Drop in Net Foreign Direct Investment (FDI) 

Syllabus: GS3/ Economy

In News

• Net FDI inflows in India dropped by 98.2% to about $40 million in May 2025, compared to $2.2 billion in May 2024.

Reasons for Decline

• Increased repatriation and divestment by foreign investors.
• Higher outward FDI by Indian companies.
• Gross FDI inflows also dipped somewhat to $7.2 billion from $8.1 billion year-on-year.

What is Net FDI?

• Net Foreign Direct Investment (FDI) refers to the difference between gross FDI inflows into a country and the outflows due to repatriation of profits, divestment, or outward FDI from that country. 
• It essentially represents the net addition of foreign capital into the domestic economy after accounting for foreign capital leaving the country.

Source of FDI for India

• Major Sources: Singapore, Mauritius, UAE, and the US together accounted for over 75% of FDI inflows in May 2025.
• Top Sectors: Manufacturing, financial services, and computer services dominated FDI absorption.

Implications of Net FDI Decline

• Short-Term Impact: Sharp drops in net FDI can create temporary pressure on the balance of payments and external finances.
• Economic Confidence: Despite the net dip, gross inflows remain solid, showing sustained investor confidence in India’s growth prospects.
• Sectoral Effects: Sectors dependent on foreign investments see short-term liquidity or expansion challenges if outflows persist.
• Market Maturity: RBI suggests the rising repatriation signals a “mature market” where foreign investors have liquidity flexibility to enter and exit smoothly.

Types of Foreign Direct Investment

• Horizontal FDI: The foreign investor replicates the same business operations in another country. Example: McDonald’s or Toyota setting up restaurants/factories in India.
• Vertical FDI: Investor expands into a different stage of production (not the same product). For example: Investing in distribution or sales  (a U.S. oil company investing in a chain of fuel stations in India).
• Conglomerate FDI: Investor ventures into an unrelated business in the foreign country. For example: A manufacturing firm investing in banking abroad.
• Greenfield FDI: Building a new factory in India by a foreign firm.
• Brownfield FDI: Investment in existing facilities overseas. For example: Buying and upgrading an existing plant or unit abroad.

Source: BS