Explained: The fall in India’s net FDI

India’s net foreign direct investment (FDI) inflows fell to a mere $0.4 billion during 2024-25 from $10.1 billion a year ago, reflecting the rise in net outward FDI and repatriation FDI amid a clutch of big-ticket IPOs and several Indian firms going abroad.

In 2024-25, India’s net outward FDI (OFDI) grew 75% year on year to $ 29.2 billion. Singapore, the US, UAE, Mauritius and the Netherlands together accounted for more than half of the rise in OFDI. Meanwhile, repatriations and disinvestment, rose by 15.7% in FY25 to $51.5 billion from $44.5 billion in FY23.

The data has led to significant concern over the attractiveness of India as an investment destination, especially as the government has been working to attract foreign investors under the flagship Make in India scheme that aims to transform the country into a global manufacturing hub.

Rise in gross inward FDI after two years

A closer look at the data shows that gross inward FDI grew by 13.7% to $81 billion in FY25 after remaining stagnant at a little over $71 billion in FY23 and FY24. In FY22, FDI inflows to India stood at $84.83 billion.

However, for now, the government and the Reserve Bank of India are not overtly worried about the data and underline that gross inward FDI has posted a sharp rise.  The RBI termed the rise in net outward FDI and repatriation as a “sign of a mature market where foreign investors can enter and exit smoothly, which reflects positively on the Indian economy.”

In its monthly economic bulletin, the RBI noted that gross FDI inflows remain concentrated in manufacturing, financial services, electricity and other energy, and communication services sectors, with a share of more than 60%. Amongst investing countries, Singapore, Mauritius, the UAE, the Netherlands, and the US accounted for more than 75% of the flows during this period.

On a cumulative basis, India touched a significant milestone last year and crossed $1 trillion in FDI inflows since April 2000.

Sunil Kumar, Tax Partner, EY India notes that the recent statistics on net Foreign Direct Investment (FDI) flows might not be giving the full picture. While there's been a noticeable fall in net FDI flows, it’s not as negative as it may seem at first glance. Interestingly, the gross FDI inflows into India have risen by 13.7% year-on-year. “Several factors contribute to this sharp drop in net FDI. A key consideration is that more Indian companies are expanding and diversifying by investing abroad, aided by the Overseas Direct Investment (ODI) guidelines liberalized in 2022. This has resulted in a substantial increase in ODI by 75% on a year-on-year basis,” he underlined.

Additionally, higher repatriation, which reflects profitable returns on investment through IPOs, domestic investors’ interest and investors' confidence, has also impacted the net FDI, he further said.

High profile IPOs like the $3.3 billion listing of Hyundai Motors India Ltd and Swiggy are seen another reason for the fall in net FDI inflows as they gave investors a chance to exit these companies.

Investment climate

Government officials underline that efforts continue to turn India into an investment destination and there has been a pick-up in investments in recent months. The Budget has also announced more measures to boost investments just as a focus on deregulation and cutting down on compliances.

“India remains the fastest growing major economy in the world and given the size of its huge market, more foreign investors will definitely want to be a part of this journey,” underlined an official source.

Geopolitical developments, most recently the US led trade and tariff policies, have however, made most companies more cautious for now, although there is expectation that India may benefit as companies and countries look to diversify beyond China.

Kumar of EY India pointed out that while more investments coming into India are certainly desirable, we must acknowledge the various geopolitical developments that have made investors more cautious.

At present, FDI is permitted under the automatic route in most sectors, and the government has limited scope for further liberalisation of FDI, he further noted. “However, addressing gaps in taxation, regulatory, and judicial norms, undertaking reforms, and providing clarifications wherever necessary will improve the ease of doing business resulting into higher FDI,” Kumar underlined.

In the past, India’s share in the global FDI, after peaking at 6.5% in 2020, declined gradually to 2.1% in 2023. According to World Investment Report 2024 by UN Trade and Development, India slipped to the 16th position in attracting FDIs in 2023 from the eighth position in 2022. However, in an earlier report, India Ratings and Research had said that with the increased infrastructure spending by the union and state governments post FY22, the medium-term outlook is positive for FDI inflows.