India must probe the reasons behind rising outward FDI flows

Waning FDI flows hold critical implications even for the Indian economy, specifically due to the rising tide of outflows and Indian industry’s growing preference for overseas investment destinations.

Also Read: India’s FDI inflows offset by outflows: Blip or worry?

The annualWorld Investment Report 2025 from the United Nations Conference on Trade and Development (UNCTAD), states that FDI flows fell 11% in 2024, a second straight year of decline, and the prognosis for 2025 is equally disheartening due to “high investor uncertainty.” However, what shines through in the report was a doubling of project values in the digital sector. But this was not without its drawbacks.

According to UNCTAD secretary-general Rebeca Grynspan, “Despite more than $500 billion in greenfield investment in the digital economy into developing countries over the past five years, this investment is heavily concentrated in a few countries. Many structurally weak and vulnerable economies remain marginalized, constrained by inadequate digital infrastructure, limited digital skills and policy and regulatory uncertainty.”

The second data release emanated from the Organisation for Economic Cooperation and Development (OECD), a club for rich nations. The OECD report states that while the US, Luxembourg and Canada were the world’s top three FDI destinations during 2024, flows to the G-20’s non-OECD economies (which includes India) declined by 30%. China witnessed a decline for the third consecutive year.

Also Read: Rework India’s investment treaty framework to attract FDI flows

A third report,Foreign Direct Investment in Retreat: Policies to Turn the Tide, was released by the World Bank. The report, using recent project announcements, states that greenfield FDI to emerging and developing economies (the dominant form of investment flows into these economies) declined 25% during 2024. This indicates a growing distaste for setting up new manufacturing facilities in these markets.

The report also nails down the 2008 financial crisis as a turning point for global FDI: flows as a share of global GDP declined from 5% in 2007 to below 1% during both 2023 and 2024, the lowest since the start of this century.

All three reports point to heightened trade tensions, policy uncertainty and a breakdown of global value chains due to rising protectionism as the primary reasons for waning FDI. These factors have contributed to a weakening of the global macroeconomic backdrop, further imperilling the near-term outlook for FDI flows.

Also Read: How best to attract FDI: Four pointers for an ‘investment-friendly charter’

This has an unmistakably adverse impact on India, though the picture may look different at a gross level. Let’s unpack this. Among FDI recipients, the UNCTAD report places India at 15th rank in 2024, marginally up from 16th position in 2023. And while greenfield activity was reportedly strong in India (led by semiconductor and metal projects), international project finance inflows contracted by 37%. What makes India’s FDI data remarkable, however, is the country’s growing outflows.

The first category is of existing FDI investors cashing out and taking funds back home. A proportion of these outflows has overseas investors liquidating local holdings in favour of domestic groups. For example, Walt Disney sold its Indian operations (Star India) to Jio and private-equity firm Advent International relinquished its 100% stake in Bharat Serum to Mankind Pharma. However, given the lack of granular data, it becomes difficult to pin down the exact ratio of domestic versus overseas buyouts.

Also Read: India’s FDI decline seems easier to explain than reverse

What seems more disconcerting, though, is Indian businesses increasingly favouring overseas investments rather than putting their money to work at home. Outflows under this category in 2024 jumped 75% over the previous year. Compared with 2016-17, outflows in 2024-25 were more than four times larger.

According to the World Bank’s report: “Among the push factors that tend to encourage FDI outflows from the source country are its weak growth prospects, macroeconomic risks, political instability, rising production costs, and deterioration of the regulatory environment.”

Also Read: Flagging FDI: India must find ways to attract more of it before it’s too late

The growing volume of outflows seems counter-intuitive, since the government has initiated policies to both facilitate FDI inflows—such as higher FDI caps in a number of sectors (insurance and defence, for instance) and liberalized rules for construction or single brand retail trading—and expedite domestic manufacturing (such as its production-linked incentive scheme).

Typically, the largest sources of outward FDI are rich economies with capital account convertibility, barring conduits like the Netherlands or Singapore. For example, the US and Japan occupy the top two spots in the outward FDI league tables, while China, with partial convertibility, is in third place. India, in contrast, is still a low-middle income economy and the rupee’s internationalization is lower than the renminbi’s. It thus becomes imperative for the Indian government to probe the reasons behind India Inc’s reluctance to invest at home, despite all the incentives, low interest rates and generous tax breaks.

The author is a senior journalist and author of ‘Slip, Stitch and Stumble: The Untold Story of India’s Financial Sector Reforms’ @rajrishisinghal