Decreasing Quality of Foreign Direct Investment in India

Foreign Direct Investment (FDI) has been a mainstay of Indian economic expansion over the years, and recent statistics show it is an alarming trend. Although gross inflows are high, net inflows are falling at a critical pace and hence the sustainability of foreign capital in India is at a question.

Decreasing Net Inflows Even as Gross FDI increases.

India registered gross FDI inflows of 81 billion in FY 2024-25 , up 13.7 per cent on last year. But net inflows in the year, including disinvestments and repatriations, fell drastically to only 0.4 billion. The rate of disinvestments has increased over 50 percent in the last few years implying that foreign investors are leaving at a higher rate than the rate at which there is retained capital.

Movement To Short Term Gains.

FDI is also evolving in nature. Investors are also focusing a lot on short term financial incentives as opposed to long wave industrial growth. Financial services, energy and hospitality industries are drawing more inflows and the ratio of manufacturing has dropped down to 12 % only. This constrains the creation of jobs and decreases the innovation of industries so that the multiplier effect of foreign capital is weakened.

Expansion to Foreign Markets by the Indian Companies.

At the same time, Indian enterprises are making increased foreign investments, and outward FDI increased to $29.2 billion in FY 2024-25 , which is over twofold within a decade. Corporates give regulatory barriers, infrastructure bottlenecks and policy uncertainty as causes to relocate capital abroad. This trend points to weaknesses in the domestic business environment in the form of structures.

Economic Implications

This has a threat to the balance of payments, currency stability and flexibility of monetary policy in India because of declining net FDI. In addition, the inflows are concentrated in such states as Maharashtra and Karnataka, primarily in rent-seeking service sectors, which provide a low degree of economic resiliency.

The Way Forward

India needs to think long and invest in quality in order to turn around this trend. Some of the major steps include simplification of regulations, consistency of policy, infrastructure strengthening and investments on advanced manufacturing and clean energy. Major reforms will be strategic in terms of retaining capital, generating jobs and developing domestic technological capacity.