Context:
The Reserve Bank of India (RBI), in its Annual Report 2024–25, highlighted a paradox in India’s foreign direct investment (FDI) landscape. While gross FDI inflows rose by 13.7%, net FDI sharply dropped to just $0.4 billion, compared to $44 billion in FY 2020–21, driven by high disinvestments and repatriation.
What is FDI?
Foreign Direct Investment (FDI) is investment by foreign entities in India’s productive sectors (equity, joint ventures, greenfield, etc.), aimed at:
- Capital inflow for infrastructure and startups
- Technology transfer and skill enhancement
- Job creation
- Support to balance of payments (BoP)
Key Findings – RBI Annual Report 2024–25:
- Gross vs Net Disparity:
- Gross inflows: Up 13.7% in FY25
- Net FDI: Down to $0.4 billion (from $44 billion in FY21) due to sharp rise in disinvestments
- FDI Composition Concerns:
- High disinvestment rate: Now 63.5% of gross FDI
- Major sources: Singapore (15%), Mauritius (~10%) – reflecting round-tripping and tax haven usage
- Fall in manufacturing FDI share: Down to 12% from previous peaks
- Long-Term Trends:
- Average annual FDI growth (FY21–FY25): Just 0.3%
- Outward FDI (OFDI): Rose to $29.2 billion, tripling in 5 years
- Rising private equity and venture capital flows focused on exits rather than production
- Sectoral and Geographic Issues:
- Withdrawal from productive sectors: Manufacturing, computer services see declining FDI
- Drop in FDI from innovation hubs like the US, Germany, and UK
- Discrepancy between RBI and UNCTAD FDI figures: RBI estimates up to 60% higher
Structural Challenges in India’s FDI Framework:
- Over-reliance on financial flows vs. greenfield investments
- Policy uncertainty and tax complications
- Limited reforms in labour, land acquisition, and judicial ease
- Weak monitoring of FDI’s real economic impact
Policy Recommendations – The Way Forward:
- Ensure Policy Consistency:
- Clear, stable FDI rules to attract long-term investors
- Prioritize Quality over Quantity:
- Target manufacturing, green energy, and R&D-driven investments
- Domestic Reforms Alignment:
- Improve ease of doing business, simplify labour and land laws
- Tax Treaty Rationalization:
- Prevent round-tripping through financial centres like Mauritius
- Robust Monitoring Mechanism:
- Evaluate sector-wise FDI impact, employment creation, and value addition
