India’s $1 trillion FDI milestone masks a troubling trend. Here’s why

On the face of it, there was indeed cause for celebration. So-called ‘gross’ flows—what the government was highlighting—amounted to $81 billion in 2024-25, up over $10 billion from a year earlier, and the third highest annual inflow ever into India. According to the central bank, globally, India ranked fourth in terms of greenfield FDI (new projects) capital investments announced during 2024-25, following the US, UK and France.

But gross flows account only for the FDI that flows into the country. It doesn’t take into account the funds that flow out due to foreign companies repatriating funds back to their head offices overseas, or foreign investors selling off investments in Indian companies, or Indian companies investing in ventures overseas. Add all that back in, and net flows, after accounting for the outward movement of funds, collapsed to just around $400 million in 2024-25, from over $10 billion a year earlier.

Put differently, a sea change in India’s FDI landscape in the last few years has been the extent to which funds have moved out of the country rather than into it.

This could well be a short-term blip. India’s GDP growth for 2024-25 was 6.5%, down from 9.2% in 2023-24. Slower growth, both in India and globally, as well as economic uncertainty following the election of Donald Trump as US President, could be a factor forcing global companies to take a pause on committing new investments. The imposition of new tariffs by the US government (starting in April), and even threats to US companies like Apple, asking them to invest in the US instead of India, will disincentivize foreign investment.

But the Indian economy remains one of the fastest-growing economies in the world, with a large pool of young workers at a time when major developed economies have an ageing population. So, an optimist might argue that longer-term factors will work in India’s favour in terms of inward investment.

Global slump

The current FDI slump is a global phenomenon, and it goes much deeper. Net inward FDI as a share of GDP started to dip a few years after the global financial crisis and has not recovered since. In 2011, net FDI inflows as a percentage of GDP across economies hit 3.11% and then began a slow decline. In 2023, the last year for which this data was available, it fell below 1% of global GDP for the first time since 1994.

Behind the headline numbers, often denominated in billions of dollars, India has not been immune. As a share of GDP, net FDI into India peaked at 2.65% of GDP in 2009. Other favoured destinations for FDI such as China or Vietnam have also seen net FDI as a share of GDP fall in recent years. In 2024, a report for the United Nations Conference on Trade and Development (UNCTAD) on global trends in FDI pointed out that since 2010, FDI flows have essentially become disconnected from trade flows and GDP growth.

“FDI has essentially plateaued from about 2010, well before the onset of trade tensions and recent crises,” said the report. “While global [GDP] and global trade continued to grow, FDI stagnated. This is different from previous decades, in which FDI grew rapidly in parallel with other macroeconomic indicators.”

The report points out that net FDI increased by more than 15% per year on average during the 1990s. This average growth rate fell below 10% in the 2000s and has essentially become stagnant in the 2010s. Recent events, including the covid-19 crisis, and the possibility of ‘decoupling’ between the US and Chinese economies, have not helped. But the key point is that the slowdown in FDI predates these tensions by several years.

This decoupling is very evident in the case of India. Goods trade (exports and imports), and FDI as a share of GDP, both rose in tandem up to 2008. After that, FDI declined sharply, while goods trade peaked in 2012 before declining for the rest of the decade, though the ride is bumpier than that of FDI.

Great decoupling

What was the cause of the slowdown in FDI? For one, it’s clear that the 1990s and early-2000s before the 2008 financial crisis were exceptionally good for the world’s main economy: the US, which saw a combination of both low inflation and relatively strong growth.

The Unctad report also points to another reason. Until 2008, global trade became more tightly integrated as even a single production process was spread across multiple countries. The share of such ‘global value chains’ in overall trade, according to the report, rose steadily till 2008, and plateaued soon after. FDI flows were closely tied to the expansion of such value chains. This still continues, but at well below the pace of a couple of decades ago.

More generally, manufacturing as a share of global GDP has been 15-16% since around 2006, even as FDI in manufacturing as a share of total FDI in cross-border greenfield projects has declined sharply. The authors of the UNCTAD report argue this is evidence of a ‘de-globalization’ in manufacturing.

Global manufacturing companies, a key driver of FDI in the sector, even before the ‘Trump’ shock and the move to decouple from China, were looking to simplify their supply chains, making them more oriented toward intra-country production, with fewer intermediate inputs crossing international borders. Thus, rather than set up their own plants overseas (resulting in investments, which would be reflected in FDI flows), companies moved more toward arms-length relationships such as contract manufacturing, which didn’t require cross-border investments in equity.

Services play

Even as manufacturing has ‘de-globalized’, global FDI flows in the services sector as a whole over the last two decades have been far more buoyant. “The services sector grew rapidly throughout the 2000s,” points out the UNCTAD report. “This growth stabilized in the 2010s and showed resilience in the post-covid phase. In contrast, manufacturing has followed a substantially flat trajectory over the past two decades.”

Within services, it is so-called high value added services—such as business and tech services—that have gained share in terms of FDI flows globally, into greenfield projects.

Interestingly, India’s relatively greater success in services versus goods exports over the last two decades echoes trends in global patterns of FDI flows.

Within services, it is the so-called high value added services—such as business and tech services—that have gained share in terms of FDI flows globally, into greenfield projects.

While India’s share in global exports of goods flattened after the financial crisis at less than 2% and stayed there, its share of global services exports rose steadily, and had crossed 4% by 2023. In terms of Indian GDP, after 2008, and the decade after, services exports declined. But by 2023, they had crossed the 2008 level. Further, in November 2024, monthly exports of Indian services exceeded Indian goods exports for the first time. According to RBI data, net exports of services in April-December 2024 were at $135 billion.

Reflecting this, the bulk of FDI flows into India have been in the services sector, especially financial services, business services and computer software. The bulk of India’s services exports (around 74%) is in software and business services.

On the face of it then, India seems to have been well-placed to take advantage of this structural shift in FDI trends—from manufacturing to services. But the specific types of services that India exports are far less labour intensive than the kinds of FDI that drove the Chinese manufacturing boom.

“The shift towards services is not merely sectoral but signifies a deeper transformation in the role of FDI in global value creation,” says the UNCTAD report. Earlier, FDI in emerging markets was towards the labour intensive, low value-added end of the manufacturing spectrum. The shift in FDI now is towards services at the knowledge-intensive end of the spectrum – the kind of investment that was usually earlier made only in advanced economies.

Thus, these kinds of services demand highly skilled labour, and thus benefit a relatively smaller proportion of the Indian workforce. The boom in India’s services exports has taken place against a backdrop of overall stagnation in the Indian labour market, in terms of both non-agricultural employment and wages over the last decade.

An RBI analysis of manufacturing showed that an important determinant of productivity growth is FDI flow into a sector since it is through this route that knowledge transfers happen. “Productivity gains of high-tech firms in the manufacturing sector are found to be associated with higher R&D intensity in the previous period along with FDI flows in the sector,” the study found.

One implication: if FDI flows are disproportionately concentrated in high knowledge-intensive sectors, which already require high skilled labour, the difference in productivity between those sectors and the rest of the economy will widen. Workers in such sectors will be paid more over time, compared with counterparts elsewhere, widening income inequality.

Outward Flows

The flip side of the coin is a massive outflow of FDI from India. As pointed out earlier, both repatriation of investments from India by foreign firms, and outward investments by Indian firms in other geographies, rose in 2024-25, and came close to exceeding fund flows into the country. Globally, the share of emerging markets as a source of FDI funds (rather than the destination) has risen, from 9.7% in 2009 to 16.5% in 2023.

According to the RBI’s annual report, India is now among the world’s top 20 source countries for FDI. The RBI analyses show that the destinations for India’s outward FDI closely track both geographical proximity and the size of exports to that destination. Between them, Singapore, US, UK and the Netherlands account for 60% of the outward FDI from India.

The RBI doesn’t seem too concerned about outward FDI. But it’s worth noting that just repatriations and disinvestment by existing foreign investors in India amounted to 63% of incoming FDI in 2024-25, sharply up from 30% in 2016-17.

Repatriations have risen sharply in the post-pandemic years. If this is a short term ‘flight to quality’ because of geopolitical tensions, and concerns over the direction of global trade, it’s likely that such flows will reverse back into the country as confidence improves. But if not, and a structural shift in FDI flows to and from India have taken place, that’s far more worrying.

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