India must prioritise quality FDI over headline inflow figures

Source: The post India must prioritise quality FDI over headline inflow figures has been created, based on the article “ A complex turn in India’s FDI story” published in “The Hindu” on 8 September 2025. India must prioritise quality FDI over headline inflow figures.

UPSC Syllabus Topic: GS Paper 3 – Indian economy and mobilisation of resources

Context: FDI powered India’s post-1991 modernisation, especially in e-commerce and computer hardware/software. Recent years show strain: inflows look strong, yet withdrawals surge, investments skew short-term, and Indian firms invest abroad. The concern is weak capital retention, narrow sectoral depth, and a less predictable domestic climate.

For detailed information Global FDI is falling and India faces growing challenges read this article here

How has India’s FDI story shifted?

1. From reform-led modernisation to mixed signals: FDI strengthened industry, innovation, and global market integration. Lately, the pattern looks complex, with rising disinvestments and outward flows tempering earlier gains.
2. Short-term focus eclipsing long-term development: Investments increasingly chase quick returns, including tax arbitrage and treaty routing. Durable commitments to technology and capacity creation have weakened.
3. E-commerce and tech transformed; breadth lags: Large inflows reshaped e-commerce and computer hardware/software. However, broader industrial deepening has not kept pace.
4. Indian capital going out, not staying in: Domestic firms invest heavily abroad. This questions policy predictability and the attractiveness of building capabilities at home.

What do the numbers reveal post-pandemic?

1. Gross inflows rose, but with volatility: Gross inflows touched $81 billion in FY 2024-25, up 13.7% year-on-year. Flows climbed from $46.6 billion (2011) to $84.8 billion (2021), peaked in FY 2021-22, then slipped to $71 billion in FY 2023-24 before a mild recovery.
2. Divergence between inflows and repatriations: Post-pandemic, gross inflows totalled $308.5 billion, while $153.9 billion was withdrawn or repatriated. Inflows grew just 0.3% annually; repatriations rose 18.9%.
3. Net inflows eroded sharply: After subtracting repatriations and loan repayments, net inflows fell steeply from FY 2021-22 to FY 2024-25. After adjusting for outward FDI, net retained capital shrank to $0.4 billion.
4. Disinvestments surged to new highs: Disinvestments rose 51% to $44.4 billion in FY 2023-24 and to $51.4 billion in FY 2024-25. They now represent over 63%, marking a decisive behaviour shift.

Why are withdrawals and outflows rising?

1. Manufacturing’s shrinking share: Manufacturing, once central to FDI, saw steep outflows. Its share fell to 12% of total FDI, curbing technology diffusion and jobs.
2. Domestic bottlenecks deter stickiness: Regulatory opacity, legal unpredictability, and inconsistent governance dampen confidence. Rankings improved, yet execution frictions persist.
3. Indian firms’ outward push accelerates: Outflows grew from $13 billion (FY 2011-12) to $29.2 billion (FY 2024-25). Firms cite regulatory inefficiencies, infrastructure gaps, and policy uncertainty.
4. Confidence, not capital, is the constraint: The parallel rise of foreign withdrawals and Indian outward FDI signals systemic issues that limit long-horizon commitments.

Where is capital going—and what is missed?

1. Tax-hub dominance and source fatigue: Singapore and Mauritius dominate inflows, hinting at tax-driven routing. Traditional industrial sources—the U.S., Germany, and the U.K.—have scaled back.
2. Services and rent-seeking tilt: Financial services, energy distribution, and hospitality drew more capital. These add to GDP but lack the strong multipliers of manufacturing, infrastructure, and advanced tech.
3. Weaker long-term resilience: Shifts toward short-term, service-heavy flows reduce potential for capability building and durable growth.
4. Gross figures conceal fragility: Headline inflows look robust but mask churn, sectoral skews, and limited retention.

What are the macro risks and policy priorities?

1. External account pressures rise: FDI supports the balance of payments and the currency. Falling net inflows narrow policy space and complicate external management.
2. RBI’s measured caution: The RBI notes outflows mirror broader emerging-market trends yet carry risks that require careful handling.
3. Quality over quantity of capital: India should prioritise durability and strategic alignment over raw inflow size. Committed capital must build domestic capabilities.
4. Reform and human capital: Simplify rules, ensure policy consistency, upgrade infrastructure, and expand education and skills to attract advanced manufacturing, clean energy, and technology.

Question for practice:

Examine how rising disinvestments and outward FDI since FY 2021–22 have reduced India’s net FDI inflows and weakened long-term industrial development