The reality behind falling net FDI, Pg10

Key Highlights:

• India's net Foreign Direct Investment (FDI) drastically declined from a peak of $44.0 billion in 2020-21 to less than $1 billion in 2024-25.
• It recovered slightly to $7.6 billion in 2025-26, while gross inflows were $94.6 billion.
• The primary reason for weak net FDI is disinvestment and capital repatriation by foreign investors, not profit repatriation.
• Real FDI (RFDI), from traditional multinational enterprises, constituted 41.9% of effective inflows, while financial investors accounted for 40.5%.
• For every dollar of fresh FDI inflow (excluding reinvested earnings), approximately $1.50 flowed out between 2022-23 and 2025-26.

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Detailed Insights:

• The debate on falling net FDI often overlooks the changing composition of international capital and Balance of Payments (BoP) mechanisms.
• India's liberal FDI policy, introduced in 1991, initially focused on technology and export promotion, later prioritizing larger inflows.
• Financial investors, including private equity and venture capital firms, aim for capital growth and planned exits, leading to future large-scale capital repatriations.
• A significant portion of gross FDI figures includes corporate accounting changes like intra-group reorganizations, not fresh capital injections.
• Outward Foreign Direct Investment (OFDI), particularly into financial, insurance, and business services (FIB) in locations like Singapore and the UAE, often goes to holding companies.
• The increasing OFDI, including through GIFT City, can represent both genuine corporate expansion and the recycling of capital.
• Dividend remittances and Intellectual Property Rights (IPR) payments are significant outflows recorded in the current account, impacting external sustainability.
• RFDI into manufacturing declined, accounting for only 10.6% of total effective inflows in the most recent four-year period.

Key Concepts Involved:

• Net Foreign Direct Investment (FDI): The difference between FDI inflows and outflows, adjusted for capital repatriation.
• Balance of Payments (BoP): A statement summarizing all economic transactions between a country and the rest of the world over a period.
• Real FDI (RFDI): Long-term investments by multinational enterprises bringing technology and production capabilities.
• Financial Investors: Entities like private equity and venture capital firms focused on capital growth and planned exits.
• Outward Foreign Direct Investment (OFDI): Investments made by domestic companies into foreign countries.