India's Net FDI Inflows Could Pick-Up This Fiscal After Decadal Low

India's net foreign direct investment could see a pick-up in the current financial year after declining to a decadal low in fiscal 2024 supported by political and policy stability amid consistently higher growth and increasing domestic demand in the country.

The country's current account balance recorded a surplus for the first time since April–June 2021, aided by a lower merchandise trade deficit and higher service exports. The current account balance recorded a surplus of $5.7 billion, or 0.6% of GDP, during the January–March 2024 quarter, against a deficit of $8.7 billion, or 1% of GDP, in the preceding quarter, according to data published by the RBI on Monday.

However, net foreign direct investments continued to ease in the January–March 2024 quarter and for the full fiscal year amid higher outflows, even as inflows remained relatively steady.

While the net FPI stood at a nine-year high of 1.3% of GDP in fiscal 2024, the net FDI dropped to just 0.3% of GDP, which was the lowest since financial year 1993, according to a research note by India Ratings.

Net FDI flows slumped to $9.8 billion in fiscal 2024, the lowest level since fiscal 2007, from $28 billion in full year ended March 2023. On a quarterly basis, net FDI stood at $1.9 billion in the January-March 2024 quarter.

The decline in FDI was led by repatriation at $44.7 billion in fiscal 2024 versus $29.4 billion in the full year ended March 2023, while inflows into India were largely flat at $70.9 billion in financial year 2024 versus $71.4 billion in fiscal 2023, said Teresa John, chief economist at Nirmal Bang Institutional Equities.

There is reason for concern about capital flows beyond fiscal 2025 if FDI flows do not recover, she said. "While repatriation of profits and private equity exits through IPOs—on the back of buoyant equity markets—have likely contributed to FDI outflows, we remain watchful of this trend."

FDI in any particular year is influenced by multiple factors, including the domestic situation, how positive global investors are on Indian markets, and the competitiveness to export from India, along with global sentiments, said Aditi Nayar, chief economist at ICRA. The current fiscal year will be a little better than the last fiscal, and going forward, FDI is likely to strengthen, she said.

FDI flows to India should see a significant improvement over the medium term driven by political and policy stability, consistently higher growth and domestic demand prospects in India over the medium term as compared to China and other developing economies, a global imperative to develop alternative manufacturing centres beyond China, policy measures taken by the government through production-linked incentive programmes, and the continuing investment and growth in global capability centres due to the availability of skilled manpower at a lower cost, according to Suman Chowdhury, chief economist at Acuite Ratings.

John of Nirmal Bang estimates that India's net FDI is likely to nearly double to $20 billion in the current fiscal, but will still remain low by historical standards.