Govt must address issue of falling net FDI urgently

Update: 2025-05-30 06:53 IST
Govt must address issue of falling net FDI urgently

There is a conundrum that no policy maker or economist has been able to explain, let alone solve: India, despite being the fastest growing major economy, is not able to attract investment, especially foreign direct investments (FDI).

The conundrum became more painful last week as the Reserve Bank of India (RBI) published data showing that net FDI dropped 96.5 per cent in 2024-25. Net FDI in the previous fiscal year amounted to $353 million, the lowest on record, compared with $10 billion in 2023-24.

This sharp downturn is as inexplicable as it is disconcerting. Inexplicable because, on the whole, India has been doing well on almost all macro-indicators: the fiscal and revenue deficits have been going down; infrastructure building is continuing; inflation is low; there is political stability. And disconcerting because money is not coming in.

Conventional wisdom suggests that robust economic growth should inspire confidence among foreign investors, prompting them to invest in industries, infrastructure, technology, and services. However, that correlation appears to be weakening in India’s case.

Several underlying factors may be contributing to this paradox. First, policy unpredictability remains a deterrent for long-term foreign investors. While India has made significant strides in improving the ease of doing business, concerns remain over bureaucratic hurdles, regulatory overreach, and shifting tax policies.

Second, geopolitical tensions and an increasingly protectionist global environment may also be influencing investor decisions. As companies de-risk their supply chains and capital allocations, India might not yet present the certainty or competitiveness that global investors demand.

Moreover, while FDI inflows have dried up, foreign portfolio investments (FPIs)—which are generally more short-term and market-driven—have recently shown signs of strength. In May 2025, FPIs poured Rs 14,256 crore into Indian markets, marking the highest monthly inflow in eight months. This surge offers a glimmer of hope and suggests that global investors are still interested in India’s growth story, albeit through more liquid and reversible channels.

FPIs are often driven by factors such as stock market performance, interest rate differentials, and global risk appetite. Their renewed interest in India may reflect confidence in certain sectors or in the macroeconomic outlook, but it does not compensate for the strategic value that long-term FDI brings to the economy. FDI supports infrastructure development, job creation, technology transfer, and sustainable economic growth—benefits that portfolio investments alone cannot provide.

The current trend demands serious introspection. India cannot afford to let its growth story be undermined by a lack of confidence among foreign investors. The government must conduct a comprehensive review of the entire policy ecosystem governing foreign investment. This includes streamlining approval processes, ensuring greater regulatory transparency, enhancing legal protections for investors, and making India’s investment environment globally competitive.

The sharp fall in FDI is not merely a statistical concern; it is a signal that something deeper is amiss. If left unaddressed, it could have long-term consequences for India’s ambitions to become a global manufacturing hub and a critical player in the global economy. Reversing this trend requires not just reactive measures but a strategic, forward-looking reform agenda that restores investor confidence and makes India a truly attractive destination for long-term capital.

Ultimately, India’s ability to convert its economic potential into sustained investment will determine whether it can truly capitalise on its growth and demographic dividend. The time to act is now.

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