Foreign Direct Investment in India

• 07 Jun 2025

For Prelims: Reserve Bank of India (RBI), Foreign Direct Investment (FDI), ASEAN, Non-tariff Barriers, Foreign Exchange Management Act (FEMA), 1999, Startups, Competition Commission of India (CCI), Niyamgiri Hills, Special Economic Zone (SEZ). 

For Mains: Status of FDI inflow and outflow in India, importance and challenges associated with India and way forward. 

Source: TH 

Why in News? 

According to the Reserve Bank of India (RBI), India’s net foreign direct investment (FDI) crashed from USD 10.1 billion in 2023–24, and just USD 0.4 billion in 2024–25. 

• The sharp decline in net FDI is mainly due to increased repatriation and disinvestment by foreign firms, totaling USD 51.5 billion in 2024-25, coupled with a rise in Outward FDI (OFDI) by Indian companies. 

What is Foreign Direct Investment? 

• About: FDI refers to investment made by a person residing outside India through capital instruments in either an unlisted Indian company or in at least 10% of the post-issue paid-up equity capital (on a fully diluted basis) of a listed Indian company.  
  • It is typically a long-term investment and mainly represents a non-debt capital flow. 
• FDI Routes: Under the FDI Scheme, non-residents can invest in shares, fully convertible debentures, and preference shares of Indian companies through two routes: 
  • Automatic Route: An overseas investor is only required to inform the RBI after the investment is made. 
    • E.g., Agriculture & Animal Husbandry, Air-Transport Services, Auto-components, Automobiles, Biotechnology (Greenfield) etc. 
  • Government Approval Route: A foreign investor must obtain prior approval from the relevant Ministry or department before proceeding. 
    • Banking & Public Sector, Broadcasting Content Services, Food Products Retail Trading, Uploading/Streaming of ‘News & Current affairs’ through digital media etc. 
• FDI Regulation: Currently, FDI in India is regulated by the FDI Policy 2020 and the FEMA (Non-debt Instrument) Rules, 2019 under the Foreign Exchange Management Act (FEMA), 1999. 
  • The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, is the main regulator of FDI in India. 
  • RBI also plays a key role by enforcing the FDI Rules. 
• FDI Prohibition in India: FDI is strictly prohibited in sectors like atomic energy generation, gambling and betting, lotteries, chit funds, real estate, and the tobacco industry. 
• Current Status of FDI in India: 
  • Strong Gross FDI Inflows: Gross FDI rose to USD 81 billion in 2024–25, up from USD 71.3 billion in 2023–24 and $71.4 billion in 2022–23. 
    • Key sectors attracting FDI were manufacturing, financial services, energy, and communication services, together making up over 60% of total inflows. 
    • Top investing countries—Singapore, Mauritius, UAE, Netherlands, and the United States—contributed over 75% of gross FDI. 
  • Outward FDI by Indian Companies: Outward FDI by Indian companies surged to USD 29.2 billion in 2024–25, a 75% increase from 2023-24. Top destination countries for Indian OFDI were Singapore, United States, UAE, Mauritius, and the Netherlands. 
    • The sectors driving over 90% of OFDI growth included financial, banking and insurance services, manufacturing, and wholesale and retail trade, restaurants, and hotels. 
  • Mature Investment Ecosystem: Repatriation and disinvestment by foreign companies in India rose to USD 51.5 billion in 2024–25, indicating a mature market that allows smooth entry and exit, reflecting positively on the Indian economy. 

Note: To prevent opportunistic takeovers or acquisitions of Indian companies amid the Covid-19 pandemic, the Government amended the FDI Policy 2017. 

• It mandates that entities from countries sharing a land border with India, or whose beneficial owners are from such countries, can invest in India only with prior government approval. 
• For the above purposes, India identifies Pakistan, Afghanistan, Nepal, Bhutan, China (including Hong Kong), Bangladesh, and Myanmar as countries sharing a land border with India (Bordering Countries). 

What are the Primary Drivers Behind the Growing Trend of Outward FDI by Indian Companies? 

• Global Expansion for Market Diversification: Indian firms are investing abroad to access new markets in Africa, Southeast Asia, and developed economies, with companies like Tata, Reliance expanding globally to reduce reliance on the Indian market. 
  • In April 2025, India’s outward FDI rose sharply by 90% YoY to USD 6.8 billion, led by Tata Communications, LIC, and JSW Neo Energy. 
• Securing Access to Critical Resources: Resource acquisition is a key driver for outward FDI by Indian firms, as they look to secure essential natural resources like oil, gas, minerals, and agricultural products to ensure long-term supply chains.  
  • Companies like ONGC Videsh and Adani Group have actively invested in international resources, particularly in oil and gas fields and mining operations, to meet both domestic and international demands. 
• Gaining a Competitive Edge through Cost Efficiency: Firms like Infosys, TCS, and Sun Pharma expand to low-cost countries (e.g., Eastern Europe, Mexico), while Indian auto firms invest in ASEAN to bypass strict non-tariff barriers of developed countries. 
  • Also, Companies like Havells and Dixon Technologies have expanded their manufacturing units and export operations to the US, aiming to tap into the North American market. 
• Capitalizing on Trade Agreements: As India increasingly signs Free Trade Agreements (FTAs) with countries and regional blocks such as the India-UAE FTA and Australia-India Economic Cooperation and Trade Agreement (ECTA), Indian firms are positioning themselves to benefit from reduced tariffs, easier market access, and improved business relations with trading partners. 
• Globalization of Service Sector: Globalization of Indian service sector firms—especially in IT, fintech, and banking—drives outward FDI as companies expand into developed markets to strengthen client ties, ensure regulatory compliance, improve service delivery, and access new customer bases for long-term growth. 

Why is Foreign Direct Investment Pivotal to India's Sustainable Economic Transformation? 

• Macroeconomic Growth: FDI contributes to capital formation, infrastructure development, and industrial expansion.  
  • In 2020, Facebook invested USD 5.7 billion in Jio Platforms, marking the largest deal in India’s tech sector and strengthening the digital economy. 
• Employment Opportunities: Foreign investments have been pivotal in driving job creation across various sectors. By funding startups, establishing factories, offices, and R&D centers, foreign companies generate millions of jobs. 
  • E.g., India’s startup ecosystem, heavily supported by FDI, has generated over 1.6 million jobs across the country. 
• Advanced Technology & Innovation: FDI brings advanced technology, automation, and R&D to India, enhancing global competitiveness through technology transfer and best practices from multinational corporations.  
  • E.g., Tesla's proposed EV and battery plant in India could introduce advanced battery technology like Powerwall, supporting India’s renewable energy goals. 
• Infrastructure Development: FDI has been instrumental in financing large-scale projects that enhance the country's infrastructure capacity such as roads, ports, airports, and smart cities.  
  • E.g., Japan is investing in the Mumbai-Ahmedabad Bullet Train, and Singapore’s sovereign wealth fund, GIC, is investing over USD 615 million in Indian roads. 
• Enhanced Exports:  FDI plays a crucial role in transforming India into a key export hub, helping reduce the trade deficit by boosting foreign exchange earnings. Foreign companies set up production facilities in India that cater to both domestic and global markets, enhancing India's export capacity.  
  • E.g., iPhone exports from India surged to USD 12.1 billion in 2023-24, while Toyota and Hyundai export cars from India to Africa and Europe. 
• Encourages Competition & Efficiency: The influx of FDI encourages domestic companies to enhance their competitiveness by adopting international standards of quality, efficiency, and customer service.  
  • E.g., Amazon and Flipkart encouraged Indian retailers to go digital, while Starbucks and McDonald’s raised food service standards in India. 

What are the major barriers to attracting and sustaining FDI in India? 

• Challenging Regulatory Environment: Complex regulations such as tax laws and transfer pricing create compliance challenges for foreign investors, leading to legal disputes, financial losses, and loophole exploitation.  
  • E.g., Vodafone faced legal issues due to retrospective taxation. 
• Infrastructural Deficiencies: Although there has been significant progress, India still faces challenges related to inadequate infrastructure, especially in sectors like transportation, power supply, and logistics (14–18% of GDP as per Economic Survey 2022–23).  
  • Poor infrastructure can increase the cost of doing business, cause delays in supply chains, and discourage FDIs.  
• Challenges in Market Competition: Structural challenges in India’s market, such as predatory pricing by e-commerce platforms, hinder fair competition and pressure traditional retailers.  
  • Although regulations exist, bodies like the Competition Commission of India (CCI) struggle to effectively curb anti-competitive practices and ensure a level playing field. 
• Uneven Distribution of FDI: FDI inflows are heavily concentrated in a few sectors like services and in urban areas of states such as Maharashtra and Karnataka, causing unequal development opportunities.  
  • Additionally, inadequate infrastructure, especially in rural areas, deters FDI attraction. 
• Environmental and Sustainability Concerns: As global investors prioritize sustainability and environmental responsibility, India’s environmental regulations and enforcement mechanisms have raised concerns.  
  • While India has improved its environmental laws, the implementation of rules on pollution, waste management, and resource conservation remains inconsistent. 
  • E.g., Mining in the Niyamgiri Hills faced strong opposition from activists. 

What Measures can India Adopt to Boost FDI Inflows? 

• Policy & Regulatory Reforms: Single-window clearance for FDI approvals by merging processes in DPIIT, RBI, and state processes. 
  • Fast-track dispute resolution via dedicated commercial courts to avoid delays like the Vodafone tax case. 
  • Establishing clear, time-bound frameworks for resolving disputes could enhance investor confidence and signal that India is serious about maintaining a business-friendly environment. 
• Addressing Structural Challenges: To boost FDI in underdeveloped sectors, India should offer incentives like tax breaks, grants, and low-cost capital in key areas such as agro-processing, healthcare, and renewable energy. Special investment packages for states with low FDI inflows can reduce regional disparities and promote growth.  
• Encouraging Reinvestment and Reverse FDI: India should create a more favorable environment for managing outward FDI. Offering tax incentives for foreign firms that reinvest their profits in India could help attract a steady flow of reinvested capital.  
  • Additionally, relaxing restrictions on dividend repatriation related to new investments would further encourage multinational companies to re-invest in India and streamline cash flows across borders.   
    • A notable example is Tata Motors’ acquisition of Jaguar Land Rover, which later led to substantial investments in India’s automotive sector. 
• Infrastructure and Skill Development: To ensure balanced FDI inflows across the country, India must prioritize investments in infrastructure, especially in Tier-II and Tier-III cities.  
  • Improving multimodal connectivity, including roads, rail, and air, as well as enhancing logistics networks, would make these regions more attractive to investors.  
    • This would not only alleviate congestion in major urban centers but also support the balanced development of India’s economy. 
  • There is also a need to upskill the workforce and develop sector-specific clusters and Special Economic Zone (SEZ) to boost foreign investments in emerging sectors. 

Gross FDI and Net FDI 

Gross FDI refers to the total amount of foreign investment made by investors from one country into another during a specific period, without subtracting any disinvestments or withdrawals. 

• Net FDI is the total foreign investment coming into India (gross FDI) minus the money repatriated by foreign companies and outward FDI by Indian companies. 
  • Therefore, Gross FDI = Total inflows of foreign direct investments. 
  • Net FDI = Gross FDI inflows – FDI outflows (disinvestments). 

Conclusion 

Despite strong gross inflows, India’s net FDI has declined due to rising disinvestment and outward FDI. Addressing regulatory bottlenecks, infrastructure gaps, and sectoral imbalances is vital. A balanced, investor-friendly environment with equitable regional growth, policy certainty, and global competitiveness can sustainably enhance FDI and strengthen India's economic resilience.

Drishti Mains Question:

Q.Evaluate the role of Foreign Direct Investment in India’s economic development. What steps can be taken to make FDI more inclusive and sustainable?

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Prelims

Q. Consider the following: (2021)

1. Foreign currency convertible bonds  
2. Foreign institutional investment with certain conditions  
3. Global depository receipts  
4. Non-resident external deposits  

Which of the above can be included in Foreign Direct Investments?  

(a) 1, 2 and 3  

(b) 3 only   

(c) 2 and 4  

(d) 1 and 4  

Ans: (a) 

Q. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (2020)

(a) It is the investment through capital instruments essentially in a listed company.  

(b) It is a largely non-debt creating capital flow.  

(c) It is the investment which involves debt-servicing.  

(d) It is the investment made by foreign institutional investors in Government securities.  

Ans: (b)

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Mains

Q. Justify the need for FDI for the development of the Indian economy. Why is there a gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (2016)