Direct impact: Foreign investment dynamics must be studied carefully

Foreign direct investment (FDI) numbers for 2024-25 have attracted significant public and policy attention. While at gross level India attracted $81 billion during the year, at net level it translated into only $0.35 billion, the lowest in the past two decades. The low level of net FDI was driven by significantly higher repatriation and disinvestment by foreign firms, along with increased outbound investment by Indian corporations. Last financial year, foreign firms repatriated over $51 billion. Meanwhile, outward investment by Indian corporations increased about 75 per cent compared to the previous year to $29.2 billion. As a consequence, at net level, very little was left.

 

In the normal course, repatriation by foreign multinationals and overseas investment by Indian corporations should not be cause for concern for a large and open economy like India. Some foreign firms would repatriate profits for company-specific reasons, while growing Indian corporations will seek opportunities abroad. However, what is attracting attention and has raised concern is the scale of the outflow. Even in 2023-24, with gross FDI of over $71 billion, India was left with only about $10 billion at net level. And while repatriation by foreign firms is witnessing a rising trend, outbound FDI substantially increased last year. The latest monthly review of the finance ministry has taken note of the development and said: “...Indian overseas direct investment increased nearly by $12.5 billion during the year FY25, even as uncertainty reigned in the world, warrants attention, especially given their cautious attitude towards domestic investment.” 

 

The developments are definitely worth probing. In this regard, policymakers can address the issue differently for foreign and Indian firms. Foreign firms came to India primarily to meet the demand in the Indian economy. Since India remains the fastest-growing large economy in the world, and is reported to have become the fourth-largest economy, why are foreign firms not investing their surplus here in India? It is unlikely that the substantial increase in repatriation is intended only to return the money to shareholders. Some companies are offloading shares in Indian markets, possibly because of attractive valuations. But this doesn’t explain the entire repatriation and disinvestment story. A deeper probe and analysis are needed. Are they moving out because of the business environment or demand conditions?

 

The action of Indian corporations is more curious. They are reluctant to invest in India but seem to be finding opportunities abroad at a time when the global environment is fairly uncertain. However, notably, the big jump in outbound FDI could be a one-off. Some companies may have found attractive deals at the same time. Outbound FDI between 2018-19 and 2023-24, for example, moved between $12 billion and $18 billion, before increasing to about $29.2 billion in 2024-25. Nonetheless, the issue needs deeper examination. However, this should not lead the government and regulators to create barriers to foreign or domestic firms transferring funds abroad because it would adversely affect the investment climate. The fact that India needs higher investment for sustained higher growth cannot be overemphasised. FDI in this context plays an important role because multinationals also bring technology and best practices along with capital. It is also the best mode to fill the savings-investment gap in the economy because FDI tends to be the most stable form of foreign capital. It is thus important to understand the dynamics of such investment and address policy gaps, if any.