Paper: GS – III, Subject: Economy, Topic: Trade and External Sector, Issue: Changing nature of FDI inflows into India.
Context:
India is among the world’s fastest-growing major economies, with GDP growth averaging 8.2% during 2021–24. Yet, foreign capital inflows remain subdued, reaching a decade-and-a-half low in 2024–25. This raises concerns about the sustainability of growth financing, the effectiveness of FDI policies, and investor confidence.
Key Takeaways:
What is FDI?
- Definition: Investment by a company or individual from one country into business interests in another country, involving significant ownership and management influence.
- Difference from FPI: FDI is long-term, hands-on, whereas FPI is short-term, passive investment in shares or bonds.
- Types of FDI:
| Horizontal | Vertical | Conglomerate |
| Same business abroad (e.g., McDonald’s expanding internationally) | Investment in supply chain abroad (e.g., BMW acquiring a foreign car parts firm) | Investment in unrelated sectors (e.g., Apple investing in a foreign fashion brand) |
- Methods:
| Greenfield Investment | Setting up new operations from scratch |
| Brownfield Investment | Acquiring/merging with existing foreign firms |
Significance of FDI:
FDI in India:
- Legal Framework: Governed by FEMA and regulated by RBI while the Foreign investment policy is administered by DPIIT.
- Definition Threshold: ≥10% of post-issue paid-up capital qualifies as FDI.
- Cumulative Inflows (2014–2024): USD 667.4 billion
Top Source Countries (FY 2023–24):
Top Sectors:
- Services (16%), IT & Software (15%), Trading (6%), Telecom (6%), Automobile (5%)
Routes:
- Automatic: No government approval needed (most sectors)
- Government Route: Approval required (sensitive sectors)
FDI Limits by Sectors:
| Sector | FDI Limit |
| E-commerce | 100% (marketplace only) |
| Civil Aviation (MRO) | 100% (automatic) |
| Railway Infrastructure | 100% |
| Print Media | 26% |
| Private Banking | 49% automatic; up to 74% govt approval |
| Pharmaceuticals | 100% greenfield; 74% brownfield |
| Defence | 74% automatic; 100% govt approval |
Prohibited Sectors: Lottery, Chit Funds, TDR trading, tobacco manufacturing, gambling, Nidhi companies, certain real estate, atomic energy, railway operations.
Recent FDI trends:
- Declining capital inflows: Despite high GDP growth of 7–8%, foreign capital inflows are low, with net foreign investment only $4.5 bn in 2024–25, including $959 million FDI and $3.6 billion FPI.
- Foreign Portfolio Investors (FPI): FPIs are mostly net sellers and only the FY of 2023–24 saw $25.3 bn net inflows.
- Private Equity / Venture Capital: Past investments being cashed out, contributing to outflows.
Reasons for Low Capital Inflows:
- Past PE/VC exits: $24–33 bn over 2022–24 monetized via public markets.
- FPI sell-offs: Driven by high market valuations.
- Trade deficit pressures: Merchandise imports ($287.2 bn in 2024–25) exceeded exports.
- Investor perception: Corporate earnings sustainability and business climate matter more than GDP growth.
- Global factors: US tariffs, geopolitical uncertainties, and currency volatility (rupee hit 88.37/USD in Sept 2025).
Balance of Payments (BOP) Implications:
- Invisibles surplus (services exports + remittances) offsets trade deficit because of which current account deficit is maintained below $50 bn in most years.
- Thus, capital inflows are critical to finance deficits and maintain foreign exchange reserves.
Policy Measures:
- GST rate cuts: Boost domestic consumption and corporate earnings.
- Task force for next-gen reforms: Improve ease of doing business.
- Goal: Attract fresh FDI/FPI while maintaining financial market stability.
Conclusion:
India faces a foreign capital paradox: high economic growth but muted foreign inflows. It points out the need for reforms to improve business climate, corporate earnings, and investment transparency. Strengthening FDI and foreign capital inflows is vital for India’s aspiration as a $10 trillion economy by 2035.
https://www.thehindu.com/opinion/op-ed/a-complex-turn-in-indias-fdi-story/article70022990.ece
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