India’s FDI challenge: We must turn success into sustainable growth

However, there is more to this trend than the headline numbers suggest. India’s net FDI drop stems equally from increased outward investment by Indian companies (up 60%) and decreased inflows from foreign investors (down 50%). The oft-cited 100% decline refers to net flows, or the difference between inward and outward investments, both adjusted for profit repatriations.

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The underlying dynamics reveal a more complex picture. Based on available data, gross FDI inflows have fallen by only 13% (from $82 billion to $71 billion, peak to trough), while repatriation of profits by foreign companies has surged 64% (from $27 billion to $44 billion). This repatriation surge is the primary driver of declining net FDI inflows.

The equity component of FDI tells the clearest story. Net equity FDI declined by $38 billion, driving the overall drop. Gross equity inflows fell 25% from $61 billion to $46 billion, while equity repatriations increased by more than half. Traditional sources, including the US, have reduced their investments, while Japan, the Netherlands and Mauritius have increased theirs. The services sector, primarily computer services and R&D, accounts for much of the decline.

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Neither increased repatriations by foreign companies nor higher outward investment by Indian residents should cause alarm. Both may partly reflect India’s economic maturity. Foreign firms are extracting profits from Indian operations through dividends, share buybacks and technical fees, thus demonstrating confidence in the profitability of their investments.

Our challenge isn’t to reverse repatriation, as that is perhaps a natural outcome or even a paradox of our success. We should focus on increasing gross inflows to fuel continued growth. With India’s massive infrastructure and development financing needs, current gross FDI levels remain well below potential.

Over-reliance on traditional partners may have created vulnerability. While punitive tariffs on Indian merchandise exports to US markets pose challenges, they could also present an opportunity to look beyond traditional partners for both trade and investment. We could establish a dedicated task force to engage with the world’s top 50 companies, offering compelling reasons to choose India over competitors. This may also require proactive diplomacy that highlights India’s unique advantages: political stability, macroeconomic strength and a vast domestic market potential, factors that could partially offset tariff challenges.

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Research by The Foundation for Economic Development on Special Economic Zones (SEZ) reveals how policy reversals, like the 2012 introduction of minimum alternate tax and removal of dividend distribution tax exemptions, coincided with structural declines in SEZ growth. Foreign investors seem to prize predictability above all else. Every policy change should undergo rigorous impact assessment to ensure it does not inadvertently signal instability.

Global surveys consistently identify political stability and macro fundamentals as primary FDI drivers. India excels in both, but could leverage these advantages more effectively. The government’s electoral mandate and demonstrated economic management offer compelling selling points.

More action is needed on easing the regulatory environment, improving logistics and enhancing workforce skilling. The World Bank’s Logistics Performance Index, for example, placed India at 38th position in 2023, based on six parameters. Closing these gaps could yield substantial FDI returns. We can learn from success stories within India and the stark disparity between states. Tamil Nadu, for example, receives a whopping 250 times more FDI than Bihar in absolute terms, likely due to advantages in governance, infrastructure and business facilitation. States can study and adapt successful models from leading states. Internal competition for FDI benefits the entire country.

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Investment climate improvements, streamlined regulations and reduced bureaucracy have created momentum that must be sustained. The next phase requires deepening existing reforms, rather than introducing new ones that might signal policy uncertainty. Credit rating upgrades could help, as foreign investment and sovereign ratings have shown a strong historical correlation globally. India’s continued economic resilience, commitment to fiscal consolidation and reform trajectory position it well for potential upgrades that could unlock new investor interest.

Our FDI challenge reflects success as much as a struggle. Companies are extracting profits from successful Indian operations, while apparently hesitating to make fresh commitments amid global uncertainties. Instead of lamenting increased repatriation and outward investment by residents, we must expand the pipeline of new investment by using policy stability as a competitive advantage, aggressively courting global companies and learning from internal success stories. According to UNCTAD’s World Investment Report 2025, India ranked fourth globally in the number of greenfield projects announced in 2024. Their implementation is important.

Our economic fundamentals remain strong, domestic market continues to expand and demographic dividend persists. FDI strategies must be bold, consistent and globally competitive. The data shows foreign companies can succeed in India, but we must convince them to start more new ventures. A window for action is open, but it won’t remain so indefinitely. We must move decisively to transform the FDI challenge into the next chapter of our economic growth story.

Vidushi Balakrishnan contributed to this article. These are the authors’ personal views.

The authors are, respectively, professor of economics at Ashoka University and director and head of Ashoka Isaac Centre for Public Policy; and an officer of the Indian Economic Service.