Understanding India's Shifting FDI Landscape: A Tale of Rising Repatriation and Outward Investments

India's FDI landscape is witnessing a shift, with net FDI inflows plunging 96% in 2024-25, driven by rising repatriation ($51.5 billion) and surging outward FDI ($29 billion). Gross inflows grew 14%, but gains were offset by these trends. Key contributors to inward and outward FDI include Singapore, the UAE, and the US, with sectoral focus differing. While the Reserve Bank views this as market maturity, declining reinvestment and domestic investment enthusiasm highlight structural challenges. Policy reforms are critical for sustainable growth.

The economic dynamics of foreign direct investment (FDI) in India have undergone a significant transformation in recent years. While gross FDI inflows have shown resilience, the sharp increase in repatriation and outward FDI by Indian companies has raised questions about the future trajectory of investments in the country. The financial year 2024-25 marked a notable shift, with net FDI inflows plunging by a staggering 96%, reaching a mere 0.35billioncomparedto0.35 billion compared to 0.35billion comparedto10.13 billion in the previous year. This represents the lowest level of net FDI inflows in over two decades.

The Dual Factors Behind the Decline

Two primary factors contributed to this sharp decline in net FDI inflows:

1. Rising Repatriation and Disinvestment: Foreign investors withdrew a significant $51.5 billion from Indian companies, marking a 16% increase over the previous year.

   
   

2. Surging Outward FDI: Indian companies invested $29 billion abroad, a 75% jump from the previous year’s outward FDI figures.

   
   

Although gross FDI inflows reached $81 billion, reflecting a 14% rise over the last year, the combined impact of repatriation and outward FDI effectively neutralized these gains.

Inward and Outward FDI: A Regional and Sectoral Analysis

Interestingly, there is a strong overlap between the countries contributing to India’s inward FDI and those receiving Indian outward FDI. Singapore, Mauritius, the UAE, the Netherlands, and the United States accounted for over 60% of India’s inward FDI and more than 50% of outward FDI.

However, the focus of these investments differs by sector:

• Inward FDI: Manufacturing, financial services, energy, and communication services dominate, contributing 60% of the total.

  
  

• Outward FDI: A remarkable 90% of the investments are directed toward financial services, manufacturing, wholesale and retail trade, and hospitality.

  
  

Notably, data on the sectoral breakdown of repatriation is not readily available, leaving a gap in understanding the complete picture.

A Mature Market or a Cause for Concern?

The Reserve Bank of India, in its recent bulletin, has suggested that the rising repatriation and outward FDI are indicative of a maturing market where foreign investors can seamlessly enter and exit. It highlights that this trend reflects positively on India’s economic fundamentals. While this perspective is valid, it raises the question of whether the current trajectory is entirely free from concern.

Over the last two decades, gross FDI inflows have mirrored global economic conditions. They surged in the early 2000s, faced minor setbacks during the North Atlantic Financial Crisis, and recovered robustly until the US Federal Reserve’s Taper Tantrum in 2013. Post-2014, the Modi government oversaw a period of accelerated FDI growth, which persisted even during the pandemic years. However, the post-pandemic phase has witnessed a deceleration, culminating in last year’s slight reversal of this declining trend.

Yet, what has largely gone unnoticed is the rapid rise in repatriation and outward FDI since the pandemic. From 2020-21 to 2024-25, the share of repatriation and outward FDI in gross inflows surged from 46% to an alarming 99%. This trend sharply contrasts with the pre-Covid years when repatriation accounted for only about 25% of gross inflows.

Implications for Domestic Investments

The increasing preference of foreign investors to repatriate earnings rather than reinvest in India is a worrying sign. Reinvested earnings remain substantially low, constituting less than a third of gross FDI inflows in recent years. This indicates a lack of confidence in reinvesting within the Indian market.

Simultaneously, the growing enthusiasm of Indian companies for outward investments is noteworthy. Prominent firms like Dr. Reddy’s Laboratories, Infosys, Tata Steel, and Wipro, among others, have made substantial acquisitions and investments abroad. While this global expansion is commendable, the lack of comparable zeal for domestic investments is concerning.

Addressing the Challenges

The government must address the factors hindering domestic investments. These include:

• Ease of Doing Business: Streamlining bureaucratic processes and expediting FDI approvals.

  
  

• Factor-Market Reforms: Addressing structural issues in land, labor, and capital markets.

  
  

• Policy Clarity: Enhancing transparency and predictability in regulatory frameworks.

  
  

Efforts to create a conducive environment for domestic investments could encourage both foreign and Indian investors to prioritize India as a favorable destination.

India’s growing outward FDI and rising repatriation reflect an evolving economic landscape. While these trends underscore the maturity of Indian markets, they also highlight underlying challenges that need urgent attention. By fostering a more investment-friendly environment and addressing structural constraints, India can ensure that its FDI narrative remains a driver of sustainable economic growth. The road ahead calls for a balanced approach that leverages India’s global ambitions while revitalizing its domestic investment ecosystem.