India’s FDI Turn: A Complex Turn and Systemic Issues

Foreign Direct Investment (FDI) in India

• FDI has been a significant contributor to India’s economic growth since the 1991 reforms.

• FDI has played a crucial role in modernizing India’s industrial base, leading to technological innovation and linking the country with global markets.

• E-commerce and computer hardware and software sectors have seen a massive influx of FDI, changing these sectors profoundly.

Divergence Between Inflows and Outflows

• Gross FDI inflows reached $81 billion in FY 2024-25, up 13.7% from the previous year.

• Between 2011 and 2021, FDI climbed from $46.6 billion to $84.8 billion.

• After peaking in FY 2021-22, FDI inflows fell to $71 billion in FY 2023-24 before recovering slightly.

• Post-COVID-19, gross inflows recovered at an annual rate of 0.3%, while disinvestments and repatriations by foreign investors grew at 18.9% annually.

Decline in FDI Net Inflows

• Gross FDI net inflows declined from FY 2021-22 to FY 2024-25, limiting FDI’s long-term development impact.

• The sharp rise in disinvestments has significantly contributed to this deterioration.

• Short-term investments aimed at rapid financial returns replace those contributing to sustained industrial or technological development.

Outward Investment by Indian Firms

• FDI outflows have grown from $13 billion in FY 2011-12 to $29.2 billion in FY 2024-25.

• This outflow of capital weakens the domestic economy, hampering job creation, arresting innovation, and stifling industrial growth.

The Long-Term Importance of Reforms

• Short-term capital inflows lack potential to support long-term growth.

• India must prioritize reforms that reward long-term commitments to build a more resilient investment ecosystem.

• The dominance of financial centres such as Singapore and Mauritius in India’s FDI inflows suggests that much of this capital may be driven by tax strategies rather than productive investment.

• Services and rent-seeking sectors such as financial services, energy distribution, and hospitality saw increased capital flow, but lack the broader multiplier effects typically associated with manufacturing, infrastructure, or advanced technology.

What Needed to Be Done

• If India seeks to lead as a global investment hub, it must focus on the quality, durability, and strategic alignment of capital inflows.

Systemic Barriers to FDI is important topic for Civil service exam (WBCS).

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