. Nature of FDI Inflows:

   • A significant portion comprises private equity (PE) and venture capital (VC) investments (brownfield FDI).

   • PE/VC funds account for over 75.9% of FDI inflows, compared to 12.2% in 2009-10.

3. Concerns with PE/VC Investments:

   • Investments are primarily in services (e.g., fintech, retail, healthcare, real estate).

   • These funds typically divest after 3-5 years during stock market booms, contributing to rising disinvestment.

4. Decline in Greenfield FDI:

   • Greenfield investments, which enhance production capacity and technology transfer, are on the decline.

5. Gross FDI Inflow-to-GDP Ratio:

   • Declined from 3.1% (2020-21) to 2.1% (2024-25).

6. Tax Arbitrage and “Hot Money”:

   • Outward FDI includes flows to tax havens like Singapore and Mauritius, raising concerns about treaty shopping and tax arbitrage.

7. FDI in Fixed Capital Formation:

   • Gross FDI inflows peaked at 7.5% of GFCF in FY21, but have since declined.

8. Policy Implications:

   • The decline in net FDI reflects waning foreign investor interest and is aligned with subdued domestic corporate investment.

   • Reforms are needed to:

     • Promote greenfield FDI.

     • Address concerns over tax arbitrage.

     • Align foreign capital inflows with long-term industrial and technological goals.

India’s FDI trends underscore the need for a strategic overhaul to attract sustainable investments that contribute to industrial growth, technology adoption, and overall economic resilience.