New Delhi: As the Indian economy walks into 2025, it faces three key challenges: a foreign direct investment (FDI) paradox, foreign portfolio investments (FPI) outflows and declining foreign exchange (forex) reserves.
Coupled with the fall in tourist arrivals in India, these challenges need a closer look at a time when growth is declining and demand is sluggish.
Net FDI inflows to India fell to a 12-year low in the April-October period of the current fiscal year, compared to the same periods of previous years. But gross FDI has been rising. This forms the crux of the FDI paradox.
As Reserve Bank of India (RBI) data analysed by ThePrint shows, net FDI flows into India slumped to $14.5 billion in April-October 2024.
Against this backdrop, it is also important to note the trends in terms of decline in FDI as a percentage of GDP.
The second key challenge facing the Indian economy is the outflow of FPI, which must be seen together with the consistent and steep increase in foreign investments by Indian businesses.
Foreign portfolio investors, data shows, pulled out Rs 2.5 lakh crore from Indian markets during the April-December 2024 period of the current fiscal year. At the same time, foreign investments by Indian companies jumped to $12.4 billion in the April-October 2024 period.
There is also the question of declining foreign exchange (forex) reserves and how the Reserve Bank of India (RBI) sees it.
A closer look at all these challenges justifies the demand for more concrete reforms, and perhaps another privatisation drive.
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High amount of money pulled out through divestments/ repatriations is not necessarily a bad thing. It shows that investors who had invested over earlier years have probably made capital gains and have returned money to original investors. That sets a good track record for foreign investors and adds credibility. But this hypothesis needs to be cross checked against the type of money pulled out which analysis was not focussed on in this episode. One of the problems in China is that foreign investors have not be able to repatriate or divest their holdings in China as compared to the massive investment coming ‘in’ the country.