India’s Net FDI Hits Lowest Level Since 2007
India has seen a significant decline in foreign direct investment (FDI), with net FDI dropping to its lowest level since 2007, according to recent data released by the Reserve Bank of India. In the fiscal year 2023-24, net FDI fell by 62.17% to $10.6 billion from $28 billion in the previous financial year. This decline was largely driven by an increase in repatriation through block deals and disinvestment. Of the gross inflow of $71 billion, more than half was repatriated through dividends, share sales, or disinvestment, while Indians invested $15.96 billion overseas.
FDI is a crucial metric as private capital fund infusion typically leads to job creation. Despite India being the best-performing emerging market economy for three consecutive fiscal years, the decline in net FDI raises concerns about the future economic landscape.
In the fiscal year 2023-24, FDI inflows into Indian equity increased to $41.26 billion from $27.09 billion the previous year. Mauritius accounted for 26% of the inflows, followed by Singapore (23%), the US (9%), the Netherlands (7%), and Japan (6%). Key sectors such as finance, banking, insurance, software & hardware, trading, telecommunications, and automobiles saw the highest inflows during the year.
The primary reason for the decline in net FDI is the substantial increase in repatriation by foreign companies. Post-pandemic, India experienced high FDI inflows, leading to subsequent outflows. Partial exits by private-equity investors following Indian companies’ public listings also contributed to increased repatriation. Public-market sales, particularly block trades, accounted for a significant portion of exits.
To attract more FDI, India must create a conducive policy environment and enhance ease of doing business to compete with countries like Vietnam and Mexico. Incentives for long-term investment, reducing cost disadvantages, and developing specialized zones with plug-and-play models can make investing in India more appealing.
While FDI policies in India have evolved to attract more investments, the government must focus on sector-specific policies and improve existing capacity to boost investor sentiment. With a well-devised monetary policy, fiscal prudence, and favorable liquidity conditions, a correction in net FDI numbers is possible in the near term.
Despite India being a prime destination for FDI, policy changes over the years have aimed at liberalizing the FDI regime to attract more foreign investment. However, certain restrictions, such as obtaining approval for FDI from countries sharing a land border with India, have been implemented to safeguard against opportunistic takeovers of Indian companies.