The decline in net foreign direct investment in 2024-25 to $0.4 billion has created a needless stir among analysts and policymakers. It is true that net FDI figure has been gradually moving lower since FY21, when it amounted to $44 billion. Yet, gross FDI inflows have held steady, displaying resilience in this period. Net flows have been impacted in the last two years due to an increase in repatriation and disinvestment, and a surge in net outward FDI in FY25.
The May report of the Department of Economic Affairs had expressed concern at the $12.5 billion increase in outward FDI in FY25, stating that it “warrants attention, especially given their (private companies’) cautious attitude towards domestic investment.” But a closer look at the disaggregated numbers shows that the higher outward FDI flows are an outcome of the strong growth in Indian companies and the maturing investment ecosystem in the country.
The spike in net outward FDI in FY25 is led by large Indian companies which already have operations across the globe such as Tata Steel, Vedanta, Samvardhana Motherson, Sun Pharma and Mahindra & Mahindra. These companies are sending additional money to their wholly owned subsidiaries and joint ventures in other countries. As companies grow in scale, it is natural for them to look beyond India to expand their market, to source technical expertise and raw materials or to expand their product portfolio. Restraining these overseas fund transfers would impede their future growth and profitability. Since the profits made through the overseas ventures are taxed in India, authorities should not attempt to discourage such fund transfers. The gross foreign direct investment flows have, in fact, risen 13.7 per cent in FY25 to $81 billion. This is a turnaround from the subdued flows in the previous two years. The RBI notes in its Annual Report that India was placed fourth globally in announcements of greenfield FDI capital investments in FY25, after the US, France and the UK. With the PE/VC funding of Indian start-ups witnessing a slight revival last year, the gross FDI numbers could improve further in the coming months, supporting the net FDI number.
Given this backdrop, there is no real cause for anxiety over higher repatriation and disinvestment by global companies. While these outflows recorded a sharp increase in FY24 to $44.5 billion and remained elevated at $51.5 billion in FY25, they are likely to abate as the rally in stock market cools. An analysis of the disinvestments revealed that multinational corporations in India were selling small stakes and repatriating it home, probably cashing in on the strong bull-run in Indian stock markets until last September. The other reason for increase in repatriation is the IPO boom over the last two years which allowed many PE and VC investors to sell their holdings in the primary market. The outflows would seem to affirm India’s status as a viable investment destination for foreign investors.