Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Context
- Recent FDI data highlights India’s fragile position as an investment destination.
- India’s investment inflows remain highly sensitive to external shocks, especially U.S. policy actions.
Recent Trends in Foreign Direct Investment
- Net FDI turned negative for three consecutive months till October 2025.
- Negative net FDI implies higher investment outflows than inflows.
- Before August 2025, India’s FDI position in 2025–26 was relatively strong.
- Net FDI during April–July 2025 stood at $10.7 billion, over three times last year.
- Investment reversal began after U.S. tariff announcements on Indian goods.
- In August 2025, net outflows reached $622 million.
- September and October 2025 saw further net outflows of $1.7 billion and $1.5 billion.
- Cumulative net FDI declined to $6.2 billion by October 2025.
- Although higher than April–October 2024, the direction of flows reversed sharply.
Concerns in Gross Inflows and Outflows
- Poor net FDI is not only due to rising outflows.
- Gross FDI inflows also declined year-on-year in August and October.
- This contrasts with 33% average inflow growth during April–July 2025.
- Rising outflows were partly driven by Indian companies investing overseas.
- This may reflect growing global competitiveness of Indian firms.
- However, it raises questions about insufficient domestic investment opportunities.
- The issue extends beyond profit repatriation to structural investment confidence.
Government Measures to Attract Investment
- Government introduced corporate tax cuts to boost private investment.
- Production Linked Incentive (PLI) schemes were launched to support manufacturing.
- Demand-side measures included income-tax and GST reductions.
- These reforms were welcomed as structural improvements by corporations.
- Despite reforms, investment sentiment shifted rapidly after U.S. tariff actions.
Role of External Uncertainty
- U.S. tariff hikes of 25%, later increased to 50%, triggered capital outflows.
- RBI noted uncertainty around the India–U.S. trade deal affected investor confidence.
- Foreign portfolio investors also exited Indian equity markets.
Core Insight
- Growth narratives and market size claims reassure investors only during stable conditions.
- India’s investment appeal remains fragile without deeper structural reforms.
- Sustainable attractiveness requires resilience against global economic headwinds.
