India has received a cumulative sum of $729 billion ($1,072 billion if reinvested earnings, equity capital and other capital are included) since 2000 as foreign direct investment (FDI) via direct equity flows up to March 2025, according to Bank of Baroda’s economic research department.
The bank’s economists observed that FDI will continue to progressively become one of the most important source of funding for investments in the country.
“With the government working hard to accelerate the pace of growth, there is urgency being shown in terms of easing the ‘doing business’ environment. This has manifested in higher flows of FDI into the country since the last 10 years or so,” they said.
Besides increasing the overall flows, the focus should be on channelling them to the manufacturing sector, which will benefit a lot from such an impetus, opined the researchers.
Twelve countries, including Mauritius, Singapore, the US, Netherlands, Japan, and the UK, account for over 85 per cent of the FDI flows.
In this regard, BoB economists noted that there has been a change in hierarchy, with Singapore gaining major share (24 per cent as of March-end 2025 from 13 per cent as of March-end 2024) from Mauritius (down from 35.2 per cent of March-end 2025 to 24.7 per cent as of March-end 2025), among other countries. Shares of the UK, Japan, Germany, and France have come down, while those of the US, Netherlands, the UAE, and Cayman Islands have increased.
“Here the important thing to note is that investments coming from countries like Mauritius, Singapore, Cyprus, and Cayman Islands are likely to be third parties investing on behalf of the original investors in other countries.
“This has been done to take benefit from tax agreements with India. Therefore, the origin of the investor may not be clear. But clearly the tax systems, as well as well as the treaties signed by these countries with India, will have a bearing on these flows. Hence, the sources of FDI may be less indicative of the origin of the investor,” the economists said in a report.
Sector-wise FDI share
The report highlighted that the most significant shift has been the increase in the share of IT software and hardware in overall FDI. From a cumulative investment of $15 billion (6 per cent) in March 2015, it has risen to $111 billion (15.2 per cent) in March 2025.
“This has also been associated with significant increase in the export of services in this industry. During this period, exports of software service increased from $69 billion to $170 billion in FY24, which is indicative of the sharp rise in the business. This has in turn attracted more FDI,” the economists said.
The economists attributed the decline in share of services to the limits being reached already in the banking space. But the increase per se has been impressive from a cumulative of $43 billion (17.2 per cent) as of 2015 to $118 billion (16.3 per cent) as of 2025.
The share of construction development has come down (from 9.7 per cent to 3.7 per cent), mainly due to the relatively higher growth in other sectors. In absolute terms, however, there was an increase during this period. Other factors contributing to lower share have been posed by higher inventory, land acquisition issues and slower township development activity.
Competition
The economists opined that the decline in share of drugs and pharma (from 5.3 per cent to 3.2 per cent) can be linked to increased uncertainty in the industry, coupled with pricing pressures in various countries, given the level of competition.
Also, the push towards generic drugs and price reductions have made this sector less attractive for investors. In absolute terms the flows increased by around $10 billion during this period.
The decline in FDI share in power (from 3.9 per cent to 2.7 per cent) was made up by higher investments in the non-conventional energy sector (1.5 per cent to 3 per cent) involving renewables. Therefore, the push being given to green technology oriented business has been supported by these inflows.
Govt policy
BoB economists observed that FDI in trading (from 3.2 per cent to 6.5 per cent) has been supported by government policy of allowing participation in both the wholesale and retail segments. Given the large population of the country and growth of the organised retail segment, there has been a lot of interest shown by investors in this sector.
The increase in FDI in infrastructure related construction activity (from 1.4 per cent to 5.0 per cent) has been a result of the exponential increase in government capex, which has had backward linkages with the companies providing the output for projects in roads, railways and urban development. This is, hence, one segment which will continue to witness higher inflows as the government at both levels increases the level of capex.