Why FDI investors are turning away from India

THE Organisation for Economic Cooperation and Development (OECD) recently released the data of global inward foreign direct investment (FDI) (what a country receives) and outward FDI (what a country invests in other countries) for the calendar year 2024. India’s inward FDI, after peaking at $64.36 billion in 2020, has consistently declined thereafter. It was $44.73 billion in 2021, $49.94 billion in 2022, $28.08 billion in 2023 and $27.61 billion in 2024. India’s FDI inflows, in 2024, were 43 per cent less than those in 2020.

Why is India’s FDI declining so rapidly? Let me say here, upfront, that the ongoing tensions between India and Pakistan or the fear that the situation in the region may escalate towards a dangerous “nuclear flashpoint” has no bearing on India’s FDI crisis.

Global investors, especially in the last couple of years, seem to be inured to war, whether between Russia and Ukraine or between Israel and Gaza. The fact is, that India’s problems are much deeper.

Inward FDI is made up of three components — one, new FDI inflows (an Indian company receives new/additional FDI); second, capital repatriation/disinvestments (an existing FDI exits or partially sells its stake); and third, retained and reinvested earnings (share of profits attributable to FDI investors, not distributed as dividends).

India’s FDI stock now exceeds $1 trillion (it began to be counted from 2000) as per data published by the Department for Promotion of Industry and Internal Trade (DPIIT).

In 2023-24, as per the RBI, the gross inflow of FDI (investment inflows plus reinvested earnings) amounted to $70.94 billion whereas the repatriation/disinvestment of the FDI stock totalled $44.47 billion, resulting in actual inward cash/new FDI inflow of $26.47 billion. Retained and reinvested FDI in 2023-24, as per the DPIIT, amounted to $19.77 billion. Thus, India received net cash inward FDI of $51.17 billion ($70.94 billion minus $19.77 billion). If we take out $44.47 billion, which went out as disinvestment/ repatriation, the net inward cash FDI was only $6.70 billion. It is quite paltry.

The DPIIT and RBI data, put together, informs that, in 2020-21, 2021-22, 2022-23 and 2023-24, net cash FDI amounted to $37.99 billion, $36.88 billion, $22.90 billion and $6.70 billion respectively. Net cash FDI decline got accelerated over the last two years. Why?

Retained/reinvested earnings were fairly stable during these four years — $16.94 billion, $19.35 billion, $19.12 billion and $19.77 billion, respectively. New FDI inflows increased from $81.97 billion in 2020-21 to $84.84 billion in 2021-22 and, thereafter, declined, though moderately, to $71.36 billion in 2022-23 and $70.94 billion in 2023-24. It is the massive acceleration in repayments/ disinvestments in these four years that explain the big decline in net cash FDI inflows from $27.05 billion in 2020-21 to $28.61 billion in 2021-22, $29.35 billion in 2022-23 and $44.47 billion in 2023-24.

The net new cash FDI inflow situation is not looking any better in 2024-25 either.

The DPIIT data informs that India received gross FDI inflows of $62.48 billion during April-December 2024-25, of which, $16.87 billion was reinvested/retained earnings. As per the RBI, repatriation/disinvestment accelerated further during this period, amounting to as high as $44 billion (almost equalling $44.47 billion in entire 2023-24).

This large outflow of FDI stock shrank the gross inward FDI inflow to only $18.49 billion. Taking out retained/reinvested FDI of $16.87 billion, the net cash inward FDI inflow turned out to be only $1.61 billion in the nine months of 2024-25. The RBI data for January-February 2025 suggests that acceleration in repayments/ disinvestments continued in the last quarter. There is a likelihood of the new net cash FDI inflow in 2024-25 to be close to zero, if not in the negative.

Why are FDI investors turning away from India? Four major factors seem to explain.

First, Make-in-India and Production-Linked Incentive (PLI) initiatives, expected to attract FDI flying out of China post the US’ China+1 policy to India, have failed miserably. Barring an odd Apple, no major multinational FDI investment has come to India. Instead, FDI investors went to Vietnam and other East-Asian countries.

Second, the government’s capital investment programme almost entirely focussed on the old-world physical infrastructure. Plus, loss-making public sector enterprises like the Railways, highways and the BSNL could not become a major investment multiplier and have failed to accelerate private and foreign investment.

Third, India imposed protective tariffs in the name of Atmanirbhar Bharat, which actually ended up making India a less investment-friendly country, resulting in discouraging foreign investors from driving in.

Lastly, venture capital and private equity in Indian start-ups has entered into a maturing phase, with many cashing out their investments quite furiously in the past two years.

As there is very little likelihood of any of these factors reversing for the better anytime soon, India seems to be in danger of a medium-term slowdown, if not collapse, of new net inward FDI.

Most FDI in India is received in southern and western states which are quite unaffected by the tensions with Pakistan. The consequences of US tariffs on global investment flows are too uncertain and unpredictable at the moment. In any case, we don’t have any great investment ecosystem ready to receive global FDI, if it relocates.

Inward FDI has collapsed in China massively (OECD data) — from $344.08 billion in 2021 to $190.20 billion in 2022, $51.34 billion in 2023 and to $18.56 billion in 2024. This testifies to the world, especially the US, turning away from China and transferring existing investments to other countries. China, however, has grown enough to worry about inward FDI.

It has, instead, turned into a major global FDI investor. In 2024, of the total global outward FDI of 1.61 trillion, China’s share was $172.24 billion (nearly 11 per cent), second only to the US ($298.98 billion). In 2023, Chinese outward FDI was $225.67 billion (14 per cent of the global outward FDI of $1.57 trillion).

India should, therefore, draw no comfort from the falling Chinese inward FDI. Instead, it should watch how other countries — Brazil ($59.18 billion), Indonesia ($24.21 billion), Australia ($64.067 billion) and Vietnam ($25.35 billion) — are managing to attract high inward FDI. A serious review and restructuring of our industrial investment and FDI policies is needed.

Subhash Chandra Garg is former Finance Secretary.

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