Source: The post Global FDI is falling and India faces growing challenges has been created, based on the article “India should probe the reasons behind rising outward FDI flows” published in “Live Mints” on 14th July 2025
UPSC Syllabus Topic: GS Paper1- Indian economy and mobilisation of resources
Context: Three global reports in 2024–25 highlight a sharp fall in foreign direct investment (FDI), raising concerns for developing economies. These countries depend on FDI to boost industrial capacity, infrastructure, technology, and clean energy. India, despite appearing stable on the surface, faces deeper issues due to rising outflows and shifting investment preferences.
Global Decline in FDI: Scope and Causes
- Sharp Worldwide Contraction: The UNCTAD World Investment Report 2025 reported an 11% fall in FDI flows in 2024, the second consecutive year of decline. Investor uncertainty remains high for 2025. OECD and World Bank data confirm similar trends.
- Disproportionate Impact on Developing Economies: Developing nations, reliant on FDI for growth and sustainability goals, are especially hurt. Despite $500 billion in digital greenfield FDI over five years, investments remain concentrated in a few countries, marginalizing vulnerable ones.
- Long-Term Trends and Global Factors: FDI as a share of global GDP fell from 5% in 2007 to under 1% in 2023–24. The 2008 financial crisis marked a permanent decline. Rising protectionism, policy unpredictability, and fractured global value chains are core reasons
behind falling investments.
FDI Distribution Patterns and Emerging Gaps
- Concentration in Rich Economies: According to the OECD, the US, Luxembourg, and Canada were top destinations in 2024. However, FDI to non-OECD G20 economies like India fell by 30%, and China marked its third consecutive year of decline.
- Greenfield Versus Project Finance: The World Bank notes a 25% fall in greenfield FDI to emerging markets, indicating a lower willingness to set up manufacturing. India, while seeing greenfield strength in semiconductors and metals, witnessed a 37% fall in project finance inflows.
India’s Changing FDI Profile
- Marginal Gains and Deeper Concerns: India’s rank rose slightly to 15th in 2024 from 16th in 2023. But this masks underlying issues, especially the surge in FDI outflows.
- Investor Exits and Domestic Buyouts: Foreign investors are cashing out, often selling assets to domestic buyers. Examples include Disney’s exit via sale to Jioand Advent International’s exit from Bharat Serum. The lack of detailed data blurs domestic-foreign distinctions.
- Rise in Indian Overseas Investments: More strikingly, Indian companies are investing abroad, not domestically. Outflows rose 75% in 2024 and are four times higher than in 2016–17. Weak domestic prospects and regulatory burdens are key push factors.
Policy Response and Structural Paradox
- Incentives Versus Reality: Despite policies like FDI cap hikes and production-linked incentives, domestic investment hasn’t kept pace. Sectors such as insurance, defence, construction, and retail have seen liberalization, but with limited impact.
- India’s Unusual Position: Outward FDI is usually led by wealthy nations with convertible currencies like the US and Japan. India, with a partially convertible rupee, doesn’t fit the typical profile, raising concerns about underlying investment deterrents.
- Need for Government Action: The government must investigate why India Inc avoids domestic investment, despite favourable incentives and low borrowing costs. Addressing this is crucial to reverse the FDI imbalance and foster growth.
Question for practice:
Discuss the reasons behind the global decline in FDI and explain how it is impacting India’s investment patterns and economic prospects.
