5 min readJun 24, 2026 02:55 PM IST
First published on: Jun 24, 2026 at 02:55 PM IST
India attracted gross FDI of $94.53 billion in 2025-26. That appears encouraging for an economy aspiring to become a global manufacturing hub. Yet the headline conceals a less comforting reality. Net FDI — after accounting for outflows — stood at only $7.65 billion, barely 8 per cent of gross inflows. If this were a temporary fluctuation, it would not be especially troubling. But the trend appears structural rather than cyclical.
FDI has long been regarded as the most desirable form of external capital for developing economies. Unlike portfolio flows, which can enter and exit quickly in search of short-term gains, FDI is assumed to reflect long-term confidence. It brings capital, technology, managerial expertise, and access to global markets. That is why net FDI matters more than the headline gross figure. It captures what remains after repatriation, disinvestment, and outward investments are taken into account. On this measure, the picture is sobering.
In 2020-21, India’s net FDI inflows were around $44 billion, equivalent to nearly 54 per cent of gross inflows. Over the next four years, they fell steadily, reaching less than $1 billion in 2024-25. Although there was a modest recovery in 2025-26, it was driven largely by higher gross inflows rather than a reversal of the underlying trend. Part of the decline reflects growing outward FDI by Indian firms. In principle, overseas investment can be a sign of corporate confidence. Yet the prominence of jurisdictions such as Singapore, Mauritius, the UAE, and the Netherlands among both India’s inward and outward FDI flows raises questions about whether all such transactions represent genuine productive investment.
More worrying is the scale of foreign investor exits. Global conditions have undoubtedly played a role. Higher interest rates, weaker growth, and geopolitical uncertainty have dampened investment flows across the world. But those explanations are only part of the story. According to World Bank data, India’s net FDI inflows declined by around 39 per cent between 2021 and 2024, while Vietnam recorded an increase of approximately 29 per cent. Looking back to 2014, the contrast is even sharper: India’s net FDI fell by nearly 21 per cent while Vietnam’s rose by about 119 per cent. The conclusion is difficult to escape. India’s FDI challenge predates current global uncertainties and is indicative of something more.
The much-discussed “China Plus One” strategy helps explain why. As multinational firms sought to diversify supply chains away from China, many expected India to emerge as a major beneficiary. Given its market size and labour force, that expectation seemed justified. Yet the gains have been more modest than anticipated. The reason lies in India’s limited integration into global value chains in areas where China dominates. The sectors that have benefitted most from supply-chain diversification — electronics, electrical machinery, mechanical equipment, and automobiles — are deeply embedded in international production networks. China dominates these sectors not simply because of scale but because of the dense ecosystems of suppliers and manufacturers that support them.
India has made progress, particularly in electronics. Incentives have helped attract firms such as Apple and Samsung. But attracting final assembly operations is only the beginning. The larger challenge is developing domestic supplier networks and component manufacturing ecosystems that anchor production locally. In contrast, despite a population barely one-fifteenth the size of India’s, Vietnam has become deeply integrated into global manufacturing chains and exports far larger volumes in several key sectors. The difference is not one of market size but of integration.
India’s current account has long remained in deficit, making stable capital inflows essential. Pressure on the rupee and periodic intervention by the RBI underline that reality. Gross FDI numbers may appear healthy, but when a growing share simultaneously leaves the country, the cushion becomes much thinner than it seems. This is particularly worrisome as foreign companies are known to prefer retained earnings to borrowings to fund expansion.
India’s challenge is no longer simply attracting FDI; it is retaining it. That requires a predictable policy environment, greater investor confidence, and deeper integration into global value chains. Without those changes, impressive headline figures will continue to obscure a more uncomfortable reality. Investors are still coming to India. The concern is that too many are also finding reasons to leave.
Pant is visiting professor at the Shiv Nadar University and Rahul is assistant professor at the Institute of Economic Growth
FDI has long been regarded as the most desirable form of external capital for developing economies. (Representational image/File) 
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