There has been considerable commentary in recent days about data related to foreign direct investment (FDI) in India. Of particular focus have been the net FDI numbers that have moderated to $0.4 billion in 2024-25 from $10.1 billion in the previous year.
Notably, while net FDI dropped, gross inward FDI actually grew 13.7 per cent to $81 billion in 2024-25, with manufacturing, financial services, electricity and energy, and communication services, together accounting for over 60 per cent of the inflows, mirroring India’s strong pull as an investment destination of choice by transnational corporations.
The key question here is whether the fall in net FDI inflows indicates, in any way, that India is beginning to lose its attractiveness as a preferred investment destination. The response to this is more nuanced, than just a binary analysis of a one-off metric.
It is important to recognise that FDI is a category of cross-border investment where corporations commit capital, either in projects or in specific local companies, drawn by expected power of returns and a range of other associated reasons.
To that extent, India, the world’s most populous country, the fourth largest economy and also among the fastest growing major economies with a rapidly swelling and vast consuming middle class remains a top draw for transnational corporations to set manufacturing and business bases committing large amounts of capital.
There is no gainsaying the fact that progressive liberalisation policies by the capital recipient country towards private foreign capital can usher in the several benefits. Not all these benefits are tangible. For instance, there is the element of social returns. FDI yields greater social returns when value added exceeds investor appropriation. More employment and higher real wages for domestic labour; greater consumer choice; and higher tax revenues are examples of these.
High ROI
In the current context, net FDI outflows should also be examined in terms of maturing of investments. During 2024-25, many foreign investors divested their Indian operations through initial public offerings (IPO), making significant returns on their investments in some of India’s trailblazing startups. For instance, foreign venture capital funds sold their stake in Swiggy worth $2 billion through the IPO.
During 2024, private equity and venture capital funds realised a total of US$26.7 billion in exits, representing a 7% year-on-year increase. According to a report by EY, open market exits dominated, “while PE-backed initial public offerings (IPOs) gained momentum, buoyed by a capital market that offered robust opportunities for investor exits”.
There were other markers of capital exit evolution, too, from legacy companies. South Korean car major Hyundai sold a 17.5 % stake in Hyundai Motors India through an IPO and repatriated Rs 27,870 crore back to South Korea. That even after the IPO, it still holds an 82.5% stake in Hyundai Motors India Limited, shows that India remains a strong bet for the company. In other examples of outflows, Singtel sold stakes in Airtel, while BAT too sold stakes in ITC, all of which added up to the column of net FDI outflows.
Net FDI and GDP
Another central element in this focus is about the analytical markers, itself. It may be worthwhile to analyse FDI inflows as a percentage of gross domestic product (GDP) on a cross-country basis.
The data, as put out by the World Bank, makes for an insightful pattern. In each of the large economies and economic groupings, net FDI inflows as a percentage of FDI has moderated between 2022 and 2023.
In China, this has fallen to 0.24 per cent in 2023 from 1.06 per cent in 2022. In India, net FDI outflows as a percentage of GDP has moderated to 0.79 per cent in 2023 from 1.48 per cent in the previous year. In the United States, this has fallen from 1.57 per cent to 1.28 per cent. In the United Kingdom, this has slumped from 1.44 to (-) 2.6 per cent.
India’s attractiveness as a preferred capital recipient country remains, anecdotally and statistically, broadly unshaken.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
