India's FDI Challenge: Let Us Turn Success into Sustainable Growth

Our net FDI drop was partly on account of profit repatriation and we must pitch India's high potential to lure fresh inflows

- Prachi Mishra & Anuradha Guru

After years of steady growth, net flows of foreign direct investment (FDI) into India declined sharply from $39 billion to less than $1 billion between fiscal years 2021-22 and 2024-25, a stunning reversal that has attracted attention. This decline mirrors trends in other emerging markets, including Asian peers like China and Thailand. Yet India's share in world net FDI has fallen by 2.5-3.0 percentage points. However, there is more to this trend than the headline numbers suggest. India's net FDI drop stems equally from increased outward investment by Indian companies (up 60%) and decreased inflows from foreign investors (down 50%). The oft-cited 100% decline refers to net flows, or the difference between inward and outward investments, both adjusted for profit repatriations.

The underlying dynamics reveal a more complex picture. Based on available data, gross FDI inflows have fallen by only 13% (from $82 billion to $71 billion, peak to trough), while repatriation of profits by foreign companies has surged 64% (from $27 billion to $44 billion). This repatriation surge is the primary driver of declining net FDI inflows.

The equity component of FDI tells the clearest story. Net equity FDI declined by $38 billion, driving the overall drop. Gross equity inflows fell 25% from $61 billion to $46 billion, while equity repatriations increased by more than half. Traditional sources, including the U.S., have reduced their investments, while Japan, the Netherlands, and Mauritius have increased theirs. The services sector, primarily computer services and R&D, accounts for much of the decline.