India's net FDI plummets: for every $1 inflow, $1.5 flows out — cracks in the emerging market capital myth

When "Strong" Gross Inflows Become an Illusion

India's recent FDI data presents a puzzling paradox: Gross inflows remain high, reaching $94.6 billion in 2025-26, but net inflows have plummeted from a peak of $44 billion in 2020-21 to less than $1 billion in 2024-25, recovering only to $7.6 billion in 2025-26. This contrast has sparked intense debate in India—opponents see it as a sign of collapsing foreign investor confidence, while officials emphasize that the "strong" gross inflows demonstrate economic resilience. However, from the deeper logic of capital flows in emerging markets, both sides overlook the real structural changes.

Why Net FDI Has Collapsed: Unpacking the Three Channels of Capital Outflows

Net FDI = Gross Inflows – Outflows. India's outflow pressure primarily stems from three sources:

1. Divestment and Capital Repatriation: This is the direct cause of the decline in net FDI. According to balance of payments conventions, dividend repatriation is recorded under the current account rather than the financial account, so the decline in net FDI is actually the result of divestment and capital repatriation (rather than profit repatriation). Between 2022-23 and 2025-26, PE/VC exits alone contributed $52 billion in outflows.

2. Fast In-and-Out by Financial Investors: FDI inflows into India are not monolithic. Traditional multinational corporations' "Real FDI" (RFDI) accounts for only 41.9% of effective inflows, while financial investors such as private equity and sovereign wealth funds account for 40.5%, whose essence is seeking capital appreciation and planning exits. A typical case: Singapore's Temasek exited Schneider Electric's India operations in 2025, turning a $637 million investment into $6.4 billion in returns over five years.

3. Capital Circulation and SPV Channels: India's outward FDI (OFDI) reached $65 billion over the same period, with 45% flowing into "financial, insurance, and business services," mainly through holding companies in Singapore (27%) and the UAE (11%). Some capital may merely be circulating cross-border rather than representing real industrial expansion. OFDI via GIFT City surged from $246 million in 2023-24 to $1.18 billion in 2025-26, further blurring the true destination of capital.

Manufacturing FDI: The "Hardcore" Investment Most Valued by Emerging Markets Is Shrinking

Manufacturing is the core yardstick for measuring FDI quality, as it embodies technology transfer, employment, and industrial upgrading. However, India's situation is worrying:

• Real manufacturing FDI as a share of effective inflows has been declining, standing at just 10.6% from 2022-23 to 2025-26, far below previous cycles.
• This contrasts with emerging economies in Southeast Asia such as Vietnam and Indonesia, which have attracted large amounts of manufacturing-driven FDI thanks to supply chain shifts. India's problem is that financial FDI is crowding out industrial FDI.## $1 Inflow Corresponds to $1.5 Outflow: Red Light for Sustainability

Summing all outflows (divestment, dividend repatriation of $118.9 billion, intellectual property/royalty fees of $46.6 billion, excluding OFDI and technical service fees), the total outflow for 2022-23 to 2025-26 reached $344.4 billion, while fresh inflows (excluding reinvested earnings) over the same period were $230.6 billion. This means:

• For every $1 of fresh inflow, there is approximately $1.5 of outflow.
• This ratio has been continuously deteriorating: 0.56 in 2014-18, rising to 0.70 in 2018-22, and now exceeding 1.50.

For emerging markets, a sustained net capital outflow will erode foreign exchange reserves, weaken currency stability, and force central banks to maintain high interest rates to attract capital—contrary to the narrative of a "growth story."

Common Warning for Emerging Markets Behind the Data

India's FDI case is by no means isolated. Developing countries in the Global South generally face a trade-off between "quantity" and "quality" when attracting foreign capital:

• Financial capital dominance: Global private equity and venture capital have poured into emerging markets post-pandemic, but such capital has clear exit timelines and will rapidly withdraw once global interest rate conditions change or geopolitical risks rise.
• Impact of policy environment: India's tightening of foreign investment policies after 2020 (e.g., data localization, e-commerce rules) may have prompted some capital to circumvent regulation through complex structures, exacerbating statistical distortions.
• Global interest rates and risk premiums: The Fed's rate hike cycle has raised risk premiums in countries like India, prompting capital repricing and accelerating divestment.

At a deeper level, the competitiveness of FDI in emerging markets is shifting from "low-cost labor" to "market size + institutional stability." India has a domestic market of 1.4 billion people, but if the net capital outflow trend continues, manufacturing and employment growth will be constrained.

Conclusion: Redefining FDI "Success"

India's FDI data reveal a real picture obscured by gross inflows: capital surges in like a tide, but retreats even faster. For Global South economies, the quality of FDI matters more than quantity. The share of real manufacturing investment, the duration of capital stay, and technology spillover effects are the key indicators of whether foreign capital truly drives development. When net inflows approach zero or even turn negative, the halo of "global investment destination" needs cautious scrutiny.

India's central bank and finance ministry need to take action on the structural factors behind capital outflows: reduce distortions in financial FDI, simplify exit mechanisms for genuine investors, and strengthen oversight of capital cycles. For other emerging markets, this case serves as a profound warning about the FDI statistical illusion.

Main data sources: Reserve Bank of India balance of payments data, Department for Promotion of Industry and Internal Trade (DPIIT) FDI data, and an analysis article from The Hindu in June 2026.