India's gross FDI inflows have remained robust, yet net FDI has sharply declined. Analyse the structural reasons behind this divergence and its implications for India's external sector sustainability.

Q. India's gross FDI inflows have remained robust, yet net FDI has sharply declined. Analyse the structural reasons behind this divergence and its implications for India's external sector sustainability. (15 marks, 250-350 words)

In balance-of-payments terms, net FDI = gross inflows − repatriation/disinvestment − outward FDI by Indian firms. Gross inflows rose 14% to USD 81.04 billion in FY 2024-25 [1], yet net FDI has slid from its 2020-21 peak to near zero [2] — a gap that reflects structural features of India's investment cycle, not a passing dip.

Structural reasons for the divergence - Maturing investment cycle: early-entry investors are booking gains and exiting; repatriation and disinvestment now offset a large share of fresh equity, and this is precisely the item that separates RBI's BoP-based net figure from DPIIT's gross equity figure [3]. - Composition of inflows: gross numbers are swelled by reinvested earnings and mergers and acquisitions, which transfer ownership rather than create new capacity, unlike greenfield investment [3]. - Sectoral skew: services led with 19% of equity inflows, while manufacturing drew USD 19.04 billion [1] — inflows concentrate where capital is mobile and forward linkages to exports and jobs are thinner. - Invisible outflow channels: dividends, royalties and technical-fee payments permitted under FEMA, 1999 let returns leave even when equity stays [3]. - Rising outward FDI by Indian multinationals — a sign of corporate maturity, but a BoP debit that compresses net flows.

Implications for external sector sustainability - Profit remittances enter the primary income account, structurally widening the current account deficit, which the IMF still assesses as moderate [4]. - With stable FDI shrinking, the CAD leans more on volatile portfolio and debt flows, raising rupee and rollover vulnerability; adequate reserves and import cover keep this a medium-term, not immediate, risk [4]. - Lower greenfield share means weaker technology transfer and employment returns per dollar attracted.

The divergence is thus a quality problem, not a confidence collapse. Restoring the 1991 policy's original objectives — technology, exports, capacity — through greenfield-oriented incentives, deeper PLI-linked manufacturing and a predictable tax and treaty regime can rebuild durable inflows. Measuring success by net, quality-adjusted FDI would align external-sector stability with the goal of self-reliant, employment-rich growth.

(~320 words)

Sources: 1. India Records USD 81.04 Billion FDI Inflow in FY 2024–25 — Press Information Bureau — gross inflows, 14% rise, services 19% share, manufacturing USD 19.04 billion 2. Foreign direct investment, net inflows (BoP, current US$) – India, World Bank Data — decline in BoP-based net FDI from its 2020-21 peak 3. RBI's FDI Inflow Data as per International Practices — DPIIT FDI Statistics — repatriation/disinvestment, reinvested earnings and other-capital components; gross vs. net reporting distinction 4. IMF Country Report No. 25/314, India: 2025 Article IV Consultation — contained current account deficit and external buffer assessment