In short :
Net FDI Crash: Despite $81B gross inflows, net FDI fell to just $353M in FY25
FDI-to-GDP ratio dropped from 1.6% to ~0%; reflects weak investor confidence
Key Figures (FY 2024-25)
| Indicator | Value |
| Gross FDI Inflows | $81 billion (recorded in official statements) |
| Net FDI | $353 million (a 98% decline YoY) |
| Gross FDI-to-GDP Ratio | Down form 3.1% (2020-21) —> 2.1% (2024-25) |
| Net FDI-to-GDP Ratio | Down form 1.6% —> approx 0% |
| FDI in GFCF (Capital Formation) | Peaked at 7.5% in FY21 —> steep fall in FY25 |
Understanding the Discrepancy : Gross vs Net FDI
- Gross Inflows: Total foreign investment into India
- Net FDI = Gross Inflows – (Outward FDI + Disinvestment/Repatriation)
Outward FDI (OFDI) is rising
Disinvestment (sale of equity holdings by foreign investors) has increased
Result: Net FDI is nearly zero, despite high gross inflows
Composition Shift : From Greenfield to Alternative Capital
Trend: India’s FDI is shifting from greenfield investments to brownfield investments via Private Equity (PE) and Venture Capital (VC) funds.
Nature of Investment:
- PE/VC funds primarily acquire stakes in existing companies, not new industrial setups.
- Key sectors include fintech, healthcare, retail, insurance, and real estate.
Investment Horizon:
- PE/VC funds typically invest for 3–5 years, aiming for high returns via stock market exits.
Impact:
- Leads to frequent disinvestment and low contribution to long-term capital formation.
- Generates minimal new jobs or industrial capacity.
Data Point:
- PE/VC share of total FDI rose from 12% (2009–10) to 75.9% (2020–21).
- Greenfield FDI has steadily declined during the same period.
Concern:
- The quality of FDI is weakening, with limited developmental impact on India’s manufacturing and infrastructure.
Round-Tripping, OFDI & Tax Arbitrage Concerns :
- OFDI includes flows to tax havens like Singapore & Mauritius — ironically, top sources of FDI into India
- Possible round-tripping of domestic capital via treaty routes
| Global evidence: Blanchard & Acalin (IMF, 2016) found India among top 6 countries with high FDI in-out correlation ➤ Signals “hot money” and treaty shopping, not stable, productive capital |
Structural Warnings :
- FDI ≠ Always productive: If focused on M&A, stock exits, and tax savings, it adds little to real economy
- Misleading narrative: Headline FDI inflows don’t reflect quality, longevity, or sectoral spread
- Weak links to employment, technology transfer, or manufacturing capacity
Policy Concern – India’s FDI Landscape :
Over-reliance on PE/VC funds
- Leads to short-term capital with minimal contribution to infrastructure or employment
Declining Greenfield FDI
- Weakens long-term industrial growth, technology transfer, and job creation
Lack of sectoral diversification
- Majority of FDI flows into services, not manufacturing or R&D
Inadequate monitoring of disinvestment
- Frequent exits by PE/VC funds inflate disinvestment figures, reducing net FDI
Round-tripping via tax havens
- Capital entering and exiting through Singapore, Mauritius raises concerns of treaty shopping and tax arbitrage
Weak alignment with national priorities
- Current FDI composition does not significantly support Make in India, Skill India, or digital infrastructure goals
Need for data transparency and reform
- FDI classifications should distinguish between productive (greenfield) and financial (alternative capital) flows
Recommendations :
- Encourage greenfield, tech-linked FDI
- Tighten FDI data classification — separate true investment from financial flows
- Reform double taxation treaties to reduce treaty shopping
- Link FDI incentives to job creation, R&D, and manufacturing
- Build robust FDI monitoring systems that focus on impact, not just inflows
| FOREIGN DIRECT INVESTMENTS (FDI) FDI refers to investment made by an individual or firm from one country (home country) into ownership or control of business assets in another country (host country), with the intention of managing production, distribution, and operations. Examples of FDI in India 🇺🇸 Microsoft subsidiaries in India 🇯🇵 Suzuki–Maruti joint venture 🇫🇷 SBI Life (SBI + BNP Paribas Assurance) Components of FDI Equity Capital – Value of shares owned by foreign investors Reinvested Earnings – Profits retained and reinvested in the host country Intra-Company Loans – Lending/borrowing between parent and affiliated firms Categories of FDI Horizontal FDI: Same business in host country as in home country (e.g., McDonald’s in India) Vertical FDI: Related but different operations (e.g., a car maker investing in a foreign steel supplier) Conglomerate FDI: Investment in an unrelated business, usually via joint ventures Methods of FDI Greenfield Investment: Building new facilities from scratch in host country : E.g., Starbucks or McDonald’s setting up their own outlets and training staff Brownfield Investment: Investing via cross-border mergers and acquisitions Immediate operations with existing infrastructure Private Equity (PE) Capital investment in privately held companies (not listed on stock exchanges)Typically targets mature companies for expansion, restructuring, or turnaroundInvolves larger investments, often acquiring majority or full control Venture Capital (VC) Investment in startups or early-stage businesses with high growth potential Usually involves smaller amounts and focuses on innovation-driven sectors (e.g., tech, biotech) VC firms take minority stakes, betting on long-term scalability |
| UPSC Relevance GS3 – Indian EconomyRole of FDI in capital formation, technology acquisition, Brownfield vs greenfield FDI, net vs gross distinction, Private capital behaviour in emerging markets GS2 – Policy & GovernanceFDI regulation, double tax avoidance agreements (DTAAs), Regulatory reforms for aligning foreign capital with national interest Possible Mains Question“India’s high FDI inflows mask deeper concerns about capital flight and investment quality. Critically examine.” |