India’s Foreign Direct Investment (FDI) Trends

India's net Foreign Direct Investment (FDI) inflows witnessed a dramatic fall of 96% in FY25 compared to FY24, as per the RBI Bulletin (June 2025). This sharp decline in net FDI, despite a rise in gross FDI inflows, raises several questions about the underlying causes, while also underscoring the complexities surrounding India's economic and investment landscape.

What is Foreign Direct Investment (FDI)?

FDI refers to the investment made by foreign entities in Indian companies, either through equity instruments in unlisted companies or by acquiring 10% or more of the paid-up capital of a listed Indian company. Key regulations and policies govern FDI in India, such as:

• Consolidated Foreign Direct Investment Policy (2020) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

FDI can flow through two main routes:

1. Automatic Route: No government or RBI approval is required. Example sectors include agriculture, coal and lignite, telecom, etc.

2. Government Route: Requires prior government approval for certain sectors.

Some sectors, including lotteries, gambling, and atomic energy, are prohibited for FDI in India.

Significance of Growing FDI Inflows for India

FDI plays a pivotal role in India’s economic growth due to the following reasons:

1. Capital Investment: FDI infuses non-debt capital into India’s economy, providing sustainable funding for sectors such as technology transfer and strategic sector development. In 2024, greenfield investments saw a 25% rise, reaching USD 110 billion.

2. Exchange Rate Stability: India’s foreign exchange reserves can cover 11+ months of imports and 96% of external debt as of May 2025. This stable reserve base supports the Indian Rupee's value.

3. Sustainable Finance: India has emerged as the largest carbon credit issuer in the Verra Registry, showing a growing commitment to green investments and sustainable finance.

4. Supports Competition and Innovation: FDI fosters competition, promotes the best practices, and brings in managerial and technological know-how, leading to the creation of employment.

Key Reasons for the Fall in Net FDI in India (FY25)

While India continues to be an attractive investment destination, several factors have contributed to the 96% fall in net FDI in FY25:

1. Rising Outward Indian Investment: Indian companies have been increasingly investing abroad. According to the Ministry of Finance’s Monthly Economic Review (April 2025), Indian direct overseas investment surged to USD 12.5 billion in FY25, leading to a rise in outward FDI.

2. Liberalized Policy for Overseas Direct Investment (ODI): India’s ODI guidelines (2022) have enabled Indian entities to invest abroad with fewer restrictions. This shift is contributing to an increase in Indian investment abroad, impacting net FDI inflows.

3. Increase in Repatriations: The increase in repatriations (foreign investors pulling back capital) signifies a maturing market, where foreign firms are withdrawing investments after achieving their targets.

4. Global Economic Uncertainty: Rising global trade tensions, such as tariff hikes by the USA, and a weak global demand, especially in key markets, have dampened FDI flows worldwide. Global FDI declined by 11% YoY in 2024, as per UNCTAD’s WIR 2025.

5. Maturing Investment Cycle: Many earlier foreign investments in India are now entering the harvest phase, where investors have realized their growth targets and are withdrawing investments, affecting net FDI figures.

Initiatives to Boost FDI in India

Despite the challenges, India continues to take proactive measures to attract and retain FDI:

1. Sectoral Reforms:

   • Several sectors like Defence, Insurance, Petroleum and Gas, Telecom, and Space have seen reforms aimed at increasing FDI caps. For instance, the Union Budget 2025 increased the FDI sectoral cap for the insurance sector from 74% to 100% for companies investing the entire premium in India.

2. Investor-Friendly Environment:

   • The Jan Vishwas (Amendment of Provisions) Act, 2023 decriminalized 183 provisions across 42 central acts, making the regulatory environment more business-friendly.

3. Promotion Agreements:

   • India has signed Bilateral Investment Treaties (BITs) with countries like Kyrgyzstan (2019), UAE (2024), and Uzbekistan (2024), along with a Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA).

4. Competitive Cooperative Federalism:

   • Programs like Business Reforms Action Plan (BRAP) 2024 and Logistics Ease Across Different States (LEADS) 2024 encourage states to compete for FDI by improving their business environment.

5. Institutional Mechanisms:

   • The Project Development Cells (PDCs) set up by the government fast-track investments by providing support across various ministries and departments.

6. Government Schemes:

   • Initiatives like Make in India, Start-up India, PM Gati Shakti, National Industrial Corridor Programme, and the Production Linked Incentive (PLI) Scheme are designed to promote both domestic and foreign investments.

Way Forward

India must implement strategic reforms to reverse the fall in net FDI and enhance its position as a top investment destination:

1. Undertaking Policy Reforms:

   • Stable and predictable policies, including taxation, regulatory, and judicial reforms, are essential to improve the ease of doing business and attract higher FDI. Vietnam’s 10-year economic plans offer a good example of long-term investment planning.

2. Strengthening the Digital Economy:

   • India should focus on advancing the digital economy, given that it is one of the key drivers of global FDI. Investments in digital technologies were up by 14% in 2024 (UNCTAD's WIR 2025), and India can capitalize on this trend.

3. Investment Incentives:

   • Offering targeted fiscal incentives such as tax breaks, grants, and subsidies can help steer foreign capital into key sectors, especially green technology and innovation-driven sectors.

4. International Cooperation:

   • India must continue reforming the international financial system and engage in multilateral cooperation to manage global risks, promoting fair investments.

Conclusion

The decline in net FDI in FY25 is largely temporary and driven by a combination of matured investments, outward Indian investments, and global economic challenges. However, India’s long-term potential to attract sustainable and inclusive capital remains strong. With focused reforms and smarter investment strategies, India can retain its position as South Asia's largest FDI recipient and continue to drive economic growth.