India’s FDI Trends in FY25

Contrasting Narratives from RBI Bulletin

• Gross FDI inflows: Reported at $81 billion – hailed by government/media as a record high.
• Net FDI: Just $353 million, a steep fall, indicating increased disinvestment and outward FDI.
• Highlights discrepancy between headline numbers and underlying trends.

FDI-to-GDP and GFCF Ratios (Declining Trend)

• Gross FDI-to-GDP ratio: Dropped from 3.1% (FY21) to 2.1% (FY25).
• Net FDI-to-GDP: Declined from 1.6% to 0% over the same period.

Rise in Outward FDI (OFDI) & Disinvestment

• Outward FDI includes investment by Indian firms abroad for:
  • Technology acquisition
  • Market expansion
  • Tax arbitrage via havens like Mauritius and Singapore
• Disinvestment refers to exit of foreign capital, especially during stock market booms.

PE/VC Dominance in FDI Composition

• Private Equity (PE) and Venture Capital (VC) now constitute over 75.9% of FDI (2020-21).
• Mostly brownfield FDI, focused on:
  • Fintech
  • Real estate
  • Healthcare
  • Retail
  • Insurance
• Investments are short-term, exit-oriented, and loosely regulated.
• Examples:
  • Blackstone in Care Hospitals
  • ChrysCapital in Lenskart

Concerns from Global Research Findings

• Blanchard & Acalin (2016): India ranks 6th among 25 EMEs in correlated inward-outward FDI.
• Suggests India is a conduit for hot money and treaty shopping.
• FDI flows may reflect tax optimisation, not real investment in productive assets.

Structural & Policy Implications

• Decline in greenfield FDI → Less contribution to new capacity, tech absorption.
• Rising disinvestment and OFDI → Indicates limited domestic investment appeal.
• FDI’s role in gross capital formation is modest and shrinking.
• Need to reform foreign capital regulations to:
  • Prioritise tech-intensive, long-term investments
  • Minimise tax-arbitrage-led flows
  • Align FDI with domestic industrial policy goals