Making sense of FDI trends

Considering that they bring a package of entrepreneurship, technology, and integration with the global value chains besides augmenting capital stock, foreign direct investment (FDI) inflows are welcomed by most governments which actively court MNCs to invest in their countries through promotion, facilitation, incentives, and concessions.

- NAGESH KUMAR

India has progressively liberalized its FDI policy regime since 1991. Over the past decade, the Indian government has also undertaken reforms to enhance ease of doing business, lowered corporate tax rates, production-linked incentives, and has established Invest India as an investment promotion agency to attract FDI inflows.

In that context, recent reports appearing in the media suggesting that net inflows of FDI have plummeted to negligible levels have raised concerns. In this article, we make sense of the trends in FDI inflows to India.

The confusion arises from "Foreign Investment Inflows" reported in Reserve Bank of India (RBI) bulletins, which present gross inflows/gross investment to India, repatriations/disinvestments, as well as FDI by India or outward foreign direct investment (OFDI). The RBI works out net FDI by subtracting from gross FDI inflows the values of repatriations and OFDI. As both repatriations and OFDI flows have grown in recent years, the net FDI after subtracting them from gross FDI inflows of $81 billion (in 2024-25) leaves a marginal figure of $353 million. This may be relevant as a balance-of-payments (BoP) entry. But from the point of view of development, FDI inflows and OFDI represent two distinct phenomena, both favourable and hence promoted, but they should be kept separate, as argued below.