Here Today, Gone Tomorrow: India Clocks Record FDI Inflow, But How Much Really Stays?

At the same time, Indian companies accelerated overseas investments, taking outward FDI to US$33.3 billion.

Data from the Department for Promotion of Industry and Internal Trade (DPIIT) and the Reserve Bank of India (RBI) show that while gross FDI inflow rose 17% (from US$80.6 billion in 2024-25 to an all-time high of US$94.5 billion in 2025-26), the net FDI (which adjusts for foreign investor exits, profit repatriation, and overseas investments by Indian companies) stood at only US$7.7 billion.

The gross FDI inflow figures paint a positive picture – the net FDI, another.

Weakening Investor Confidence?

K.S. Chalapathi Rao, Senior Research Fellow, Academy of Business Studies, Delhi, told The Secretariat, “Critics cite the sharp decline in net inflows as evidence of weakening investor confidence, while the government points to record gross inflows as proof of India's continuing success in attracting foreign capital. Both sides, however, are missing the trees for the woods. By focusing on competing aggregate indicators, they overlook the more fundamental question: what kind of FDI is India actually receiving? Neither gross nor net inflows, by themselves, answer that question.”

Meanwhile, government officials have rejected suggestions that the sharp fall in net FDI reflects weakening investor confidence.

Replying to an unstarred question in the Lok Sabha, Minister of State for Commerce and Industry Jitin Prasada said that higher overseas investments by Indian companies reflected their "growing global aspirations and capabilities", enabling them to acquire technology, brands, and international assets.

The government has also argued that rising foreign investor exits are characteristic of a maturing investment ecosystem where early investors monetise successful investments and transfer ownership to domestic investors rather than signalling a flight of capital.

Chief Economic Adviser V. Anantha Nageswaran has also similarly maintained that higher repatriation largely reflects profits generated in India and should not automatically be interpreted as a deterioration in the investment climate.

Critics cite the sharp decline in net inflows as evidence of weakening investor confidence, while the government points to record gross inflows as proof of India's continuing success in attracting foreign capital. Both sides, however, are missing the trees for the woods

– K.S. Chalapathi Rao, Senior Research Fellow, Academy of Business Studies

Economists contend that the government's explanation understates deeper structural concerns. Biswajit Dhar, former Professor, Jawaharlal Nehru University, said that the pace of foreign disinvestment has far exceeded the growth in fresh investment. "Disinvestments by foreign direct investors reached a record level," Dhar told The Secretariat.

"When the Indian economy is the fastest growing among major economies, one would expect domestic investors to identify investment opportunities at home. Instead, they are investing in other countries," Dhar observed, describing the situation as paradoxical at a time when India continues offering incentives to attract foreign investors under various free trade agreements and industrial policies.

Disinvestments by foreign direct investors reached a record level

– Biswajit Dhar, former Professor, Jawaharlal Nehru University

The criticism extends beyond capital flows to broader investment conditions.

Drawing on RBI Consumer Confidence Survey data, economists argue that domestic demand has remained weaker than the headline GDP growth suggests, reducing incentives for companies to undertake fresh private capital expenditure. Analysts at the Institute for Studies in Industrial Development (ISID) have also pointed out that a sizeable share of India's outward FDI is routed through financial holding companies and special purpose vehicles in jurisdictions such as Singapore and the UAE, rather than directly financing overseas manufacturing projects.

The divergence between gross and net FDI assumes greater significance as India's balance of payments comes under pressure from global financial volatility and geopolitical tensions.

India's Balance Of Payments

In a recent report, economists Yuvika Singhal, Vivek Kumar, and Dr. Shubhada Rao of QuantEco Research said that the West Asis crisis reversed India's balance of payments from a US$4.4 billion surplus a year earlier to an equivalent deficit in May 2026.

The report showed foreign portfolio investors withdrew nearly US$12 billion during April-May 2026, turning the capital account into a deficit.

Nevertheless, QuantEco noted that improving net FDI had helped cushion the external sector.

The economists observed that the net FDI rose to US$6.5 billion during April-May 2026 from US$2.5 billion in the corresponding period a year earlier, driven by a nearly 60% increase in gross inflows. As a result, India's "Basic Balance of Payments"—defined as the current account balance plus net FDI—improved despite sharp volatility in portfolio flows, underscoring why stable FDI remains critical to external-sector resilience.

Rating agencies have also begun focusing on the quality rather than the quantity of capital inflows.

CareEdge Ratings expects net FDI to improve further in 2026-27 to around US$15 billion as the pace of repatriation moderates while gross inflows remain strong. However, it has also cautioned that sustained foreign portfolio outflows continue to expose India's dependence on more volatile sources of capital.

Economists at Bank of Baroda also noted that debt inflows into Indian government securities have increasingly offset weak equity flows.

Draft Foreign Investment Rules 2026

To improve the investment climate, the RBI has released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, which propose simplifying investment definitions, streamlining downstream investment norms, and reducing compliance burdens.

The government has eased provisions under Press Note 3 governing investments from neighbouring countries by permitting up to 10% non-controlling beneficial ownership under the automatic route in specified cases, a move widely viewed as facilitating participation in supply-chain investments.

Yet, economists argue that regulatory simplification alone cannot address the structural constraints limiting long-term capital retention.

Long-Standing Challenges

India continues to face persistent challenges in contract enforcement, judicial delays, logistics costs, and domestic supply-chain depth. Although Production-Linked Incentive (PLI) schemes have significantly expanded electronics assembly and attracted multinational manufacturers under the "China Plus One" strategy, value addition within India remains relatively low, with many industries continuing to rely heavily on imported intermediate components.

For many economists, the central question is no longer whether India can attract foreign investment, but whether it can retain enough of that capital to finance sustained industrial expansion.

What Needs To Change

The record gross FDI figures underline India's strategic importance in an increasingly fragmented global economy. But the persistently weak net FDI numbers suggest that attracting investment is only part of the challenge. Unless stronger domestic demand, deeper manufacturing ecosystems, faster dispute resolution, and higher local value addition accompany regulatory reforms, analysts warn that a growing share of foreign capital may continue to flow through India's financial accounts rather than remain invested in building long-term productive capacity.

“The real policy challenge is therefore not to celebrate ever-larger gross inflows or lament declining net inflows, but to understand the nature of the capital being attracted and its long-term implications for India's industrial development and external payments. This, in turn, requires FDI statistics to be published at a much finer level of disaggregation so that policymakers and analysts can judge foreign investment by its quality, composition, costs, and developmental contribution, rather than by headline aggregates alone," Rao underscored.