MUMBAI: India’s outbound investments jumped 75% to $29.2 billion in FY25, while foreign firms repatriated a massive $51 billion from the country. Yet, gross foreign direct investment (FDI) in the last fiscal saw a satisfactory growth of 14% to $81 billion, including equity inflows exceeding $50 billion. So, there were robust flows on either direction, but the net inflow remained negligible.
On the face of it, this trend hasn’t triggered alarm bells among policymakers or most analysts. They see the jump in outbound FDI as a sign of the coming of age of India Inc which has long been supported by FDI of assorted variety, including venture capital (VC) and private equity (PE). Observers also draw parallels with China’s global investment spree over the past two decades. Such deployment of capital overseas helped China to acquire technology and resources at competitive rates, access new markets, and solidify its dominance in global exports.
The narrative may not be entirely unfounded. However, China’s aggressive overseas investments were part of a strategy to overcome the barriers to its ascending foreign trade, and were concurrent with robust domestic investments. In India’s case, however, the rise in capital outflows comes in the backdrop of a prolonged torpor in domestic private investments, and its merchandise export growth lagging world trade expansion. In FY25, for instance, new project announcements by India’s private sector declined 7.4% to Rs 28.9 lakh crore, according to Centre for Monitoring Indian Economy.
Typically, just about half of the investment intents materialise. That means outbound FDI (roughly Rs 2.5 lakh crore at current exchange rate in FY25) is a fifth of private investments in India.A closer look at India’s outbound FDI destinations reveals a mixed picture. According to official data, as much as 45% of such outflows in April-February FY25, were to countries often regarded as tax havens or low-tax jurisdictions, like Singapore (24%), Mauritius (7%), UAE, Switzerland, British Virgin Islands and Cyprus.
The capital flight in these cases would have an element of tax planning, and might even involve round-tripping strategies. Even though the avenues to such shifts have narrowed in recent years, they aren’t fully closed either.Sectorally, “financial, insurance and business services” accounted for 42% of outbound FDI in the first ten months of FY25—challenging the assumption that these investments are primarily driven by the need for acquiring raw materials or technology. Manufacturing did contribute a respectable 23%, suggesting some Indian conglomerates are looking to improve value chains and access new markets.
“Wholesale & retail trade, restaurants and hotels” made up 16%, while agriculture and mining accounted for just 6%.Indian companies like L&T, Tata Steel, Infosys, Wipro, GMR Power, Essar, Jindal Steel and Power, Reliance New Energy and Adani Ports & SEZ and Sun Pharma among others have made significant investments abroad in recent years. They invest more in overseas subsidiaries, and in acquisitions of firms and projects in their bid to ramp up global presence. As far as the surge in repatriation is concerned, the wave of IPOs in the Indian market where benchmark indices touched record highs in FY25 gave ample opportunity for global investors to exit.
Among them was Hyundai Motor’s Rs 27,870-crore IPO, which saw the parent reduce its stake to 82.5% from 100%, repatriating the proceeds. Prosus, a Dutch investor, netted over $2 billion in Swiggy’s pre-IPO exit round last year. And Singtel trimmed its stake in Airtel, unlocking $2 billion via a block deal.
A report by the Indian Venture Capital and Alternate Capital Association and EY noted that PE and VC exits touched $26.7 billion in FY25—a 7% year-on-year rise—buoyed by strong investor sentiment.This trend is in sync with RBI’s description that the big fall in net FDI into the country (at least to a two-decade low) was sign of “market maturity” and reflected a situation where foreign investors can now enter and exit India smoothly. “The ability of investors to put in money and exit the investment after a few years is a sign of strength, not weakness,” says Harish HV, managing director of Bengaluru-based ECube Investment Advisors.Economic analysts point out that mature economies often shift from being net FDI recipients to net FDI exporters to achieve scale, competitiveness, and productivity gains.
However, in India’s case, the outbound investments seem to rise not in periods when its economy is firing on all cylinders. In fact, the converse may be the case. For instance, between 2005-2007, when the economy was in a high-growth phase, the FDI outflows were relatively at a low ebb, but during the global financial crisis of 2007-2009 and immediately thereafter, outbound investments surged (see chart) and domestic investments declined. This suggests that capital outflows are not necessarily a function of economic “maturity” as some claim.
The global FDI landscape has been undergoing a structural change in recent years, in tune with the geopolitical re-alignments. Besides, the share of services in global FDI has risen, and emerging market economies have raised their share in total FDI inflows. In this context, it is indeed doubtful whether India being the largest growing economy is able to attract inflows to the extent it should.While inward FDI is more meaningful in the greenfield sector as it leads to fixed asset creation, outbound flows could be useful even if meant to acquire firms or brownfield assets, opined a senior economist, who doesn’t wish to be identified.
“What is important is that whether these funds are used for technology acquisition and market gains,” he stressed. On domestic investments lagging while capital is shifting shores, he said private investors might be in a wait-and-watch mode, given the global uncertainties. “As long as inflows too are strong, there is no need to worry.”A notable trend about India’s outbound FDI is the rising share of developed countries; roughly half of the funds go to such countries now, indicating that market access, rather than resource capture, is the objective of the investments. In FY25, for example, 15% of funds went to the US, and 11% to the UK.
According to Mayank Arora, director-regulatory, Nangia Andersen India, the increase in overseas investment by Indian companies may be attributed to a number of factors, including sustained inbound foreign investment over the past two decades. “FDI in Indian companies by strategic, VC and PE investors have developed large corporations, which are now mature enough to venture overseas to follow green shoots across the world,” he said. Besides, being the fourth largest economy in the world, India must venture abroad to secure its future growth by investing in strategic sectors such as mining, oil & gas, telecom, etc, Arora added.
Experts caution that while the trend of India Inc going abroad may not be misplaced, the government may need to turbo-charge domestic reforms to attract greater investments into the country. “There are three aspects here. One is the ease of doing business, second is the cost of doing business and the third part is the joy of doing business. If policy makers can ensure there is improvement across these parameters, we could see more investment by companies into the local market,” Arvind Singhal, chairman of Gurugram-based corporate and retail consultancy Technopak Advisors, said.
Source: The Financial Express