Opinion New data raises concerns over India as an investment destination. Trade pacts can offer a solution

In 2024-25, foreign direct investment (gross) into India stood at $81 billion. But net FDI — essentially the difference between direct investment to and that by India — fell to just $353 million, down from $10.1 billion in the previous year. The reasons for this stunning collapse can be traced to an increase in investments by Indian firms abroad and greater repatriation/disinvestment by foreign firms from the country. Coming at a time of subdued domestic private investments, and when the country is trying to emerge as an attractive destination for firms moving operations out of China and integrate itself to a greater extent in global supply chains, this fall raises questions. Are both domestic and foreign firms finding more attractive investment opportunities in jurisdictions other than India? Do other countries offer a more favourable risk-return ratio? This deserves closer attention.

The finance ministry has taken note of this trend and voiced its concern. In its most recent monthly economic review, the ministry says that increasing investment by Indian firms abroad “even as uncertainty reigned in the world, warrants attention, especially given their cautious attitude towards domestic investment”. And while it also notes that gross FDI inflows have “remained broadly stable”, not only are flows lower than in 2021-22, but over the past few years, FDI (net inflows as a percentage of GDP) has remained well below recent highs as per data from the World Bank. Surprisingly, though, the RBI appears to be more sanguine about these trends. In its monthly bulletin, the Bank says that the moderation in net FDI, which reflects a rise in net outward FDI and repatriation FDI, “is a sign of a mature market where foreign investors can enter and exit smoothly, which reflects positively on the Indian economy”. Compared to India, UBS says that the “ASEAN 6’s FDI dynamics are robust” based on the first three quarters of 2024, and McKinsey has recently noted that most Southeast Asian economies are “seeing higher FDI in the fourth quarter” than in previous quarters. As these countries are India’s competitors in the China+1 play, these trends call for policy intervention at multiple levels to address the issues/impediments that are holding back investments from both domestic and foreign firms.

Advertisement

The near-term outlook for investments remains muddied as both firms and households face uncertainty due to US President Donald Trump’s tariffs . The finance ministry’s monthly review also notes that private sector capex “could lag behind, with firms adopting a more cautious stance amid global uncertainty”. However, a successful conclusion of the ongoing trade talks with the US and the EU could have a positive impact on investments and exports. After all, investment is more likely to flow to regions with broader and deeper trade agreements. The finance ministry also notes that “a successful US-India trade agreement could flip current headwinds into tailwinds, opening up new market access and energising exports”. The government must press ahead with these trade deals.