Distress Signals in FDI: Big Numbers Mask a Sharp Investor Exit

A deeper story is still buried inside FDI data, writes Subhash Chandra Garg.

A serious and critical review of our industrial, investment, start-ups, and FDI policies is needed to put India back on high inward FDI path.

(Photo: Kamran Akhter/The Quint)

The Department of Promotion of Industries and Internal Trade (DPIIT) and the Reserve Bank of India have released provisional data of foreign direct investment (FDI) for the financial year 2024-25.

India’s gross inward FDI—comprising new cash inflows and reinvested earnings from accumulated FDI stock—stood at $81.04 billion, marking a 13.7 percent increase from $71.28 billion in 2023–24.

The good news, however, stops with this.

Disinvestment or repatriation of inward FDI (from accumulated FDI stock since 2000) accelerated at a higher 15.78 percent rate, growing to $51.49 trillion from $44.47 trillion in 2023-24, pulling down net inward FDI flows ($29.56 billion) growth to 10.25 percent.

Outward FDI (Indians investing abroad) surged as well—from $16.68 billion in 2023-24 to $29.20 billion in 2024-25, at a massive rate of 75.09 percent. This left net FDI inflows (inward minus outward) at $354 million—a dramatic decline of 96.51 percent from $10.13 billion in the previous fiscal year.

A deeper story is still buried inside FDI data. India’s cash FDI inflows (excluding reinvested earnings) is falling rapidly - from $36-37 billion in 2020-22 to $7.04 billion in 2023-24 and $6.01 billion in 2024-25.

India’s net cash FDI flows were heavily negative, at (-) $16.64 billion in 2024-25. What is going on in India’s FDI landscape? Why are cash FDI inflows declining so rapidly? 

Cash Inflows Determine Real FDI Dynamics

Inward FDI is made up of three components:

1. New FDI inflows (new/additional FDI both under automatic and government route by companies, unincorporated entities and other capital)

2. Capital repatriation/disinvestments (FDI investor sells its stake fully or partially to a non-FDI party)

3. Retained/reinvested earnings (share of profits attributable to FDI investors not distributed as dividends). India’s inward FDI stock exceeds $1 trillion. 

The table below summarises DPIIT data of new FDI inflows for five years since 2020-21 (all in billion US$).

The pattern is concerning:

• Gross FDI inflows, after falling in 2022-23 and 2023-24 revived in 2024-25 to $81.04 but was still less than inflows of $84.84 billion in 2021-22. 

• FDI inflows in form of reinvested earnings is constantly rising- from $16.94 billion in 2020-21 to $19.77 billion in 2023-24 and further to $23.55 billion in 2024-25 (annual growth of 19.11 percent). 

• Repatriation/disinvestment are on accelerator, indicating FDI investors fast cashing out- from $29.35 billion in 2022-23 to $44.47 billion in 2023-24 (growth 51.53 percent) and further to $51.49 billion in 2024-25 (15.78 percent growth on top of 2023-24). 

• As a consequence, net inward FDI (gross minus repatriation) has fallen precipitously in last two years- from $55-56 billion per annum in 2020-22 to nearly half ($26.81 billion in 2023-24 and $29.56 billion in 2024-25).

This should worry us. Net cash inward FDI inflows should worry us more as these have, after declining rapidly over last four years, fallen deeply into negative territory.

Drastically falling inward FDI inflows are a surer proof of international investors cooling towards India. Why are they turning away? Four major factors seem to explain.

Why Investors Are Turning Away

First, the Make in India and Production Linked Incentive (PLI) initiatives, launched from 2018-19 onwards, with a lot of expectations of attracting FDI exiting out of/diversifying away from China post China+1 policy and Covid-19, have singularly failed to do so.

Barring an odd Apple, no major multinational FDI investment has come to India in response to PLIs (batteries, electronics hardware, solar cells, automotive and so on). Instead, FDI investors went to Vietnam and other East-Asian countries.

Second, the government’s heavy duty capital investment programme launched after 2021-22 to leverage private/ foreign investment could not become a major investment multiplier as it almost entirely focused on old-world physical transport infrastructure (railways and highways) and loss-making public sector enterprises (BSNL, Air India). 

Third, India imposed high and widespread tariffs in the name of Aatmanirbhar Bharat and vocal-for-local policies, which ended up making India a less investment-friendly country, discouraging foreign investors from driving in. 

Fourth, venture capital and private equity investment in Indian start-ups, scuppered by policies like angel tax (finally abolished in 2024-25), have now entered into maturing phase allowing many to cash out furiously by listing on bourses or otherwise selling off their investments. 

As there is little likelihood of these factors reversing anytime soon, India seems to have entered into a long winter of slowdown, if not collapse, of new net cash inward FDI flows. 

Indian Investors Are Stepping Up Investment Abroad

There is unrelenting upsurge in Indian companies’ investing abroad. Outward FDI flows are, therefore, shooting through the roof. Table below speaks out loud (there is no repatriation of such FDI).

Total and cash outward FDI have nearly tripled in the last five years—from $11 billion to $29 billion and from $8 billion to $23 billion respectively. 

India is no major technology innovator. Outward FDI flows mostly represent Indian companies acquiring foreign companies, IT services companies setting up bases abroad, and Indian entrepreneurs setting up ‘factories’ to meet Indian diaspora’s demands or taking advantage of incentives provided to counter Chinese investment/imports.

While there is every justification to allow Indians to take capital abroad for investment, unless such outflows are balanced by accelerated FDI investment in India, there might soon be pressure on rupee exchange rate.

China is on a Different Planet

Inward gross 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 a nominal $18.56 billion in 2024. As China has accumulated massive stock of FDI over the years, cash FDI inflows in China must be hugely negative.

While this testifies to the world, especially the US, furiously turning away from China, it has grown enough not to worry about inward FDI inflows. 

China has, over the last two decades, become a major global FDI investor. In 2024 (OECD data), of total global outward FDI of 1.61 trillion, China’s outward FDI was as much as $172.24 billion (nearly 11 percent), second only to the US ($298.98 billion). In 2023, the year before, Chinese outward FDI had reached $225.67 billion (14 percent of global outward FDI of $1.57 trillion).

India must not draw any comfort from falling Chinese inward FDI. India needs FDI; China does not. Many other countries are still attracting high inward FDI: Brazil ($59.18 billion), Indonesia ($24.21 billion), Australia ($64.07 billion), and Vietnam ($25.35 billion) in 2024, against India’s $27.61 billion.

A serious and critical review of our industrial, investment, start-ups, and FDI policies is needed to put India back on high inward FDI path.

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)