India’s FDI performance contradicts growth ambitions with $353 million net investment from $81 billion gross inflows. Manufacturing sector’s PLI-dependent growth competes with massive repatriation and domestic capital exodus. Vietnam’s streamlined approach achieves better results without extensive subsidies, exposing India’s unsustainable investment retention model requiring immediate policy recalibration.
The Stark Reality of India’s FDI Performance
India’s FDI scenario for FY 2024-25 reveals a harsh reality that directly challenges the country’s bold economic aspirations. Gross FDI inflows reached $81.04 billion, falling short of the impressive figures recorded in FY 2021 and FY 2022. However, the real shock lies in the net FDI figure of merely $353 million – a devastating outcome resulting from massive capital outflows totaling $51.5 billion in repatriation and $29.2 billion in outward FDI.
This dramatic decline exposes a troubling trend: while India continues to promote its economic potential on global platforms, foreign investors are actively withdrawing their capital, and domestic industrialists are increasingly looking toward alternative destinations like Mexico and Vietnam for their expansion plans.
PLI Scheme: Manufacturing FDI’s Artificial Boost
The Numbers Behind the Incentives
India’s Production Linked Incentive (PLI) scheme has emerged as the government’s primary weapon to attract manufacturing FDI. The results show some promise – manufacturing FDI reached $19.04 billion in FY 2024-25, representing 23.5% of total inflows and marking an 18% increase from the previous year’s $16.12 billion.
The electronics sector, heavily supported by PLI incentives, has led this transformation. Major players like Apple and Foxconn have successfully established India as a significant smartphone export hub. The scheme’s $26 billion allocation, offering 4-6% incentives on incremental sales, has generated $16 billion in investments by August 2024, primarily concentrated in electronics and semiconductor manufacturing.
The Dependency Dilemma
However, this apparent success story reveals a concerning dependency on government subsidies. An unnamed industry expert, who preferred to remain anonymous, pointed out that without PLI cashbacks, India’s manufacturing FDI would likely contract significantly. Historical data supports this concern – before the PLI scheme’s 2020 launch, manufacturing FDI represented only a fraction of current figures.
This raises critical questions about sustainability. Vietnam, India’s key competitor, attracted $22 billion in manufacturing FDI in 2024 without relying on substantial cash incentives, demonstrating that streamlined policies and infrastructure can achieve similar results without direct financial handouts.
Competitive Analysis: David vs. Goliath Economics
Vietnam’s Impressive Performance
The comparison with smaller economies reveals India’s underperformance relative to its economic size. Vietnam, with a GDP of $470 billion, attracted $36 billion in total FDI in 2024 – equivalent to 7-8% of its GDP, with $22 billion specifically directed toward manufacturing. Similarly, Malaysia, with a $450 billion GDP, matched Vietnam’s performance with $38-40 billion in FDI.
These smaller economies have leveraged streamlined policies and superior infrastructure to outperform India’s $4 trillion economy, where manufacturing FDI represents merely 0.5% of GDP. The broader ASEAN bloc collectively attracted $230 billion, effectively capitalizing on the “China Plus One” diversification strategy that India claims to lead.
The Vietnam Model Success
Vietnam’s export-driven approach, reminiscent of China’s Special Economic Zone (SEZ) boom in the 1990s, has proven remarkably effective. This model focuses on creating manufacturing hubs specifically designed for global supply chain integration, rather than primarily serving domestic markets.
The Repatriation Crisis: Capital Flight Concerns
Massive Outflow Impact
Repatriation hit $51.5 billion in FY 2024-25, effectively eliminating 63.5% of gross inflows. This massive capital flight stands in stark contrast to China’s development phase during the 1990s, when net FDI reached nearly 7% of GDP with minimal repatriation due to strategic policies including 15% SEZ taxes and robust reinvestment incentives.
India’s current corporate tax structure of 25-30%, combined with bureaucratic complexities and inflated valuations driven by retail-funded mutual funds, creates an environment that encourages foreign investors to exit rather than reinvest. Vietnam maintains an impressive 80-90% FDI retention rate, highlighting the stark difference in investor confidence and policy effectiveness.
Policy Framework Shortcomings
The high repatriation rate reflects structural issues within India’s FDI policy framework. Unlike China’s strategic approach during its rapid growth phase, India lacks comprehensive retention mechanisms that would encourage foreign investors to reinvest their profits domestically rather than repatriate them.
Indian Capital Exodus: The Outward FDI Surge
Domestic Industrialists Looking Elsewhere
Perhaps the most concerning trend is the 75% surge in outward FDI to $29.2 billion in FY 2024-25. Major Indian conglomerates, including industry giants like Tata and Adani, are increasingly exploring opportunities in the UAE, Mexico, and Vietnam rather than expanding domestically.
This capital flight by domestic players reflects the challenging business environment within India. Mexico offers attractive USMCA (United States-Mexico-Canada Agreement) access, while Vietnam provides competitive 20% tax rates and export-friendly special economic zones. These advantages make overseas expansion more attractive than domestic investment for Indian industrialists.
The Self-Defeating Cycle
This trend creates a paradoxical situation where Indian firms are essentially competing against India’s own FDI requirements in “China Plus One” destination markets. Unlike China’s development phase, where domestic focus remained paramount, India faces the unique challenge of its own companies contributing to capital outflows rather than domestic capacity building.
An anonymous financial analyst described this phenomenon as “hosting a feast but dining at the neighbor’s house” – a situation that undermines India’s net FDI position and reduces available capital for domestic factory development and job creation.
The Irreplaceable Role of Foreign Direct Investment
Technology Transfer and Global Integration
FDI provides benefits that domestic investment cannot replicate. China’s FDI experience during the 1980s-2000s demonstrates this clearly – foreign investment brought cutting-edge technology, significantly boosted productivity levels, and created over 30 million jobs in Special Economic Zones, driving exports to unprecedented levels.
India’s domestic private investment of approximately $585-700 billion (15-18% of GDP) primarily scales consumer goods and real estate sectors but lacks the innovation edge that FDI provides. Government capital expenditure of $120 billion, despite a 9.4% increase, focuses on infrastructure development like roads and railways but fails to create the global supply chain linkages that FDI delivers.
The Apple Effect: Manufacturing Transformation
The impact of strategic FDI becomes evident in success stories like Apple’s iPhone manufacturing plants in India. These facilities have demonstrated how FDI delivers comprehensive technology transfer, global market integration, high-skill job creation, and export growth. However, India’s low net FDI means these transformative benefits remain limited compared to the substantial impact China experienced during its comparable development stage.
Sectoral Analysis: Manufacturing vs. Consumption-Focused FDI
Retail and Startup Investment Patterns
Retail and startup sectors continue to absorb 13-18% of total FDI ($11-15 billion), primarily fueling domestic consumption and creating competitive dynamics within the Indian market. While these investments support domestic economic activity, they lack the export orientation and technology transfer impact that manufacturing FDI provides.
This sectoral distribution raises questions about India’s FDI optimization strategy. Manufacturing FDI, despite PLI support, competes with consumption-focused investments that may offer quicker returns but limited long-term economic transformation potential.
Sustainability Concerns Post-PLI
The critical question remains: will manufacturing FDI sustain its current levels once PLI incentives are phased out? The scheme’s temporary nature creates uncertainty about the long-term attractiveness of India’s manufacturing sector without government subsidies.
Current investment patterns suggest heavy dependence on these incentives, raising concerns about the underlying competitiveness of India’s manufacturing ecosystem compared to naturally competitive destinations like Vietnam and Malaysia.
Strategic Implications and Future Outlook
Policy Recalibration Requirements
India’s FDI performance demands comprehensive policy recalibration focusing on sustainable competitive advantages rather than temporary incentives. The current net FDI ratio of 0.4% compared to Vietnam’s robust retention rates highlights the urgent need for structural reforms in taxation, bureaucratic processes, and investment retention mechanisms.
Successful FDI attraction and retention require creating an ecosystem that naturally encourages reinvestment rather than repatriation, similar to China’s historical approach during its rapid industrialization phase.
The Path Forward
Moving forward, India must address the fundamental disconnect between its economic potential and actual FDI performance. This includes developing policies that encourage domestic industrialists to invest at home while simultaneously making the country more attractive for sustained foreign investment.
The current trajectory, where PLI-dependent manufacturing FDI competes with high repatr iation rates and domestic capital flight, creates an unsustainable FDI ecosystem that undermines long-term economic transformation goals.
Conclusion: The FDI Paradox
India’s FDI performance in FY 2024-25 reveals a fundamental paradox: while gross inflows appear substantial at $81.04 billion, the reality of net FDI at just $353 million exposes critical structural weaknesses. The country’s reliance on PLI incentives to drive manufacturing FDI, combined with massive repatriation outflows and increasing domestic capital exodus, creates an unsustainable investment ecosystem.
Vietnam and Malaysia’s superior performance relative to their economic size demonstrates that effective policy frameworks and streamlined business environments can achieve better results without extensive government subsidies. India’s challenge lies not just in attracting FDI but in creating conditions that encourage reinvestment and prevent capital flight.
The manufacturing sector’s dependence on temporary PLI incentives raises serious questions about post-subsidy sustainability, while the 75% surge in outward FDI indicates that even domestic players find overseas markets more attractive than home opportunities. This dual challenge of retaining foreign capital while preventing domestic capital exodus requires immediate policy attention.
FDI’s irreplaceable role in technology transfer, global integration, and export growth makes addressing these issues critical for India’s economic transformation. Without substantial reforms in taxation, bureaucratic efficiency, and investment retention mechanisms, India risks falling further behind in the global competition for productive capital, despite its significant economic potential.
The path forward requires moving beyond temporary incentives toward creating a naturally competitive business environment that attracts and retains both foreign and domestic investment for sustained economic growth.
