In recent months, reports have surfaced indicating a decline in Foreign Direct Investment (FDI) in India. Net FDI for FY24 dropped to its lowest level since 2007, reaching $10.6 billion, raising concerns about whether global companies and foreign investors are withdrawing from India and whether this is a cause for concern for the country. Let’s understand each aspect of this issue.
What’s Happening?
Released by the Reserve Bank of India at the beginning of May, the figures present a worrying trend for the country. They indicate that net FDI declined by 62.17% in 2023-24, dropping from $28 billion to $10.6 billion.
A closer look at the numbers reveals that over half of the gross inflow of $71 billion, approximately $44.4 billion, has been withdrawn through dividends, share sales, or disinvestment. Additionally, Indians have invested $15.96 billion abroad.
Reasons for the Decline in Net FDI
This decline is primarily due to large-scale block deals and disinvestment, resulting in the withdrawal of previous investments made by foreign companies.
According to Business Line, a different picture emerges when analysing the data:
High Repatriation: The main reason for the decline in FDI is high repatriation by foreign investors in India. Foreign companies’ promoters, FDI investors, and Private Equity (PE) and Venture Capital (VC) investors have taken advantage of the Indian stock market’s growth and sold off part of their stake.
Indian Companies’ Foreign Investment: It’s noteworthy that investments by Indian companies in foreign countries increased by 14% in FY24. This has a direct impact on net FDI.
Stable Overall Flow: Although there has been a decrease in net FDI, the total gross foreign investment in FY24 remained the same as the previous fiscal year, at $71 billion. This means that the inflow of foreign capital into India has not stopped yet.
However, before moving forward, let’s understand what net FDI actually means.
What is Net FDI?
FDI, or Foreign Direct Investment, refers to the amount invested by foreign investors in another country. If foreign investors are investing money in a country, it’s called FDI inflow, while if foreign investors exit their investments for any reason, it’s called FDI outflow.
Similarly,
Net FDI = FDI Inflow – FDI Outflow
So, while foreign investment is coming into India, more than that, investors are withdrawing their investments.
What’s in it for Investors?
In total, the figures show that although there has been a decline in net FDI, it is not necessarily a sign of foreign companies completely pulling out of India. This is because FDI equity inflows in FY24 were $44.42 billion, which is only a 3.49% decrease from $46.03 billion during 2022-2023.
Additionally, according to Invest India’s report, Mauritius (26%) emerged as the largest source of FDI in India in FY24, followed by Singapore (23%), the United States (9%), the Netherlands (7%), and Japan (6%).
What’s Next?
According to Mint, Abhishek Sanyal, Partner at Economic Laws Practice, believes that while the Indian government is making efforts to attract foreign companies by easing FDI regulations, some precautions are also being taken. He explains that the government has tried to liberalise the FDI regime through changes.
However, in 2020, the Indian government made it mandatory for direct FDI from countries bordering India, including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan, to obtain government approval.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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