Why India is facing an investment winter despite booming GDP

India may have become the world’s fourth-largest economy in 2024 and may rise to the third position in 2025 (per IMF, using Indian official data). But, it is passing through an investment winter which may sour its growth story, both due to external and internal factors.

A sharp fall in net FDI inflow in FY25, as revealed by a Reserve Bank of India (RBI) report, is only one indication of this. There are many others.

Gross and net FDI

The RBI bulletin of May 21 showed net FDI inflow fell 96.8 per cent in FY25 — the sharpest fall since FY05 (since when the RBI provides data). It is, in fact, a fall for the fourth consecutive fiscal — from $43 billion in FY21 to just $353 million in FY25.

Gross FDI is the total money coming into a country. Net FDI is gross FDI minus the money repatriated out by MNCs doing business in India and the outward FDI by Indian companies.

Although gross FDI increased by 13.7 per cent in FY25 (April-February), this came after a fall in the two previous fiscals (-15.9 per cent in FY23 and -0.1 per cent in FY24).

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The RBI underplayed the sharp fall in net FDI in FY25. Citing the rise in gross FDI inflows in FY25, it said: “Net FDI inflows, however, moderated during this period due to higher repatriations and outward investment, which is a sign of a mature market where foreign investors can enter and exit smoothly, reflecting positively on the Indian economy.”

Missing in RBI’s explanation

What the RBI fails to explain are:

(i) fall in net FDI is progressive for the four consecutive fiscals, and a massive one (96.8 per cent)

(ii) gross FDI fell in FY23 and FY24, before rising in FY25 (April-February)

(iii) repatriation/disinvestment (existing FDIs exiting or partially selling stakes) is progressively rising too — from $29.3 billion in FY23 to $44.5 billion in FY24 and $51.5 billion in FY25

(iv) so is net outward FDI (OFDI, that is, Indian companies investing abroad) — rising by $14 billion in FY23, $16.7 billion in FY24 and $29.2 billion in FY25.

Rise in repatriation/disinvestment points to investment sentiment going awry. The same is reflected in rising OFDI (Indian companies upping investment abroad), while their capex in domestic economy remains lackadaisical with a declining trend.

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Add to that, equity FDI inflow (as a percentage of GDP) is on a freefall since FY21. Both the declining trends — in net FDI and equity FDI inflows — are shown in the two graphs below.

Global FDI growth

This declining trend is all the more worrisome because India has liberalised FDI over the past few years, which the RBI bulletin recognises:

“In a phased manner, almost all sectors have been opened up to 100 per cent FDI. Almost 90% of the FDI is now under the automatic route.”

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Meanwhile, an April 30 report from the Organisation for Economic Cooperation and Development (OECD) showed that the declining FDI inflows to India (and also China) in calendar 2024 came amid “modest growth” in global FDI flow — with higher flows to the US, the EU and other OECD countries.

Low private capex

The latest National Accounts Statistics, published by the Ministry of Statistics and Programme Implementation (MoSPI), shows that actual (“realised”) private corporate capex (Gross Fixed Capital Formation, or GFCF) in India declined to 10.1 per cent of GDP in FY24 (up to which data is available), from 11.2 per cent in FY23. This is far lower than the peaks of 16.8 per cent in FY08 and 12 per cent in FY16.

India Ratings' estimate for FY25 for GFCF is not upbeat either (to remain below 11 per cent of GDP). The National Statistics Office's (NSO) survey of private corporate capex “intentions” (to invest, not yet materialised), published last month, says private capex is expected to fall 26 per cent in FY26.

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Krishna Srinivasan, Director, Asia and Pacific Department at the IMF, warned last month: “We are worried about private investment, which is still lackadaisical…If India wants to become a developed economy by 2047, then private investment needs to gain more momentum.”

The IMF (April 2025) pared down India’s growth for 2025 (calendar year) to 6.2 per cent in its latest World Economic Outlook, pointing to rising trade conflicts and global uncertainties.

Tapering profit growth

Such low private (domestic) corporate capex is despite several measures to boost it, like the corporate tax cut of 2019 and the subsequent PLI-DLI subsidies, and also despite a four-fold rise in corporate profits in the past four fiscals, with the profit-to-GDP ratio hitting a 15-year high.

Now even this high-profit period is coming to an end. Single-digit growths in profits and sales are rampant in Q4 of FY25 (year-on-year), against double-digit growths earlier.

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This trend so exasperated Union Finance Minister Nirmala Sitharaman that she said on February 27: “The answer is not for me to give (on why India Inc is not speeding up investments). The answer either way has to be heard from the industry itself. Tell us why not if you are not doing it; tell us if you are doing it — why this question remains unanswered.”

Onus on India Inc?

In 2022, Sitharaman had given the famous ‘Hanuman’ speech ("Is it like Hanuman? You don't believe in your own capacity, in your own strength and there has to be someone standing next to you and say you are Hanuman, do it?") to inspire private capex. She reminded India Inc that she had conceded their two demands of corporate tax cut and PLI-DLI subsidies. "I want to hear from the India Inc, what is stopping you?” she asked.

It also upset Chief Economic Advisor Anantha V Nageswaran, who called it “a paradox” in February 2025.

“It is a bit of a paradox that uncertainties elsewhere aren't really coming in the way of the Indian private sector increasing its outbound FDI…And, therefore, all the more reason for the Indian private sector to invest in a country whose current growth record exceeds the growth performance of other economies and also whose prospects for continuing at this rate, at a minimum of 6.5 per cent, are much better than it is elsewhere," he said.

Why the investment winter

It is no rocket science to decipher the reasons why FDIs are turning away and India Inc is behaving paradoxically.

Private companies will invest only if

(a) consumption demand is robust and growing (but Private Final Consumption Expenditure, or PFCE, growth fell from 11.7 per cent in FY22 to 7.6 per cent in FY25), which would warrant fresh investment in capacity building; lack of demand shows up in below-par Industrial Production Index (IIP) numbers and manufacturing capacity utilisation (CU) and

(b) growth prospects are bright, but GDP growth fell from 9.7 per cent in FY22 to 6.5 per cent both in FY25 and FY26)

Four reasons

A few weeks ago, former Finance Secretary Subhash Garg listed four reasons for FDIs turning away from India:

a) failure of Make in India and PLI subsidy

b) India’s focus on physical infrastructure (long gestation period and low returns)

c) tariff barriers

d) withdrawal of investments by venture capital (VC) and private equity (PE) firms that have entered the maturing phase

In July 2024, former CEA Arvind Subramanian and his colleague Josh Felman had listed three factors to explain weak private capex:

(i) ‘national champions’ model of growth (business-friendly, rather than market-friendly policies)

(ii) aggressive income-tax and Enforcement Directorate operations against corporations and

(iii) India’s poor presence in global value chains (due to tariff restrictions/import bans etc)

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Sure, FDIs are turning away from India and OFDI by India Inc is rising because of better earning opportunities abroad. But there is another big factor: regulatory constraints. That is what the Economic Survey of 2024-25 and the Finance Ministry have repeatedly flagged in recent months.

More rich Indians leaving

But these are not the only reasons. More and more rich Indians (HNIs or dollar millionaires) are leaving India for the West and Middle East for a variety of other reasons, including lower tax regimes, better living conditions and even to escape the law.

The Enforcement Directorate (ED) recently sought legal permission to declare 10 rich Indians “fugitives”, having already declared 14 others in the recent past, including Vijay Mallya, Mehul Choksi and Nirav Modi.

All these developments also mark the failure of India’s push to government capex to “crowd in” private capex since the pandemic hit. Not to forget high tariff and non-tariff walls built in the name of “AatmaNirbhar Bharat” – euphemism for protections to domestic industry from global competition.

This led to the US’s threat of “reciprocal tariffs” and prolonged re-negotiations of bilateral FTAs with most of its big trading partners, including the US, EU, UK, ASEAN, Japan, South Korea etc.

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Then, in 2017, India had unilaterally cancelled 68 bilateral investment treaties (BITs), which are now being renegotiated separately (though linked with bilateral FTAs), but progress is tardy.

Trump's message for Cook

Any wonder India has failed to capitalise (“limited success”) on the MNCs’ China+1 strategy (Vietnam, Thailand, Cambodia and Malaysia emerged as “bigger beneficiaries”) as the NITI Aayog flagged in November 2024?

Moreover, the new FTA negotiations currently going on may not boost investments (FDI/private capex). Here is why.

US President Donald Trump is repeatedly telling Apple chief Tim Cook to shift its operations to the US —else he would impose a 25 per cent tax on iPhones shipped from India and elsewhere.

Trump has also directed Cook to stop expanding operations in India, which he had recently announced. This would dry up FDIs in India.

Major concessions

Also, India will be making major concessions in tariffs against the US to save its exports (India generates maximum surplus from merchandise trade, not overall trade, with the US).

India may deny Trump’s repeated claims of India having offering “a deal where basically they are willing to literally charge us no tariff”, but unless India does so the BTA with the US will not move forward.

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If India insists on high tariffs, its exports will fall, and exporting units will be forced to idle part of their production and cut down further investments.

The US proposes to impose 3.5 per cent tax on remittances (in “big, beautiful bill” that benefits the rich at the cost of the poor) – which would discourage such remittances to India, denting financial resources available for domestic investment.

Problems in FTA

There is a problem even with India's FTA with the UK. It is no “game changer” or “gold standard” as Commerce Secretary Sunil Barthwal would have us believe.

The negotiations are still on and will take a couple of more months for the agreement to be finalised and released.

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Negotiations are currently stalled over the UK’s insistence on imposing carbon tax (CBAM) from January 2026. India is facing a similar hurdle (CBAM) with the EU since 2023. Its threat to bring counter/retaliatory carbon tax is nowhere to be seen.