India's FDI Inflows Stagnate Amid Global Economic Shifts

India's annual FDI inflows have shown minimal growth with a CAGR of around 2%. While gross inflows improved, net FDI drastically declined due to increased profit repatriations. In FY25, the services sector led in FDI equity, but emerging sectors like semiconductors are gaining traction. Global FDI has also weakened amid geopolitical uncertainties.

India's annual foreign direct investment (FDI) inflows have remained largely stagnant over the past five years, with a compound annual growth rate of merely 2%, according to CareEdge Ratings. Between FY20 and FY25, these inflows hovered between USD 70 and 85 billion, yet net FDI flows plummeted drastically from USD 44 billion in FY20 to just USD 1 billion in FY25.

While gross inflows have shown improvement, increased profit repatriation and outbound investments have sharply curtailed net FDI inflows. CareEdge's analysis points out that India's inward FDI still yields a competitive return of 7.3%, surpassing those of many developed and emerging economies. The decision by foreign companies to reinvest or repatriate profits largely aligns with their strategic goals and capital allocation philosophy.

In FY25, the services sector attracted the most FDI equity, accounting for 19% of inflows. Following closely were the computer software and hardware sector at 16%, with the trading and non-conventional energy sectors each taking 8%. Meanwhile, promising sectors such as semiconductors and electric vehicles are increasingly attracting FDI. Globally, however, FDI flows lag behind GDP growth, with Europe's share declining while China's outward FDI share rises.

(With inputs from agencies.)