EconoScope | India faces record low net FDI as investor confidence wanes

(ECNS) -- India has recorded a historic low in net foreign direct investment (FDI), raising fresh concerns about the country's investment climate. According to data released by the Reserve Bank of India at the end of July, the country's net FDI in May 2025 was just $35 million, staggeringly down 99% from the previous month and 98% year-on-year.

The outlook for the entire fiscal year is equally bleak. In fiscal year 2024–2025, India's net FDI fell to just $353 million, down 96.5% from nearly $10 billion in the previous year, marking the lowest level on record.

The issue lies not just in declining inflows, but in the rapid and large-scale outflow of capital. According to the Economic and Commercial Office of the Consulate General of China in Mumbai, although gross FDI into India rose by 13.7% year-on-year to $81 billion in the 2025 fiscal year, foreign investors withdrew $49 billion during the same period. When combined with outbound investment and profit repatriation, these outflows have driven net FDI down to nearly zero.

What's driving the capital outflow?

One major factor is a wave of capital withdrawal driven by high-profile IPOs. Private equity and venture capital exits hit $26.7 billion in 2025 fiscal year.

Hyundai's India subsidiary went public, with the parent company cutting its stake from 100% to 82.5%. Meanwhile, a major foreign shareholder in food delivery giant Swiggy cashed out over $2 billion through share sales.

Another major contributor is the sharp rise in outbound investment by Indian firms. Amid global supply chain restructuring, Indian companies are increasingly expanding overseas. Outbound direct investment rose from $17 billion to $29 billion over the past fiscal year, with capital increasingly allocated to global markets and diversified strategies.

The Reserve Bank of India has downplayed concerns, stating that the increase in gross FDI indicates India remains attractive to investors and that higher capital outflows reflect a maturing market with increased liquidity and mobility.

However, many analysts question this optimistic argument. For years, India has struggled to shed its reputation as a "graveyard for foreign capital." From Google and Amazon to Nokia, Samsung, and Xiaomi, foreign companies have repeatedly faced legal and regulatory hurdles, often in the form of hefty fines. In March 2025, the Indian government ordered Samsung and its executives to pay $601 million in back taxes and penalties, nearly wiping out its annual net profit in the country.

Foreign investors' pattern of "quick in, quick out" may reflect a lack of confidence in India's growth prospects and a reaction to regulatory uncertainty and institutional instability.

In contrast, Southeast Asian nations like Vietnam and Indonesia continue to enjoy steady FDI inflows. Bao VietNamNet reports that Vietnam attracted $38.23 billion in FDI in 2024, mostly in manufacturing, while ASEAN Briefing reports that Indonesia brought in $55.3 billion in 2024, largely into mining and metals.

Institutional differences are the key. According to the UK's Centre for Economics and Business Research, Vietnam scores higher than India on economic freedom indices and offers a more stable and attractive regulatory environment. India, by contrast, still faces significant challenges in business registration, administrative approvals, contract enforcement, and legal processes.

In addition, Reuters recently reported that India is planning tighter scrutiny of foreign investment in sectors like e-commerce and pharmaceuticals, which could further dampen enthusiasm among global firms.

There's no denying that India's strengths include a massive population, strong GDP growth, and rising consumer demand, along with opportunities in digital infrastructure, green energy, and medical technology. But in today's investment climate, the real question isn't "How many come?" but "How many stay?"

Speculative capital may enter quickly, but only institutional trust and market stability can help it take root. If a country remains a mere transit hub for capital, it may never become the true destination investors are looking for.

(By Gong Weiwei)