India's average return on FDI remains robust at 7.3%, outperforming emerging economies: CareEdge

Understanding India's Foreign Direct Investment (FDI) landscape is crucial for anyone studying the Indian economy. FDI represents investment made by a firm or individual in one country into business interests located in another country. It's distinct from portfolio investment, which is purely financial, as FDI involves acquiring a lasting management interest. For developing economies like India, FDI is a vital non-debt creating source of capital, bringing not just funds but also technology, management expertise, and access to global markets.

Historically, India's approach to foreign capital was cautious, marked by a protectionist regime post-independence. The pivotal economic reforms of 1991, triggered by a severe balance of payments crisis, liberalized the economy significantly. This era ushered in a more welcoming stance towards FDI, gradually opening up various sectors to foreign investment, initially with caps and approvals, evolving towards an 'automatic route' for most sectors. This journey from a 'closed' to an 'open' economy has fundamentally reshaped India's integration with the global economic system.

The recent report by CareEdge provides a nuanced picture of India's FDI performance in Financial Year 2025. On the positive side, India continues to be an attractive destination, boasting a robust average return on inward FDI of 7.3%. This figure is particularly impressive as it outperforms many other emerging economies, signaling strong profitability for foreign investors operating in India. Gross FDI inflows for FY25 were substantial, reaching USD 81 billion, indicating continued investor confidence in India's growth story and market potential. This gross inflow is a testament to the government's sustained efforts through initiatives like 'Make in India' and the 'Production Linked Incentive (PLI)' schemes, which aim to boost domestic manufacturing and attract global supply chains.

However, the report also highlights a significant concern: the net FDI for FY25 plummeted to a mere USD 1 billion. This drastic reduction from gross inflows is primarily attributed to increased profit repatriation and other outflows. Profit repatriation occurs when foreign companies operating in India send their earnings back to their home countries. While a natural part of international business, a sharp increase can impact India's capital account and overall balance of payments. Outflows could also include disinvestment by foreign entities or repayment of inter-company loans. This trend suggests that while foreign companies find India profitable, a substantial portion of those profits is not being reinvested within the country, or existing investments are being scaled back.

Key stakeholders in this FDI narrative include the Government of India (specifically the Department for Promotion of Industry and Internal Trade – DPIIT, the Ministry of Finance, and the Reserve Bank of India – RBI), which formulates and implements FDI policies under the Foreign Exchange Management Act (FEMA), 1999. FEMA is the primary legislation governing foreign exchange transactions in India, including FDI. The RBI plays a crucial role in monitoring and regulating these flows. Foreign investors, comprising multinational corporations (MNCs) and other entities, are the direct capital providers, bringing in not just funds but often advanced technology and best practices. Indian businesses, in turn, benefit from capital infusion, technological upgrades, and increased competition, leading to efficiency gains. Ultimately, the Indian economy and its citizens are the beneficiaries of job creation, infrastructure development, and overall economic growth stemming from FDI.

This situation matters immensely for India. A high net FDI is crucial for financing the current account deficit (CAD), boosting foreign exchange reserves, and fueling economic growth. The low net FDI figure, despite high gross inflows, indicates a potential challenge for India's external sector stability. It suggests that while India remains attractive for initial investment, the retention and reinvestment of profits need attention. The focus on emerging sectors like semiconductors and Electric Vehicles (EVs) for attracting new investment is a positive sign, aligning with India's long-term strategic goals for technological advancement and sustainable growth. These sectors are critical for India's industrial future and global competitiveness.

Looking ahead, the government might need to analyze the reasons behind increased repatriation and outflows. Policy adjustments could involve creating more incentives for reinvestment of profits within India, further streamlining regulatory processes, or offering more attractive long-term investment opportunities. India's ability to maintain a robust return on FDI while also encouraging reinvestment will be vital for its continued economic ascent and integration into global supply chains. The constitutional framework, while not directly addressing FDI, places subjects like 'foreign exchange' and 'trade and commerce with foreign countries' under the Union List (Seventh Schedule), granting the central government the legislative authority to frame policies related to FDI. Acts like FEMA and the Companies Act, 2013, which regulates foreign companies, are direct legislative manifestations of this power.

In essence, while India's profitability for foreign investors remains strong, the challenge lies in converting gross inflows into higher net FDI, ensuring that the capital brought in contributes more substantially to domestic capital formation and economic expansion.