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.

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.