Net FDI to India hits 12-year low amid global, domestic economic shifts

India witnessed a steep decline in net foreign direct investment (FDI) inflows during the April-October 2024 period, marking the lowest level in 12 years.

News website The Print reported that data from the Reserve Bank of India (RBI) revealed that net FDI during this timeframe fell to $14.5 billion, a sharp drop from $15.7 billion in the corresponding period of 2023-24 and significantly lower than the $34 billion recorded in 2020-21.

The contraction in net FDI flows, the news report suggested, stems from a surge in funds being repatriated or disinvested by foreign companies and a stagnation in gross inflows.

Gross FDI inflows, however, remained robust at $48.6 billion, matching the highest levels since 2011-12, underscoring India’s potential as an investment destination. The primary driver of the decline was the increase in outflows, which surged to $34.1 billion during the period, up from $26.4 billion in the previous year.

The report also highlighted a growing trend of Indian companies channelling investments abroad, which surged to $12.4 billion in October 2024 — a 55 per cent increase compared to the same period last year and the highest since 2011-12.

Unnamed economists quoted by The Print attribute this shift to the relative attractiveness of the US economy amidst global economic uncertainty.

D.K. Srivastava, chief policy adviser at EY India, told the news website that the slowing growth in India’s gross domestic product (GDP) and subdued corporate profitability contribute to the increased outflows.

“The geopolitical situation, including ongoing conflicts, has created a challenging environment for India’s exports and energy supplies, making the U.S. economy a more favourable investment destination,” he said.

The Print quoted Rishi Shah, a partner at Grant Thornton Bharat, who echoed this sentiment, attributing the trend to geopolitical uncertainties and the stronger allure of dollar-denominated assets. “The preference for investing in US markets is evident not only in portfolio investments but also in direct investments into tangible assets like manufacturing plants and facilities,” he explained.

The decline in net FDI aligns with a broader trend observed since the onset of the pandemic. From $34 billion in the first half of 2020-21, net FDI fell to $32.8 billion in 2021-22 and further to $27.5 billion in 2022-23. This steady decline reflects a combination of global economic turbulence and India’s domestic challenges in sustaining long-term investor interest.

Indian companies, meanwhile, are increasingly turning to overseas markets, not only for higher returns but also for strategic purposes. Shah pointed out that investments in ports and shipping lines have allowed Indian firms to enhance supply chain efficiency and reduce shipping times.

Srivastava explained that the current environment underscores the need for India to reassess its investment proposition. “India must craft a compelling narrative to attract long-term productive capital, especially when competing with the US, which currently holds a stronger position,” he said.

As India navigates these shifting investment trends, policymakers face the challenge of creating a more conducive environment for both foreign and domestic investments. Addressing structural issues, enhancing profitability for businesses, and ensuring stability amid global uncertainties will be key to reversing the decline in net FDI and maintaining India’s attractiveness as an investment hub.