Mint Explainer: Why India's net FDI is at its lowest level since 2007

In 2023-24, net FDI fell 62.17% to $10.6 billion from $28 billion in the previous financial year, driven by an increase in repatriation through block deals and disinvestment. Of the gross inflow of $71 billion, about $44.4 billion—or more than half—was repatriated through dividends, share sales, or disinvestment, while another $15.96 billion was invested overseas by Indians. 

FDI is a closely monitored metric as private capital fund infusion generally leads to, among other things, an increase in jobs. 

Mint dives into the details to find out why net FDI has declined even as India’s has been the best-performing emerging market economy for three consecutive fiscal years.

What were FDI inflows like in FY24?

According to data released by the Reserve Bank of India, FDI inflows into Indian equity grew to $41.26 billion in FY24 from $27.09 the previous year. About 26% of the inflows in FY24 came from Mauritius, followed by Singapore (23%), the US (9%), the Netherlands (7%) and Japan (6%), according to a report by Invest India. 

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Services industries including finance, banking and insurance, computer software & hardware, trading, telecommunications and automobiles saw the highest inflows during the year.

Why has net FDI declined?

The primary reason is a significant increase in repatriation by foreign companies. “Post-pandemic, India experienced very high FDI inflows, which could have dampened subsequent inflows," said Sujan Hajra, chief economist at Anand Rathi Securities. “More importantly, with the substantial stock of outstanding FDI, some repatriation is expected."

Hajra added that partial exits by private-equity investors following public listings of Indian companies also contributed significantly to the increase in repatriation. “These exits, rather than reflecting a lack of confidence, underscore the bullish conditions of Indian businesses and the growing domestic equity culture."

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Bain India agreed with this assessment in its recent private-equity report, which said the value of exits rose about 15% to nearly $29 billion in calendar year 2023, while their number increased from around 210 in 2022 to around 340 in 2023. This was driven by public-market sales, specifically block trades, which accounted for half of exits by value.

These sales benefited from bustling Indian public markets, which have outperformed those of most major economies, with a significant increase in domestic investor participation across sectors and companies, Bain said in the report.

How can India attract more FDI?

“The decline in FDI is a bit worrying and needs to be monitored," said Teresa John, lead economist at Nirmal Bang. Creating the right policy environment and improving the ease of doing business is necessary amid competition from other countries such as Vietnam and Mexico, she added.

“Incentives for long-term investment and reducing cost disadvantages vis-a-vis competitors will go a long way in attracting investment. Specialised zones with plug-and-play models will also make investing in India more attractive," John said.

An analysis by The Print showed that FDI has remained more or less flat over the past decade because doing business in India hasn’t become easier and because the government has scrapped several bilateral investment treaties. The government, however, has largely attributed the fall in FDI to the global economic slowdown. 

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Even analysts who believe the decline is transient say the government needs to do more on improving policies.

“The government's future policy response should be more coherent, focusing on the sector's productivity and improving existing capacity," said Dipanwita Mazumdar, economist at Bank of Baroda. She added that more sector-specific policies would help bring back FDI in the near term by boosting investor sentiment.

With a well-devised monetary policy, fiscal prudence and increasingly favourable liquidity conditions, there could be a correction in the net FDI numbers in the near term, Mazumdar said. “With an expected downward correction in the global rate cycle and a favourable interest-rate differential for India, the repatriation numbers are also likely to see moderation."

How have FDI policies changed over the years?

FDI typically follows two routes in India—automatic and government—depending on the sector. The automatic route does not require the investor or company to seek approval from the state, while the government route does.

While India remains one of the prime destinations for FDI, policies have been changed over the years to attract more such investments. In June 2021 the cap on FDI in insurance under the automatic route was increased from 49% to 74%, and in October 2021, FDI in telecom was placed under the automatic route and the cap was raised to 100%.

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The Indian government has been trying to liberalise the FDI regime through such changes with the aim of attracting more foreign investment, Abhishek Sanyal, partner at Economic Laws Practice said. 

However, he also highlighted that in 2020 the government made it mandatory to obtain approval for FDI from countries that share a land border with India—China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan. 

“This policy decision," Sanyal said, “was taken to prevent any opportunistic takeovers of Indian companies during the covid-19 pandemic."