The Economics of Falling Net FDI in India

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A detailed economic report reveals a major structural drop in India's net Foreign Direct Investment (FDI).
Net FDI fell from a record high of $44.0 billion in FY21 to under $1.0 billion in FY25.
After touching this low point, the net FDI recovered slightly to $7.6 billion in FY26.

Gross FDI counts all cross-border money moving directly into the domestic economy within a fiscal year, showing incoming investor interest.
Net FDI is calculated under Balance of Payments (BoP) rules as the difference between gross inflows and structural capital outflows.
This calculation adjusts for capital repatriation and complete corporate disinvestments within the financial account.

India saw a massive vertical collapse in net FDI as it dropped from $44.0 billion in 2020-21 to less than $1 billion in 2024-25.
During the 2025-26 fiscal cycle, gross inflows reached $94.6 billion, but net FDI recovered to only $7.6 billion.
Between 2022-23 and 2025-26, for every single dollar of fresh incoming equity, about $1.50 left the country through repatriation, dividends, and royalties.
This exit ratio worsened over twelve years, rising from 56 cents per dollar between 2014-15 and 2017-18 to 70 cents between 2018-19 and 2021-22, before reaching its current high.

Looking closely at the decline helps reveal the changing mix of foreign investment and shows that not all money represents long-term development.
Financial investors like private equity, venture capital funds, and sovereign wealth funds now hold a massive 40.5% share of effective inflows.
Traditional real FDI now stands at 41.9%, matching the share of financial investors closely.
Tracking the investment mix shows that money is increasingly avoiding complex, greenfield industrial asset creation.
Policy analysts must separate accounting definitions to see what is truly depressing the financial accounts.
Headline gross numbers are often inflated by paper-shuffling transactions that do not bring any new economic capital.
Internal reorganizations, share swaps, and external commercial borrowing conversions made up $40 billion of the $560 billion equity inflows between 2014-15 and 2025-26.
Large corporate outbound investments need careful study to separate genuine global expansions from potential capital flight.
A major 45% of India's $65 billion outbound capital went into holding companies and special purpose vehicles in financial hubs like Singapore and the United Arab Emirates.

The historic 1991 Liberalization introduced an open FDI policy aimed at technology acquisition, export promotion, and foreign exchange conservation.
The creation of GIFT City financial channels set up an international financial center to regulate cross-border capital.
This move drove total internal and outbound flows to $1.40 billion and $2.35 billion respectively.
The Reserve Bank of India (RBI) deployed real-time accounting frameworks to track micro-remittances and corporate share conversions across domestic sectors.
Updated corporate rules allowed Indian multinationals like TML Commercial Vehicles to invest strategically overseas and acquire foreign manufacturing assets.

Financial investors are liquidating their local holdings at a large scale, creating massive capital account deficits.
Singapore's Temasek exited Schneider Electric India in 2025, turning an initial $637 million investment into a $6.4 billion cash payout.
Large corporate share sales by foreign entities can hide ongoing capital repatriation under the cover of local public offerings.
Foreign capital now focuses more on digital platforms and tech services instead of building physical factories, which slows down long-term technology transfers.
A portion of incoming capital moves through offshore tax shelters, raising serious concerns about investment quality.
Diaspora and special purpose vehicle flows account for 17.6% of effective inflows, often involving recycled Indian money passing through foreign centers.
Multinationals frequently use high internal royalty payments to send profits back home instead of paying standard corporate dividends.
Attributable intellectual property rights and royalty payments alone drained $46.6 billion out of the country between 2022-23 and 2025-26.

Policymakers must move past tracking simple gross volumes and focus investment metrics on greenfield, long-term industrial capital injections.
The RBI must separate genuine fresh equity capital from internal share swaps, debt conversions, and corporate restructurings in public data releases.
The Production-Linked Incentive (PLI) schemes should be aligned to attract traditional multinationals willing to commit capital to core manufacturing for over a decade.
The government must tighten oversight on double tax treaties and offshore corporate shelters to reduce capital recycling and domestic round-tripping.
Transparent limits should be set on intellectual property and consultancy fee transfers to ensure multinationals reinvest more of their local earnings within the country.