FDI boom conceals a troubling investment gap: India received $30.66 billion in gross foreign direct investment (FDI) during April-June 2026, the highest quarterly inflow in 15 years. Yet net FDI inflows amounted to just $7.84 billion, barely a quarter of the gross figure. Foreign investors repatriated substantial sums, while Indian companies continued to invest abroad. The divergence has persisted long enough to raise questions about India’s ability to translate foreign investment into additional productive capacity.
The latest figures offer some reassurance. Net FDI rose 50% from $5.24 billion a year earlier, while gross inflows increased 13%. India had received a record $94.53 billion in gross FDI in FY26, and Reserve Bank of India Deputy Governor Poonam Gupta expects inflows to exceed $100 billion in FY27. But the impressive headline numbers obscure a less encouraging trend in the country’s investment performance.
READ | Easier FDI rules will not solve India’s investment problem
Gross FDI measures foreign investment entering India, including equity capital and reinvested earnings. Net FDI takes account of repatriation and disinvestment by foreign investors, along with direct investment overseas by Indian companies. These transactions may involve capital invested several years earlier. Net FDI is therefore not a measure of how much of the current year’s investment remains available for domestic production. It nevertheless provides an indication of the changing balance of direct investment flows.
Why India’s net FDI remains weak
In the first quarter of FY27, repatriation and disinvestment by foreign investors amounted to the equivalent of 44% of gross FDI, while outward investment by Indian companies accounted for another 31%. Net inflows represented just over 25% of the total.
The deterioration becomes clearer over a longer period. Between July-September 2011 and April-June 2022, net FDI exceeded half of gross inflows in 28 of 44 quarters, averaging 54%. In the subsequent 16 quarters, it never crossed that threshold and averaged only 12%.
Negative net FDI has also become more frequent. It occurred just once in the earlier 44-quarter period, during the pandemic-affected April-June quarter of 2020. Since July-September 2022, India has recorded four such quarters, the most severe being October-December 2025.
There is a reasonable argument that higher repatriation reflects the maturity of the Indian market. Investors are more willing to commit capital when they can sell their holdings and transfer the proceeds without excessive restrictions. Profits and capital gains are legitimate returns on investment. Restrictions on these transactions would undermine the confidence India has worked to establish among international investors.
RBI Governor Sanjay Malhotra has made this argument, pointing out that easier entry and exit are characteristics of a mature investment destination. The explanation is persuasive, up to a point. Foreign investors exiting profitable businesses can release capital for fresh investment elsewhere, while the Indian enterprises concerned may continue to expand under new ownership.
Yet a sustained decline in net FDI deserves attention, particularly when investment in new productive capacity remains inadequate for India’s employment and growth ambitions. Former Jawaharlal Nehru University professor Biswajit Dhar has warned that changes in investor behaviour warrant closer examination of the domestic investment environment.
READ | India FDI recovery masks a manufacturing gap
Domestic demand and foreign investment
The willingness of businesses to expand depends ultimately on their assessment of future demand. Tax concessions and infrastructure improvements can reduce investment costs, but companies also need confidence that consumers or other businesses will purchase their additional output.
India’s large domestic market offers considerable long-term potential. Whether that potential translates into fresh investment depends on household purchasing power, employment prospects and the growth of consumption. Where demand is uncertain, businesses have an incentive to postpone expansion, even when financing is available.
This is particularly relevant for industries that depend heavily on domestic sales. Export-oriented businesses face different considerations, including access to international markets, trade policies and production costs. Regulatory uncertainty and delays in securing land or approvals can also influence investment decisions.
The government has sought to improve returns through production-linked incentives, infrastructure expenditure and reforms intended to make investment easier. These measures have helped attract interest in several industries. Their effectiveness, however, must be judged by actual capacity creation, production and employment rather than the value of investment proposals.
Stronger domestic demand would improve the prospects for both foreign and Indian investors. It would also reduce the dependence of investment decisions on tax concessions and other government incentives.
Why Indian companies are investing abroad
The growing overseas investment of Indian companies introduces another complication. In the 44 quarters ending April-June 2022, outward investment averaged 18% of gross FDI inflows and exceeded 30% in only four quarters. In the following 16 quarters, the average increased to 30%.
Indian businesses have expanded their international operations through acquisitions and investments in pharmaceuticals, information technology, telecommunications, steel and other industries. Overseas expansion can provide access to new markets, advanced technology and resources that may be difficult to obtain domestically.
Such investment is a normal part of the development of internationally competitive Indian companies. Acquiring a foreign business can strengthen an Indian company’s operations at home by improving its technology, market access or profitability. The increase in outward investment cannot, by itself, be taken as evidence that domestic opportunities are deteriorating.
The question is whether Indian companies are investing abroad while also expanding sufficiently at home. Former chief statistician Pronab Sen has expressed concern that businesses earning substantial profits are not investing proportionately in the domestic economy.
If companies consistently find better returns overseas, policymakers should examine the relative attractiveness of investment in India. Demand conditions are one consideration. Regulatory predictability, infrastructure quality and the availability of skilled workers also influence decisions about where new facilities should be located.
A successful Indian multinational should be able to expand internationally without sacrificing investment at home. The policy objective should be to make domestic expansion commercially attractive, rather than discourage outward investment.
READ | China FDI policy shifts from blanket curbs to safeguards
FDI boom: What foreign investment finances
The composition of incoming FDI raises a related issue. Foreign equity inflows reached approximately $19.81 billion in April-June 2026, their highest quarterly level in six years. Japan emerged as the largest source, contributing $5.71 billion, driven largely by major transactions in financial services.
Japan’s MUFG Bank acquired a 20% stake in Shriram Finance through an investment of approximately $4.4 billion. Sumitomo Mitsui Banking Corporation also became the largest shareholder in Yes Bank, with a 24.22% stake. Banking, insurance and other services accounted for 35.5% of equity inflows during the quarter, followed by computer software and hardware at 14.4%.
Foreign interest in Indian financial institutions is welcome. New capital can strengthen their balance sheets and support additional lending. Strategic investors may also bring better risk management, technology and access to international financial networks. However, the economic implications of different types of investment vary. Purchasing existing shares changes ownership without necessarily financing additional production. Fresh equity issued by a company can provide resources for expansion, although the eventual use of those funds determines the economic benefit. Investment in factories, research facilities and new production lines contributes more directly to the creation of productive assets.
The distinction deserves greater attention in the evaluation of India’s FDI performance. Large financial-sector transactions can increase headline inflows without producing an equivalent increase in fixed capital formation. Conversely, smaller investments in manufacturing or technology-intensive activities may generate substantial employment, encourage domestic sourcing and improve productivity.
India therefore needs a more discriminating assessment of foreign investment. Gross inflows indicate the willingness of international investors to commit capital, but say relatively little about the additional capacity, technological capabilities and employment that their investments create.
Crossing $100 billion in annual gross FDI would strengthen India’s standing as an investment destination. The more demanding task is to create conditions in which foreign investors and Indian businesses find sufficient commercial reason to build new capacity at home. Until domestic investment responds more decisively, record FDI inflows will remain an incomplete measure of economic progress.