India's Economic Growth and Foreign Capital Inflows
India's Rapid Economic Growth
India has been the world's fastest-growing major economy, with an average annual GDP growth rate of 8.2% from 2021 to 2024. This growth surpasses other countries such as Vietnam, China, and the United States.
Foreign Portfolio Investments (FPI)
- The Indian equity markets saw net FPI inflows of $25.3 billion in 2023-24.
- Net outflows were recorded in other years: $18.5 billion in 2021-22, $5.1 billion in 2022-23, $14.6 billion in 2024-25, and $2.9 billion in 2025-26 (till September 5).
Foreign Capital Paradox
Despite India's high growth rates, foreign capital inflows have been low, with net capital flows at $18.3 billion in 2024-25, the lowest since 2008-09.
Trends in Foreign Investment
- Net foreign investment peaked at $80.1 billion in 2020-21 and fell to $21.8 billion and $22.8 billion in the subsequent years.
- Net flows were $4.5 billion in the following fiscal, with significant outflows in equity sectors offset by investments in debt instruments.
Reason for Decline in Capital Flows
Many past investments in private equity and venture capital are being cashed out, causing a decline in new inflows.
Balance of Payments (BOP) Implications
India faces large merchandise trade deficits, offset by surpluses in invisibles like services exports and remittances, keeping current account deficits below $50 billion.
Challenges and Reforms
- Potential widening of trade deficits due to tariffs imposed by the US could impact exports significantly.
- Investor concerns include corporate earnings and sustainable market valuations.
- The Indian government is initiating reforms to boost domestic consumption and improve the business environment.
The Indian rupee has fallen to a new low against the dollar, exacerbated by capital outflows and tariff concerns.