India And FDI Retention

India And FDI Retention: Key Challenges And Solutions

Source: Indian Express
GS III: Investment Models

Overview

News in Brief
Declining Trend in India’s Net FDI
China Plus One Strategy and India
Vietnam’s Success Story
Way Forward

Why in the News?

An article in the Indian Express highlights a concerning trend in India’s Foreign Direct Investment (FDI) performance.

News in Brief

India continues to attract significant foreign investment, but a large share of these inflows is not being retained, raising concerns about long-term investor commitment.
The country faces increasing competition from economies such as Vietnam, which have integrated more effectively into global manufacturing and supply-chain networks.
Experts emphasize the need for a predictable policy environment, stronger domestic supplier ecosystems, and greater investor confidence to improve FDI retention and support sustainable economic growth.

What is FDI?

Foreign Direct Investment (FDI) refers to investment made by a foreign company or individual in productive assets of another country, such as factories, businesses or infrastructure.
It is regarded as the most desirable form of external capital for developing economies.
FDI is often called ‘stable capital’ because it reflects long-term confidence, whereas Portfolio investment is ‘volatile capital’ because investors can rapidly sell their assets and withdraw funds.
- - FDI – foreign company setting up a manufacturing plant in India.
  - Portfolio investment – foreign investor purchasing shares of an Indian company on the stock market.

Significance of FDI

Brings long-term capital
Transfers technology and managerial expertise.
Generates employment.
Enhances export competitiveness.
Integrates economies into global markets.

Declining Trend in India’s Net FDI

Reasons for the decline

Increasing exits by foreign investors have weakened the country’s ability to retain foreign capital.
Higher transfers of profits and capital abroad by foreign firms have weakened net FDI inflows.
Increasing overseas expansion by Indian firms has led to greater outward investment flows.
Global economic uncertainties, geopolitical tensions, and reduced investor confidence have adversely affected foreign investment retention.

Factors behind rising Investor Withdrawals

Increasing foreign investor exits is a significant concern for India’s investment landscape.
Global Factors
- High global interest rates.
- Slower growth in the global economy
- Geopolitical tensions and conflicts
- Disruptions in global supply chains.
Domestic Factors
- Regulatory and compliance uncertainties.
- Lack of policy predictability.
- Challenges in expanding and integrating manufacturing ecosystems.

Significance of Retaining FDI

India’s persistent Current Account Deficit makes stable and long-term capital inflows essential.
Sustained FDI helps support external sector stability and reduces pressure on the rupee.

Gross FDI vs Net FDI

Gross FDI

The total foreign investment entering the country.

Net FDI

The actual foreign investment retained after accounting for
- Profit repatriation by foreign companies
- Disinvestment or sale of foreign-owned assets.
- Investments made abroad by domestic firms.
Why Net FDI Matters?
- Reflects the amount of foreign capital that remains in the economy.
- Serves as an indicator of long-term investor confidence.
- Provides a better measure of the economy’s ability to remain foreign investment than Gross FDI alone.

China Plus One Strategy and India

A strategy adopted by multinational corporations to diversify production away from China and reduce supply-chain risks.
Expected benefits for India
- Greater manufacturing investment
- Increased exports
- Integration into global production networks.
Reality – India has benefited, but gains have been smaller than expected.
Reasons
- India remains limited integration into Global Value Chains (GVCs) compared to East Asian economies.
  - Sectors dominated by Global Value Chains include electronics, electrical machinery, mechanical equipment, and automobiles.
  - China continues to dominate these sectors due to
    - Dense supplier networks
    - Large manufacturing ecosystems
    - Strong component manufacturing base.
- India has made notable advances in Electronics through incentive schemes.
  - Attracted global firms such as Apple and Samsung.
  - Achieved significant growth in electronic assembly.
- But assembly alone is not sufficient for long-term competitiveness.
  - Challenges remain in developing domestic supplier networks, component manufacturing, and local production ecosystems.

Vietnam’s Success Story

Vietnam’s success in Global Production Networks lies in its
- Strong integration into global value chains
- Export-oriented manufacturing ecosystem.
- Well-developed supplier networks.
- Greater participation in multinational production chains.
Compared to India the difference lies not in market size but in the degree of integration into global production systems.

Way Forward

Ensure a predictable policy environment through stable environment through stable regulations, reduced policy uncertainty, and efficient approval processes.
Strengthen investor confidence by improving ease of doing business, contract enforcement, and transparent governance.
Deepen integration into global value chains by enhancing manufacturing capabilities, component production, and logistics infrastructure.
Develop robust domestic supplier networks through greater MSME participation, industrial cluster development, and increased local value addition.

Key Takeaways

India And FDI Retention — Click image to enlarge for better readability

UPSC Prelims Practice Question

Consider the following statements

1. Net FDI is always equal to Gross FDI.
2. FDI is generally considered more stable than Portfolio Investment.
3. Greater integration into global value chains can help improve FDI retention in India.

Select the correct answer using the code below

a) 1 only

b) 1 and 2 only

c) 2 and 3 only

d)1, 2 and 3

Answer: c) 2 and 3 only

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