Why Has Net FDI Inflow Plummeted?, Pg9

• Net FDI in FY25 fell to just $353 million, despite gross FDI inflow of $81 billion.
• Outward FDI surged, much of it to tax havens like Singapore and Mauritius.
• Private Equity/Venture Capital (PE/VC) share in FDI rose to 75.9% in 2020-21, mainly focused on brownfield investments.
• Greenfield investments declined, limiting FDI’s impact on capital formation and technology transfer.
  Detailed Insights:

1. Headline Growth vs. Nature of FDI - Despite strong growth in gross FDI inflows, the composition of India’s FDI is increasingly dominated by short-term, exit-oriented capital.
2. Role of PE/VC Funds - A significant portion of FDI comes from Private Equity (PE) and Venture Capital (VC) funds.

• They tend to exit quickly during market booms, leading to high repatriation of capital.

3. High Repatriation - Rapid exits by PE/VC investors contribute to substantial outflows, reducing the long-term developmental impact of FDI.
4. Concerns of Round-Tripping and Treaty Shopping - The pattern of FDI suggests practices like “round-tripping” (Indian money returning as FDI) and “treaty shopping” (using tax treaties to minimize tax liability), rather than genuine, productive investment.
5. Correlation with Global Financial Cycles - Academic research (Blanchard & Acalin, 2016) indicates that India’s FDI inflows are highly correlated with global financial cycles.

• This suggests that much of the FDI is “hot money,” influenced more by global interest rates and tax arbitrage opportunities than by India’s domestic economic fundamentals.
  Key Concepts Involved:
• Gross vs Net FDI: Gross refers to total inflows; Net = Gross – (Repatriation + Outward FDI)
  • Outward FDI (OFDI): Investments by Indian entities in foreign countries
  • Brownfield vs Greenfield FDI: Brownfield = investment in existing assets; Greenfield = investment in new projects.
• Round-Tripping: Routing domestic money abroad and bringing it back as FDI, often via tax havens
  • Treaty Shopping: Exploiting tax treaties by structuring investments via jurisdictions with favorable terms

Mains Mock Question:

Discuss the reasons behind the recent decline in India’s net FDI inflow. Critically examine how the changing nature and composition of FDI affects long-term capital formation and economic development.