The fall in net foreign direct investment inflows in FY24 has many dimensions to it. At the outset, net FDI inflows (on capital account) is $10.6 billion, but if one includes net repatriation of income by foreign companies estimated at $53 billion, which is on current account, it turns out that foreign companies may have retained very little.

The adjoining table and charts reveal trends in net FDI flows (on capital account). The Reserve Bank of India reported that net FDI flows dropped 62 per cent over the last fiscal year to $10.6 billion in FY24, the lowest since 2007. It cites that out of the gross FDI inflow of $70.9 billion, foreign companies repatriated or dis-invested 63 per cent or $44.4 billion (capital netflows). Indian companies made outbound investments worth $16 billion.

While the contraction in net FDI flows (gross FDI inflows by foreign companies less FDI outflows by Indian companies, a capital account transaction) is significant, RBI also reports that FDI companies saw 45.2 per cent growth in net profit at $32.4 billion in FY24 and similar growth in dividend payout in 2023.

FDI repatriation (capital account) has risen from $9.8 billion in FY14 (or 15 per cent of gross FDI) to $44 billion in FY24 (or 63 per cent). Additionally, the net repatriation of incomes ($53 billion, profits of MNCs, extrapolated from April-December 2023 BoP data, RBI) from India is rising even faster. Overall, the intent of MNCs in India appears to be dominated by repatriation ($97 billion, both capital and net income) in FY24, nearly $27 billion higher than the gross FDI flows.

At $10.6 billion in FY24, net FDI has dropped to a 13-year low (average $29 billion) and 59 per cent lower than the FY21 peak of $44 billion. What’s more, FPI flows ($35 billion in FY24) have been negative or flat in five out of the last eight years.

Reasons for decline

These trends characterise diminishing longer-term fixed capital commitments by foreign firms in India. Corresponding to global trends, FDI/GDP inflows have declined to a 20-year low at 0.7 per cent in FY24 from 3.5 per cent in FY09. Hence, India’s FDI/GDP ratio decline has been somewhat larger than global declines.

Long-term trends show that net FDI inflows into India as a proportion of GDP have declined from the peak of 3.5 per cent in FY09.

At the global level, our analysis reveals rising trade protectionism, associated with policies that protect domestic industries from foreign competition have resulted in declining global FDI flows. The cumulative impact of the post-GFC (2008) rise in protectionism, its intensification since the US-China trade war (2018), and the aftermath of the pandemic has resulted in a shrinkage of outward and inward global FDI flows. FDI inflows as a percentage of global GDP have declined to 1.3 per cent in 2023, the lowest since 1996 and the peak of 3.2 per cent in 2007.

Trade impulses are set to worsen again after a brief post-pandemic hiatus. The US-China trade conflicts have resurfaced with rising technology fragmentation attempts and the US’s latest actions (under Section 301, May 15, 2024) to increase tariffs on Chinese imports worth $18 billion. China’s trade and investments also face protectionism by the European Union.

During the global trade liberalisation phase (FY93-FY08), India’s real trade of goods and services expanded by 14.8 per cent CAGR. But since then, it has decelerated sharply; 5.7 per cent CAGR in the post-Covid era and 4.3 per cent during FY13-FY24. Thus, rising global trade protectionism has been associated with deceleration in private capex, job creation, household income and consumption, and higher public and household debt. US restrictions on Chinese imports could intensify dumping in India. Only select sectors can sustain gains from the China+1 theme — viz electric equipment, general machinery, auto parts, semiconductors, and apparel.

How this impacts future FDI is anyone’s guess. But historical trends indicate that the recurrence of global trade conflicts would still weigh on the outlook of external capital flows. Foreign capital flows are increasingly becoming opportunistic.

India’s FDI inflows are concentrated in a few sectors, mainly IT, trading, and non-conventional energy where the opportunities are either episodic or long-term. Since FY17 the concentration of the top nine sectors in FDI inflows, mainly services, has risen from 49 per cent to 70 per cent in FY24E. Contrastingly, the share of a wide range of 53 sectors, predominantly manufacturing, has declined to 30 per cent.

Sectoral FDI flows outside the IT sector indicate a dominating intent to tap into domestic opportunities rather than create an export base. Of the 14 focus sectors under the PLI scheme, only non-conventional energy has gained prominence in FDI inflows.

India needs to revive domestic savings and demand, thereby stimulating private capex, employment, export competitiveness, and overall productivity.

The writer is is Co-Head of Equities & Head of Research - Strategy & Economics, Systematix Group. Views are personal