Immediately, your heart stops at reading this headline. Is our economy trapped in such a grave crisis? And here you thought India was the darling of global investors, but ZERO FDI?!
After a few shocked seconds, you recover your composure and ask: “It’s fake news, isn’t it?”.
Alright, hold on to your heart. This headline in NOT FAKE. It’s the truth. But hey, do not pass out, because it’s an ardh satya (half-truth).
India’s Dollar/FDI economy is complex with four significant crosscurrents. If you look at just the gross or net numbers, without isolating key components, you will miss the nuance. So, let’s wade into the weeds.
The most critical element is Fresh Inward FDI in cash. Quite simply, these are the new dollars that investors are putting into an Indian company’s equity bank account. The second element is Retained Earnings, ie those profits that the foreign investor could have taken away but chose to keep them invested in India. These two elements add up to Gross Inward FDI, ie the total amount of dollars that either came in or stayed back in India.
But there are three critical crosscurrents that flow in the opposite direction. One is Foreign Investor Repatriation/Disinvestment, ie the amount of cash a foreign investor pulls back home after partially or fully selling her investment in India. This clearly cuts the amount of Gross Inward FDI—because if Mr A brings in $100 mn, while Ms B sells $ 50 mn and takes it home, then only $50 mn has come in on a “net basis”.
But there are two other compelling currents. First is Fresh Indian ODI (Overseas Direct Investment), ie Indian investors buying companies and assets abroad. That takes dollars out of India. And the final component is Retained Earnings by Indian investors overseas, ie those profits that local investors could have brought back to India, but chose to keep them invested overseas.
FY 2024-25: When Net FDI Crashed to Zeroi
Now let’s look at what happened in FY 2024-25, that crucial year when Net FDI fell to ZERO. Fresh Inward FDI, at nearly $60 bn, was higher by a robust 15 percent over the previous year. Retained earnings did even better, closing at $21 bn. That’s a pretty story, so where’s the problem?
Two things blew away the lid. Foreign investors sold assets and yanked away nearly $52 bn back home, an eye-watering 40 percent over the previous year. And Indian investors nearly doubled their outward investments to an eye-popping $24 bn (vs $14 bn in the previous year).
Outcome – ZERO NET FDI for the very first time in India!
We would have taken it in our stride if FY2024-25 was an outlier, once-in-a-lifetime phenomenon. Unfortunately, in the following year, FY 2025-26, foreign disinvestments and overseas investments by locals scaled even higher, by an aggregate of $ 6 bn, or nearly 10 percent. India hit a paltry $ 7 bn of positive Net FDI, barely avoiding the embarrassment of another zero year.
You can now discern the tangled strands of good and ugly outcomes, so inter-woven into the DNA of India’s Dollar Economy.
The Good: The boost that Covid-19 gave to India’s Inward FDI—from 2019 through 22, FDI boomed by nearly 50 percent over the previous 3 years as investors piled into our extraordinary digital enterprises—seems to have gotten restored after falling off a cliff in 2023 through 2025. Last year, FY 25-26, was a windfall, with gross FDI topping $94 bn, the highest ever. Juxtaposed was the highest ever repatriation, at $54 bn, but you could argue this was a “non-negative” event because foreign investors were simply cashing in on investments that had matured. You could even parade it as a “positive” upshot, a vindication of India’s deep capital markets and resounding IPOs (initial public offers). As for the highest ever overseas investments of $28 bn by resident Indians, you could give this a positive spin too, viz the chutzpah of Indian companies to go global. Some odd ball, carping critic might ask “why could they not find better investment options within India”, but you could ignore that cynic.
The Bad: While the absolute numbers are impressive—gross FDI growing about 55 percent, from $ 60 bn to $94 bn over the last decade—the fact is that India’s GDP nearly doubled during this period. So Inward FDI simply did not keep pace with economic growth. You could even call it a relative laggard. Two important policy misdemeanours caused this misstep. One, a new bilateral investment framework that was adopted in 2016, which severely degraded the foreign investors protection vs their domestic partners. The law was rewritten such that it became virtually impossible for the wronged party to win a judicial verdict against the Indian sovereign or domestic corporate adversary. And two, India did not perform as creditably on the “China+1 opportunity” as its competing peers like Vietnam, Malaysia, Indonesia, and Mexico. (Note: I will dig deeper into these aspects in Part 2 of this trilogy on India’s Dollar Economy).
The Ugly: It’s happening outside the narrow FDI definition, but its impact is devastating. Nearly 5-6 million Indians have emigrated from India over the last decade—and about 50,000 of these were “dollar millionaires”. While it’s extremely difficult to put an exact number on India’s wealth that escaped with them, it could be as high as $ 300 bn. Ouch! (Note: this astonishing phenomenon will be captured in Part 3 of the trilogy on India’s Dollar Economy).