There are distinctions between gross and net flows, inflows and outflows, and new money and reinvestment of earnings. Each signifies a different aspect of the FDI story.
The narrative surrounding India’s economic growth often carries declarations of large increases in Foreign Direct Investment or FDI. Yet, the headline FDI figures often mask nuances. At its core, FDI is the infusion of foreign capital into domestic enterprises and is seen as a signal of investor confidence. However, there are distinctions between gross and net flows, flows by foreign firms in India and Indian firms abroad, as well as new money and reinvestment of earnings. Each of these signifies a different aspect of the FDI story. One needs to be careful about which metric is used to explain what phenomenon.
FDI inflows
FDI has two routes to enter India: foreign firms bringing in capital (both equity and debt) to make new investments and existing foreign firms choosing to reinvest earnings. These make up the FDI “inflows” into India. It is useful to look at annual numbers, as they give us a more comprehensive picture of a year.
FDI inflows have been falling in the recent few years: the maximum India has received since 2011-12 was $84.8 billion in 2021-22. Within two years, this had fallen to $70.9 billion in 2023-24. The fall in FDI inflows is driven by a decline in new equity investments.
In 2021-22, equity investments by foreigners into India were at $59.6 billion, while debt investments were at $5.8 billion. In 2023-24, new equity investments fell to $45 billion and debt investments to $5.3 billion. Reinvestment of earnings has held steady between the years at roughly over $19 billion.
Foreign money also leaves India. These are the FDI “outflows”. In 2011-12, FDI outflows from India were at $13.6 billion. In 2021-22 the outflows had increased to $28.6 billion. In 2023-24, the total outflows were at $44.4 billion.
The net FDI by foreign firms, therefore, gives us a picture of the difference between foreign money that came into India, and Indian money that went out of it. In 2011-12, net FDI flows by foreign firms stood at $32.9 billion. By 2021-22, these had increased to $56.2 billion, but in 2023-24 these fell to $26.4 billion. Even in nominal terms, this was lower than the same in 2011-12. Less of "new investment" is coming into India and more of it is leaving India.
FDI outflows
Indian firms also make decisions about investing outside of India. In 2011-12, the total inflows by Indian firms from other markets were about $2.4 billion. By 2023-24, these increased to $3.6 billion. The total outflows from Indian firms also increased from $13 billion in 2011-12 to $20.3 billion in 2023-24.
Both direct investments and reinvestment of earnings abroad by Indian firms have increased. On the one hand, this signifies the maturity of Indian firms in expanding to markets outside India. On the other hand, this might signal a lack of investment avenues within India. One has to arrive at a calibrated view of what is really going on.
<p>The article was published in the Print, 4 December 2024. </p>
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