India's net FDI plummets 96% in two years: record capital inflows, but why can't the money stay?

Over the past two years, India's narrative in global capital markets has been "the fastest-growing major economy" and "a safe haven for foreign capital." But the latest FDI data reveals another side: in FY26, India's total FDI inflow reached a record high of $94.5 billion, while net FDI plummeted from $28 billion in FY24 to just $1 billion—a decline of over 96%.

This contrast is not a mere statistical anomaly, but a signal of a structural turning point in India's model of absorbing foreign capital.

The Paradox of Capital "Flowing in and Flowing Out"

The formula for net FDI is: total inflows minus profit repatriation, dividend payments, and investor exit funds. According to RBI data, capital repatriation and exit in FY26 were close to 99% of total inflows, almost completely offsetting incremental capital.

The core drivers come from two levels:

1. Accelerated profit repatriation by multinationals: As foreign companies operating in India enter their mature phase, their profitability expands, and the profits repatriated to parent companies surge. Especially in the technology, consumer goods, and financial services sectors, tax rate differentials and parent company capital needs drive profits to exit faster.

2. Intensive exits by private equity and venture capital: PE/VC funds that poured into Indian startups from 2021 to 2023 are now entering their exit cycle. Through secondary market sales, IPO stake reductions, and M&A exits, investors are cashing out large amounts of dollar-denominated assets and transferring them abroad.

The combined effect of these factors is that out of the $94.5 billion total inflow, approximately $93.5 billion flowed out in various forms, leaving a net retention of only $1 billion.

Concerns Over the "Quality" of Total FDI Boom

In aggregate terms, India's FDI inflow remains strong, and global investors have not abandoned the "India story." However, the collapse in net FDI exposes an essential problem: the "quality" of incoming capital is deteriorating.

Traditionally, the greatest value of FDI to a host economy lies in long-term industrial commitment, technology transfer, supply chain integration, and job creation. These effects mostly come from greenfield investments (new factories, R&D centers, etc.), not from financial "hot money."

Yet, in recent years, the composition of India's FDI has seen a rising share from financial investors (PE/VC, sovereign wealth funds) and a declining share of manufacturing-led greenfield investments. In 2025-26, the manufacturing FDI share has dropped from 38% five years ago to about 24%. Incoming funds are flowing more toward digital platforms, fintech, and renewable energy projects. While these sectors are capital-intensive, their direct job creation and technology spillover effects are weaker than manufacturing.

This means that despite short-term growth from digital service exports and e-commerce consumption, India has not achieved deep industrialization through FDI.

Hidden Concerns for the "Make in India" Strategy

One core goal of the Modi government's "Make in India" initiative launched in 2014 was to attract foreign investment to build manufacturing capacity, thereby replacing imports and expanding exports. But the net FDI data indicates that foreign companies, after operating in India, are not reinvesting profits into expansion but choosing to repatriate them.

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The cases of Apple suppliers Wistron and Foxconn's expansion in India are quite representative: they did drive the electronics manufacturing cluster, but profit distribution still prioritized shareholder returns.Apple suppliers Wistron and Foxconn's India expansion cases are quite representative: they have indeed driven the formation of electronics manufacturing clusters, but profit distribution still prioritizes shareholder returns. India's domestic policy incentives (such as the PLI scheme) are more about upfront subsidies rather than forming a long-term capital lock-in mechanism.

The deeper issues are infrastructure bottlenecks, land acquisition obstacles, and labor regulations, which still cause many manufacturing enterprises to view India as a "cost depression" rather than a "long-term base." As long as these structural shortcomings exist, foreign capital tends to operate with light assets, quickly exiting after earning short-term profits.

Impact of the Net FDI Plunge on the Macro Economy

The sustained deterioration of net FDI will produce a chain of effects:

• Foreign exchange reserve pressure: India's current account has been in deficit for a long time, relying on capital account surpluses (especially FDI) to balance. The sharp decline in net FDI means weakened support from the capital account, increasing depreciation pressure on the rupee.
• Shrinking investment multiplier: Only the net retained portion of FDI can be converted into domestic fixed asset investment. A net retention of 1 billion USD can hardly drive infrastructure and industrial expansion.
• Financialization risk: When FDI is closer to "financial arbitrage," the Indian economy becomes vulnerable to fluctuations in global interest rates and risk appetite. If global liquidity tightens, capital outflows may accelerate.

Policy Shift from "Attracting" to "Retaining"

The Indian government has realized the seriousness of the problem. Starting from 2025, the Ministry of Commerce and Industry has begun to adjust policy priorities:

• Maintain high dividend distribution tax on profit repatriation, but more importantly, lower the threshold for reinvestment.
• Expand the Production Linked Incentive (PLI) scheme to 14 industries, requiring companies to commit at least 50% of profits to local reinvestment in India.
• Simplify the approval process for foreign capital exit, but set a "minimum capital stay period" clause to prevent quick entry and exit.

However, structural reforms are far more complex than tax incentives. Labor laws, land approvals, and power supply remain long-term obstacles to manufacturing investment. As long as these hard constraints are not lifted, it will be difficult to establish the motivation for foreign capital to engage in "short money long investment."

Long-Term Perspective: India Needs to Build "Capital Stickiness"

The sharp drop in net FDI should not be simply interpreted as a decline in India's attractiveness to foreign capital. In fact, the strong growth in gross FDI shows that India has become a core area for global capital allocation. The real challenge is how to convert short-term capital flows into long-term growth momentum.

The experiences of South Korea and Vietnam show that the "stickiness" of manufacturing FDI depends on the deepening of industrial clusters. When a country can provide large-scale intermediate goods supply, skilled labor, and supporting logistics, the exit cost for foreign capital naturally increases, and profits tend to be reinvested locally.

India is still in the "shallow embedding" stage—a large amount of FDI is concentrated in digital services and assembly, without forming a complete localized industrial chain. To change this situation, India needs to shift from policy support to hard investment in infrastructure, while strengthening vocational education and alignment with international technical standards.The sharp drop in net FDI data is a wake-up call: it reminds policymakers that the digital "India story" can attract capital, but only a manufacturing powerhouse's "Made in India" can retain it. Over a longer time horizon, India must complete the dual transformation from the "world's back office" to the "world's factory + office." Otherwise, the pattern of large capital inflows and outflows will become a new risk for economic volatility.