Sharp Decline in Net FDI Raises Concerns

Sharp Decline in Net FDI Raises Concerns

Why in the News?

According to the RBI Bulletin (May 2025), India’s net FDI for FY 2024-25 has drastically dropped to $353 million, despite gross inflows of $81 billion, raising serious concerns over investor confidence, capital formation, and FDI composition.

Sharp Decline in Net FDI Raises Concerns

Understanding the FDI Decline:

  • Despite headline gross FDI inflows of $81 billion, net FDI dropped to just $353 million.
  • Gross FDI-to-GDP ratio fell from 3.1% in FY21 to 2.1% in FY25, while net FDI dropped from 1.6% to 0%.
  • The difference is explained by rising disinvestment and outward FDI (OFDI), often routed to tax havens like Singapore and Mauritius.
  • This trend may reflect capital flight and tax arbitrage rather than real investment in the Indian economy.

The Role of Private Equity and Brownfield FDI

  • A growing share of FDI comes from Private Equity (PE) and Venture Capital (VC), focused on brownfield investments.
  • These funds usually have a 3–5 year exit cycle and invest heavily in services like fintech, healthcare, and retail.
  • The share of PE/VC in FDI rose from 12.2% (2009-10) to 75.9% (2020-21).
  • Their exit-driven strategy leads to frequent disinvestment, especially during stock market booms.
  • The Private Equity growth in FDI has significantly impacted the nature of Foreign Direct Investment in India.

Policy Implications and Way Forward

  • FDI’s share in Gross Fixed Capital Formation (GFCF) has fallen from 7.5% (FY21), highlighting its limited role in capital formation.
  • India risks becoming a conduit for tax-optimised flows, with limited technology transfer or industrial benefit.
  • Regulatory reforms and domestic capability building are essential to realign FDI with long-term national interests.
  • Policymakers may need to consider political risk insurance mechanisms to attract more stable, long-term foreign investments.

Key points: About Net FDI (Foreign Direct Investment):

  • Refers to gross FDI inflows minus repatriation and disinvestment.
  • Reflects the actual addition of foreign capital in the economy.
  • Indicates long-term investor confidence.
  • In FY25, net FDI dropped to $353 million.
  • A lower net FDI suggests rising capital outflows or withdrawals.
  • Vital for assessing real investment impact.

About Gross FDI:

  • Represents the total inflow of foreign investment into a country.
  • Includes both greenfield and brownfield investments.
  • In FY25, India received $81 billion as gross FDI.
  • Often highlighted in official data for positive perception.
  • Doesn’t account for disinvestment or repatriation.
  • Needs contextualisation with GDP or GFCF to assess real impact.

Key points: GFCF (Gross Fixed Capital Formation)

  • Measures net investment in physical assets like buildings, machinery, etc.
  • Indicates an economy’s productive capacity expansion.
  • FDI share in GFCF peaked at 7.5% in FY21, declined since.
  • Essential for assessing capital creation from foreign inflows.
  • A falling share suggests weaker FDI contribution to infrastructure.
  • Crucial for sustainable growth.

About Outward FDI (OFDI):

  • Indian companies investing abroad to acquire assets or technology.
  • Aimed at global expansion, but also routed via tax havens.
  • Includes sectors like energy, pharmaceut