Paper: GS – III, Subject: Economy, Topic: Trade and External Sector, Issue: Recent trends in FDI.
Context:
Recent trends of FDIs show a complex turn, with declining FDI inflows and rising outflows.
Key Highlights:
Foreign Direct Investment (FDI): A major factor in India’s economic growth since the 1991 reforms.
Role of FDI:
- High inflow sectors: E-commerce, computer hardware, and software.
Divergence Between Inflows and Outflows:
| Inflows | Outflows |
| Gross inflows FY 2024–25: $81 billion (↑ 13.7% from previous year).2011–21 period: Rose from $46.6 billion to $84.8 billion.Peak: $71 billion in FY 2021–22 but decline in FY 2022–23 followed by recovery later.Post-COVID: Inflows grew only at 0.3% annually vs. 18.9% growth pre-COVID. | 2019–24: India saw $308.5 billion inflows but $153.9 billion outflows (withdrawal + repatriation).Declining net inflows: $27.6 billion in FY 2021–22 to $0.4 billion FY 2024–25 (after adjusting for outflows).Implication: Limits long-term developmental impact, as capital is not staying long enough.Source of OutflowsTraditional investors (US, UK, Singapore, Mauritius) are now driving capital flight.Causes: Policy unpredictability, Regulatory gaps, Legal uncertainties. |
Changing Nature of FDI:
Shift in Investor Behaviour:
- From long-term strategic commitments to short-term profit-seeking.
- Short-term investments: Driven by rapid financial returns (tax arbitrage, treaty-based routing).
- Sectoral shift:
- Manufacturing sector (earlier primary focus) now gets only 12% of total FDI.
- Growth seen in e-commerce, software, business services.
Concerns and Challenges:
Why the Long Term Matters?
| Short-term capital inflows | Need for long-term FDI |
| Do not contribute to sustainable development.Leave economy vulnerable to volatility. | Supports manufacturing, infrastructure, R&D.Encourages technology transfer and employment generation.Enhances India’s global competitiveness. |
Way Forward:
Policy Measures:
- Simplify Regulations: Reduce policy complexity and improve transparency.
- Strengthen Institutions: Ensure policy stability, rule of law, and contract enforcement.
- Boost Domestic Capacity: Expand education, skilling, and innovation ecosystem and upgrade infrastructure.
- Encourage Long-term Investors: Attract capital into manufacturing, green energy, advanced tech.
Strategic Approach:
- Avoid over-reliance on short-term portfolio investments.
- Build credibility through consistent policy frameworks.
- Balance openness to global capital with domestic developmental priorities.
Conclusion:
Sustained long-term FDI is essential for industrial growth, innovation, employment, and global competitiveness. The focus must shift from short-term financial flows to quality, durability, and strategic alignment of capital investments.
https://www.thehindu.com/opinion/op-ed/a-complex-turn-in-indias-fdi-story/article70022990.ece
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