Why in NEWS?
India’s net Foreign Direct Investment (FDI) collapsed from $10.1 billion in FY 2023–24 to just $0.4 billion in FY 2024–25, as per RBI data.
Key Concepts & Terms
| Term | Explanation |
|---|---|
| Foreign Direct Investment (FDI) | Investment by a person/entity outside India in equity instruments of an Indian company. Minimum 10% stake in listed companies qualifies. |
| Automatic Route | No prior govt. approval needed (e.g., auto, biotech, agriculture). |
| Government Approval Route | Mandatory prior approval for certain sectors (e.g., banking, broadcasting). |
| Outward FDI (OFDI) | Investments made by Indian companies in other countries. |
| FEMA | Foreign Exchange Management Act; governs FDI policy in India. |
What’s Happening?
- Gross FDI inflows rose to $81 billion, but net FDI plummeted due to high outflows.
- Repatriation & disinvestment by foreign firms hit $51.5 billion, a sign of investor exit or profit booking.
- Outward FDI by Indian companies surged by 75% to $29.2 billion.
FDI in India: Detailed Breakdown
| Aspect | Details |
|---|---|
| FDI Policy Regulator | Department for Promotion of Industry and Internal Trade (DPIIT), under Ministry of Commerce and Industry |
| RBI’s Role | Implements FEMA Rules; enforces FDI guidelines |
| Key Regulations | – FDI Policy 2020 – FEMA (Non-debt Instrument) Rules, 2019 – FEMA Act, 1999 |
| Prohibited Sectors for FDI | – Atomic Energy – Gambling and Betting – Lotteries – Chit Funds – Real Estate Business – Tobacco Manufacturing |
| Gross FDI Inflows (2024–25) | USD 81 billion (↑ from USD 71.3 billion in 2023–24) |
| Key FDI Sectors (2024–25) | Manufacturing, Financial Services, Energy, Communication Services (Together 60%+) |
| Top FDI Source Countries | Singapore, Mauritius, UAE, Netherlands, United States (Together 75%+) |
| Outward FDI by Indian Companies (2024–25) | USD 29.2 billion (↑ 75% YoY) |
| Top OFDI Destinations | Singapore, USA, UAE, Mauritius, Netherlands |
| Top Indian Firms Investing Abroad | Tata Communications, LIC, JSW Neo Energy |
| Sectors Driving OFDI | – Financial, Banking & Insurance Services – Manufacturing – Wholesale & Retail Trade – Restaurants & Hotels |
| April 2025 OFDI Spike | USD 6.8 billion (↑ 90% YoY) |
| Recent OFDI Projects | – Tata & Reliance global expansions – ONGC Videsh, Adani in Oil & Mining – Infosys, TCS, Sun Pharma in cost-efficient regions – Havells, Dixon in US manufacturing |
| FTA-Driven Investments | – UAE-India FTA – Australia-India ECTA |
| Globalized Service Sector Impact | Expansion of IT, fintech, and banking into developed markets to improve global presence and compliance |
| Mature Ecosystem Sign | USD 51.5 billion in repatriation/disinvestment → signals healthy entry/exit flexibility |
| COVID-Era FDI Rule Update | Entities from land-border countries need prior government approval for investing in Indian firms |
Why Are Indian Companies Investing More Abroad?
| Driver | What It Means (Simple Explanation) | Examples |
|---|---|---|
| 1. Exploring New Markets | Indian companies want to grow by selling products and services in other countries, not just India. | Tata, Reliance expanding in Africa, Southeast Asia, USA. |
| 2. Securing Natural Resources | Indian companies invest in places with oil, gas, and minerals to ensure they have enough for future use. | ONGC Videsh and Adani investing in oil & mining abroad. |
| 3. Reducing Costs | To save money, companies set up factories or offices in countries where making products or hiring workers is cheaper. | Infosys, TCS in Eastern Europe; Sun Pharma, Havells in Mexico/USA. |
| 4. Benefiting from Trade Deals | India signs special agreements with countries to reduce import/export taxes. Indian companies use this chance to grow. | India-UAE FTA and Australia-India ECTA help Indian companies expand. |
| 5. Expanding Services Globally | Indian IT, banking, and fintech companies want to reach more customers and follow global rules by working in foreign countries. | Infosys, fintechs, and banks entering markets like Europe and the US. |
Why is FDI Important for India’s Growth?
| Key Role of FDI | Simple Explanation | Examples |
|---|---|---|
| 1. Boosts Economy | FDI helps India grow by bringing in money to build industries and infrastructure. | Facebook invested $5.7 billion in Jio Platforms (2020). |
| 2. Creates Jobs | Foreign companies set up offices, factories, and support startups, creating jobs for Indians. | Startups supported by FDI created 1.6 million+ jobs. |
| 3. Brings New Technology | FDI brings modern tools, machines, and tech ideas that help India compete globally. | Tesla’s proposed battery tech (Powerwall) in India. |
| 4. Builds Infrastructure | FDI helps build roads, ports, airports, and smart cities. | Japan investing in Bullet Train; GIC investing $615M in roads. |
| 5. Increases Exports | Foreign companies use Indian factories to export goods, helping earn foreign money. | iPhone exports from India reached $12.1B (2023–24). |
| 6. Improves Quality & Competition | Indian companies improve products and services to match foreign standards. | Amazon, Flipkart, Starbucks, McDonald’s raised market quality. |
Barriers to More FDI in India
| Barrier | Simple Explanation | Examples |
|---|---|---|
| 1. Complex Rules | Hard-to-understand tax and business laws confuse foreign investors. | Vodafone faced tax issues due to old laws. |
| 2. Poor Infrastructure in Some Areas | Some places lack good roads, electricity, and transport. | Logistics cost is high (14–18% of GDP). |
| 3. Unfair Market Practices | Big companies sometimes use unfair tricks that hurt smaller businesses. | Online pricing wars hurt local shops. |
| 4. Unequal FDI Spread | Most FDI goes to big cities and a few sectors only. | Rural areas and sectors like agriculture get less. |
| 5. Environmental Concerns | Some foreign companies worry about weak pollution and environmental rules. | Niyamgiri mining faced protests. |
What India Can Do to Attract More FDI
| Suggested Solution | Simple Explanation | Examples |
|---|---|---|
| 1. Easier Rules | Create one-window system for FDI approvals and fast legal solutions. | Avoid cases like Vodafone dispute. |
| 2. Support Poorer Regions | Give tax cuts and funding to boost FDI in rural and less-developed states. | Focus on agro-processing, healthcare, clean energy. |
| 3. Encourage Reinvestment | Motivate foreign companies to put their profits back into Indian businesses. | Tata’s investment after buying Jaguar Land Rover. |
| 4. Build Better Infrastructure | Improve roads, railways, and airports in smaller cities to attract investors. | Focus on Tier-2 & Tier-3 cities. |
| 5. Train the Workforce | Teach people job skills needed by global companies. | Set up training centers and Special Economic Zones (SEZs). |
Easy Memory Code for FDI Importance: J-E-T-P-I-C
- J: Jobs
- E: Exports
- T: Technology
- P: Public Infrastructure
- I: Investment Inflows
- C: Competition Boost
Prelims Practice Questions
Q1. Which of the following is not a sector under the automatic route for FDI in India?
A) Biotechnology
B) Agriculture
C) Banking
D) Automobiles
Q2. What was the primary reason for India’s net FDI to crash in FY 2024–25?
A) Global recession
B) Decline in manufacturing
C) Rise in disinvestment and repatriation
D) Increase in crude oil prices
Q3. Under the FDI policy, who regulates the rules for non-debt instruments?
A) NITI Aayog
B) SEBI
C) RBI
D) FEMA
Mains Practice Questions
Q1.“FDI is an important catalyst for India’s economic growth.” In the context of recent trends, critically examine the statement. (GS3 – 2020)
Q2. Evaluate the key drivers and challenges of the rising trend in Outward FDI by Indian companies.
Prelims Answers with Explanations
| Q No | Answer | Explanation |
|---|---|---|
| Q1 | C | Banking falls under the Government Approval route. |
| Q2 | C | Massive repatriation and disinvestment caused the FDI drop. |
| Q3 | D | FDI is regulated under FEMA (Non-Debt Instrument) Rules, 2019. |
