Capital Leakage Beneath the Boom

India recorded a record gross foreign direct investment (FDI) inflow of $94.5 billion in fiscal year 2025-2026, a figure that caught the attention of global emerging markets. However, net FDI—that is, the actual retained foreign capital after deducting profit repatriation, dividend payments, and capital exits—plunged from $28 billion two years ago to just $1 billion.

This data discrepancy reveals a key fact: Capital flowing into India is exiting at almost the same speed. India has not lost its appeal to foreign investment, but the nature of the capital it attracts has undergone a profound change.

Profit Repatriation and Investor Exit: The Dual Engines of Capital Outflow

The primary driver of the net FDI collapse is the sharp rise in profit repatriation by multinational corporations. As the profitability of companies operating in India increases, more subsidiaries are transferring profits back to their home countries. Meanwhile, private equity and venture capital funds that rushed in over the past decade are entering their exit cycle. After reaping considerable returns, these investors are reducing holdings through secondary market sales or IPOs, leading to large-scale capital outflows.

Data from the Reserve Bank of India shows that capital outflows in FY26 nearly tripled compared to FY24, almost entirely offsetting the new inflows during the same period. This pattern of "high inflows, high outflows" significantly weakens the support of net FDI for the current account and foreign exchange reserves.

Structural Shift: Financial Capital Replaces Industrial Investment

The change in FDI composition deserves even greater attention. In recent years, the share of financial investors (such as sovereign wealth funds and private equity) in India's FDI has continued to rise, while greenfield investments by multinational enterprises in manufacturing have lagged behind. Compared with the manufacturing investment boom in the mid-2010s, current investments are more skewed toward asset-light sectors such as digital services, fintech, and renewable energy.

While such investments bring short-term capital inflows, their long-term spillover effects in technology transfer, job creation, and export capacity improvement are limited. In contrast, countries like Vietnam, Mexico, and Indonesia have secured more substantial investments in the manufacturing FDI competition, establishing a more solid industrial foundation.

Global Capital Reallocation and Concerns Over India's Competitiveness

The sharp decline in net FDI is not unique to India. Global FDI flows are undergoing structural adjustments: rising interest rates, geopolitical fragmentation, and regionalization of supply chains are prompting multinationals to favor production capacity deployment closer to end markets. Although India maintains high gross inflows thanks to its large domestic market and policy incentives (such as the Production-Linked Incentive scheme), it still faces fierce competition from Southeast Asia, the Middle East, and North Africa in high-value-added sectors like electronics, semiconductors, and electric vehicles.

What is particularly alarming is that the share of manufacturing in India's GDP has stagnated at around 17%, far below the government's target of 25%. If the sustained contraction in net FDI leads to slower accumulation of foreign exchange reserves, it could affect India's sovereign credit rating and external financing costs.

Policy Implications: From Attracting Investment to Retaining InvestmentFor policymakers, the decline in net FDI implies a shift from "quantity-driven" to "quality-driven" investment attraction. Specific measures include:

  • **Deepen the manufacturing ecosystem**: By strengthening supply chain localization, improving logistics infrastructure, and stabilizing tax policies, reduce operating costs for multinational enterprises and enhance their willingness to stay long-term.
  • **Optimize profit repatriation regulation**: Reasonably guide profit reinvestment, for example, by providing tax incentives for retained earnings to encourage multinational enterprises to use profits for local R&D or capacity expansion.
  • **Reduce capital exit friction**: Establish a more transparent and predictable exit mechanism, while attracting long-term capital to replace short-term hot money through instruments such as green bonds and infrastructure investment trusts.

Long-term Trend Judgment

Over the next three years, India's net FDI may remain at a low level, but gross inflows will still be strong. The real test lies in whether India can transform short-term capital enthusiasm into long-term industrial roots. If manufacturing investment does not recover significantly, net FDI may continue to fluctuate at low levels or even turn negative. Conversely, if structural reforms are in place, India is expected to become a key node in the global supply chain restructuring, achieving sustainable growth in net capital inflows.

Capital never stays permanently. India needs to prove not only that it can attract capital, but also that it can make capital take root.