Overview of Foreign Direct Investment (FDI) in India
Foreign Direct Investment (FDI) has been a significant influence in India's economic development since the 1991 economic reforms. It has modernized India's industrial base and integrated it more closely with global markets, particularly impacting sectors like e-commerce and computer hardware and software.
Current FDI Trends and Challenges
- Recent FDI Figures:
- FDI inflows reached $81 billion in FY 2024-25, a 13.7% increase from the previous year.
- Between 2011 and 2021, FDI increased from $46.6 billion to $84.8 billion.
- Concerns:
- FDI inflows peaked in FY 2021-22 but fell to $71 billion in FY 2023-24 before a slight recovery.
- Post-pandemic, gross inflows recovered at an annual rate of 0.3%, while disinvestments and repatriations grew at 18.9% annually.
- Net FDI inflows have sharply declined, with retained capital within India dropping to $0.4 billion in FY 2024-25.
Impact and Implications of FDI Trends
- Economic Impact:
- The shift towards short-term investments is limiting long-term development impacts.
- Manufacturing sector's share of total FDI has decreased to 12%.
- Outward Investments:
- FDI outflows increased from $13 billion in FY 2011-12 to $29.2 billion in FY 2024-25.
- Indian firms cite regulatory inefficiencies and infrastructure gaps as reasons for investing abroad.
Structural Challenges and Recommendations
- Barriers to Investment:
- Regulatory opacity, legal unpredictability, and inconsistent governance deter investment.
- Policy Recommendations:
- Implement reforms to reward long-term investments.
- Simplify regulations, ensure policy consistency, and invest in infrastructure and education.
Observations and the Way Forward
- Investment Quality Concerns:
- High reliance on financial centers like Singapore and Mauritius suggests tax-driven strategies.
- Traditional FDI sources like the USA, Germany, and the UK are reducing their investments.
- Macroeconomic Stability and FDI:
- FDI inflows are critical for maintaining the balance of payments and providing currency stability.
- Rising outflows present risks, aligning with trends in other emerging economies.
Conclusion
India stands at a critical juncture regarding its FDI strategy. To become a global investment hub, India must prioritize quality, durable, and strategically aligned capital inflows. This requires a focus on domestic capability building, policy stability, infrastructure upgrades, and human capital investments.
Authored by Amarbahadur Yadav, Assistant Professor of Economics, Zakir Husain Delhi College (Evening), University of Delhi.