28-05-2025
India's record net FDI plunge reveals a troubling trend—outward FDI beats investing at home
Importantly, there was a remarkable similarity between the sources of India's inward FDI and the destinations of its outward FDI. Singapore, Mauritius, the United Arab Emirates, the Netherlands, and the United States accounted for over 60 per cent of India's total inward FDI flows. And the same five countries also accounted for more than 50 per cent of India's total outward FDI flows in 2024-25.
A quick analysis of the data reveals that there were two factors responsible for this sharp decline: A 16 per cent rise in repatriation and disinvestment by foreign investors in existing companies to $51.5 billion, and a 75 per cent jump in outward FDI by Indian companies to $29 billion. Note that gross FDI inflows at $81 billion during 2024-25 did show a reasonable rise of 14 per cent over those in the previous year. But the rapid rise in both repatriation and outward FDI by Indian companies neutralised the gains from gross FDI.
Why did India's net foreign direct investment (FDI) inflows plunge by 96 per cent last financial year? They were estimated at $0.35 billion in 2024-25, compared to $10.13 billion in the previous year. That was not just a record drop in one year, but also the lowest level of net FDI inflows into the country in at least the last two decades.
However, the similarity in the sectors benefitting from FDI inflows and outflows was not that stark. Gross inward FDI was concentrated in manufacturing, financial services, energy, including electricity, and communication services, with these sectors accounting for 60 per cent of such inflows. In contrast, over 90 per cent of the total outward FDI was destined for financial services including banking and insurance, manufacturing, wholesale as well as retail trade, restaurants and hotels. No data on the sectoral or destination-wise breakdown of repatriation was immediately available.
In its latest monthly bulletin, the Reserve Bank of India appears to have suggested that this trend of rising repatriation and outward FDI is not a cause for concern. On the contrary, it argues that both the rise in net outward FDI and repatriation are signs of 'a mature market where foreign investors can enter and exit smoothly'. This also reflects positively on the Indian economy, the report adds. This may be a valid observation. But does this trend indeed have no cause for concern? Addressing this question will require an assessment of a longer-term trend of inward and outward FDI (see graphic).
India's gross FDI inflows over the last two decades reflect the nature of the global economic environment. They took off in the early noughties, when all boats across the world were rising on account of higher growth, only to see a mild decline in the years immediately after the North Atlantic Financial Crisis. Gross FDI inflows recovered smartly in the following years, only to face a bigger setback in the wake of the US Federal Reserve's Taper Tantrum. That, though, turned out to be a minor hiccup and was a turning point of sorts, as gross FDI inflows kept rising at a rapid pace after 2014-15, almost coinciding with the tenure of the Narendra Modi government. Growth in gross FDI inflows was not dampened even during the Covid pandemic years. If there was a deceleration, it was during the post-pandemic years of 2022-23 and 2023-24 — a trend that was slightly reversed last year.
But largely unnoticed by most observers of the economy, the amount of repatriation and outward FDI flows has been rising rapidly since the post-Covid years. In 2020-21 and 2021-22, gross FDI inflows were adversely impacted by repatriation and outward investments to the tune of 46 per cent and 54 per cent, respectively. The extent of this impact rose sharply in the following three years — to 61 per cent in 2022–23, 86 per cent in 2023–24, and 99 per cent in 2024–25. In other words, net FDI inflows fell as repatriation and outward FDI began rising.
This problem was not so acute some time ago. As noted in a Business Standard column about a year ago (Rising Repatriation), the amount of repatriation and disinvestment in 2019-20 was about $18 billion, or about 25 per cent of gross FDI inflows. But the following two Covid years saw repatriation and disinvestment rising to account for a 33-34 per cent share of gross FDI inflows. In 2023-24, this trend became alarming, with the share of repatriation and disinvestment in gross FDI inflows jumping to 62 per cent. In 2024–25, the share inched up further to 63 per cent.
What this implied was pretty serious. Foreign investors in Indian companies were showing a marked preference for ploughing back their gains from here to reinvest in other markets elsewhere. Note that this trend has continued for the last two years. Clearly, reinvesting their earnings from such investments in their existing projects or in new initiatives in India is not an idea they are favouring. Indeed, reinvested earnings by existing foreign investors have stayed at well below a third of gross FDI inflows in these years. Nor has there been a marked desire on their part to increase reinvested earnings. The gains from FDI would have been greater if reinvested earnings had risen at a higher rate and the pace of repatriation slowed.
Contributing to such gloomy prospects on the net FDI inflows front is last year's data that shows how Indian companies are raising their outward FDI in a big way. Indian companies have stepped up their outward FDI during the post-Covid years — from $14 billion in 2022-23 to $16.6 billion in 2023-24, and to $29 billion in 2024-25. And this at a time when India Inc is not seen to be showing much interest in investing within the country.
It is heartening to see India Inc going global with higher investments in different countries. Indeed, in the last couple of years, there have been reports of acquisitions of overseas companies or investments abroad by a large number of companies, including Dr Reddy's Laboratories, Zydus Lifesciences, Sun Pharma, Infosys, HCL Tech, Wipro, Coforge, Airtel, Tata Steel, Tata Agratas, Sona, HEG and PI Industries. Many other companies are planning fresh investments abroad or overseas acquisitions.
But it must also be a cause for concern if India Inc shows no similar enthusiasm for domestic investment. The government must find out what constrains Indian companies from exploring the domestic market for investment with the same zeal as they are showing with regard to outward FDI. If there are constraints in the ease of doing business or if the absence of the much-talked-about factor-market reforms is a hindrance to fresh investments at home, these should be addressed soon.
AK Bhattacharya is the Editorial Director, Business Standard. He tweets @AshokAkaybee. Views are personal.
