June 4, 2025
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.
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.
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.
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.
Decline in Greenfield FDI:
Greenfield investments, which enhance production capacity and technology transfer, are on the decline.
Gross FDI Inflow-to-GDP Ratio:
Declined from 3.1% (2020-21) to 2.1% (2024-25).
Tax Arbitrage and “Hot Money”:
Outward FDI includes flows to tax havens like Singapore and Mauritius, raising concerns about treaty shopping and tax arbitrage.
FDI in Fixed Capital Formation:
Gross FDI inflows peaked at 7.5% of GFCF in FY21, but have since declined.
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.
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