Beyond the $30 Billion Headline: Dissecting India’s Gross–Net FDI Divergence
Foreign direct investment refers to long-term capital flows by foreign investors into the recipient country, typically aiming to secure a controlling stake in a local enterprise. Key economic spillovers like technology transfer, job creation, market competitiveness, and current account stability incentivise the destination country to more readily accept long-term overseas investment over other short-term capital inflows. The stakes for developing economies are high -they receive more through trade than through what they invest; therefore, attracting FDI becomes a paramount goal for most emerging economies.
India, as per the World Investment Report 2026, was ranked as the eleventh largest recipient of FDI inflows globally, complementing the data released by the Reserve Bank of India for Q1 of FY 2026-27 that recorded gross FDI inflows as $30.7 billion - the highest quarterly figure recorded in the last 15 years. The Indian government indeed has taken pride and credit for sustained investor appeal in Indian markets amid the strained geopolitical scenario. However, the achievement should not be celebrated prematurely.
The trend: Divergence
The first quarter subtly reaffirmed a continuing trend in the Indian investment landscape which, post-2020, has been marred by a glaring gross-net divergence, also otherwise termed as “FDI leakage”. The net investment reached a peak of USD 43.9 billion in FY2020-21 and has been falling since, shockingly becoming negative in Q2 of FY 2023–24. According to recent quarterly data for FY 2026–27, gross FDI stood at USD 30.7 billion, whereas net FDI inflows amounted to only USD 7.9 billion. During the same period, USD 13.416 billion was recorded as repatriation or disinvestment and USD 9.4 billion as outward FDI by India. This resulted in a substantial gap of USD 22.821 billion between gross and net FDI inflows, thereby exemplifying the aforementioned phenomenon of divergence.
The government has assuaged concerns of domestic investors by tending to portray this divergence as evidence of a maturing investment ecosystem, with a majority of the repatriations being interpreted as ‘buy-backs’ or booking profits, where investors exit markets after selling their invested capital at profitable prices. The government’s stance ranges from positive to neutral, attributing the statistical decline to the high profitability of Indian assets and the ease with which investors can exit the capital market.
However, this assertion can be called into question. According to the IMF’s Balance of Payments Manual (BPM6), which the RBI adheres to, the accounting method proves that profit remittances of firms do not impact FDI numbers directly. Profit remittances essentially refers to business earnings that firms transfer back to their home country or organization. Balance of Payments (BoP) is a financial statement that provides a record of economic transactions between a country's residents and the rest of the world over a specific period. It consists of three separate accounts, current, capital and financial.
The first argument is that, the payment made by foreign investors, on the profits earned, to their parent companies is recorded as dividends under primary income in the current account. Second, foreign direct investment is recorded in the financial account. Essentially, items in the financial account and current account are calculated separately, which ideally means that dividends paid should not influence the calculation of FDI, since both the numbers- dividends and FDI are recorded in two separate accounts. Increase in the amount of profit, which is transferred as remittances by foreign investors is not deducted from FDI, therefore it could not possibly increase the gap between investments that enter India or Gross investments and finally that stay at the end of the period, that is, Net investment. The gap between the two is affected by the amount of disinvestment or repatriations and investments done by Indian firms in foreign countries, also called outward FDI.
This raises the question of what is driving the high levels of repatriation despite the utopian assumption that Indian assets remain highly profitable.Exit and entry of firms,in economics, depends on the per unit cost of production or marginal cost (MC) and the marginal revenue (MR) or the earning on an extra unit of commodity produced.The firms are in equilibrium or a preferred state of production when MC is equal to MR and cost per unit of production rises if the quantity produced is increased. In the short run it is assumed that the quantity produced can easily be increased or decreased. Firms would not necessarily choose to exit altogether when the marginal cost of production exceeds marginal revenue in the short run; instead, they would return to the optimum level of production or equilibrium and continue booking profits.
The possible reasons why firms disinvest in India can be either, when they are not actually earning enough to recover the costs or when it becomes more lucrative to invest in another destination, hence the price of letting their limited capital stay in a market that does not yield as good returns, starts to become heavier than what the company can support. Therefore, low capital retention in India has been recorded consistently through the falling net FDI numbers.
What sectors attract investments?
As India becomes one of the top destination countries for FDI inflows, a significant portion of greenfield equity also enters the economy. The question of how much productive capacity and employment is actually created from these capital flows becomes an even more urgent one.
First, it is pertinent to know that investments in passive equity acquisitions (USD 2.158 billion - Q1) create limited opportunities for growth in a developing economy. Equity acquisitions are brownfield investments, where investors put money into secondary shares already listed in the stock markets, creating hardly any new value in the economy. Second, greenfield investment, for more than a decade,has been concentrated in the services and computer software-hardware sector, which again has a different set of limitations.
Concentrated investment in a few strata of the market creates a short-term capital cycle of 6-7 years, with liquidity outflow guaranteed at the end of the period. Let's take a closer look at the biased sectoral concentrations of FDI that complement the problem of leakage.
India’s service sector from 2000 to 2025 has attracted the maximum foreign direct investment, followed closely by the computer software and hardware industry, according to DIIPT. The wide gap becomes particularly pronounced when one considers the fact that both the aforementioned sectors consistently accounted for more than 15% of total investment throughout the 15-year period, while most other sectors struggled to even cross the 5% mark. This concentration persisted in the first quarter of FY2026–27 as well.
This invites scrutiny of whether the development of India’s missing middle was overshadowed by disproportionate investments into the service sector. Having skipped the crucial stage of manufacturing-led growth as per the Lewisian model, India, in its development story, witnessed a premature transition from the primary to the service sector. This ultimately paved the way for educational, regional and social inequalities since service sector-oriented FDI primarily absorbs high-skilled tertiary sector workers. It exacerbates the problem of structural unemployment, where low-skilled agricultural labour cannot be absorbed by the industry. Another downside of the horizontal non-manufacturing FDI is that it involves lower capital investment, which makes repatriation easier during global downturns.
Cumulative FDI equity inflow received during January 2000-December 2025 was pegged at USD 777.42 billion, 15% of which was accounted for by computer software and hardware. The figure appears promising at first glance, but a deeper examination reveals a significant imbalance between the two sectors. Had computer hardware been receiving the majority of the inflows, the labour-intensive electronic hardware assembly and component manufacturing would have absorbed the semi-skilled labour of India. Greenfield investments in high-value physical infrastructure would have increased Gross Fixed Capital Formation (GFCF), which consequently would have boosted GDP numbers as well.
Yet harrowingly, the FDI percentage share of computer hardware remains only 0.10% of 15.62%, while computer software attracted an impressive 15.42% of the total amount. This has generated far-reaching benefits, including the accumulation of human capital and a surge in services exports, which have been catalytic to the cushioning of the current account deficit. Yet the government risks remaining trapped in the same morass of service-sector-heavy investment, overlooking the indispensable advantages derived from investment in computer software.
Conclusion
Redirecting efforts towards labour-intensive greenfield FDI has become a pressing requirement for the country to ensure that its demographic ‘sweet spot’ remains in shipshape. Some of the principal measures adopted in this direction involve the Production Linked Incentive scheme, the Make in India reforms, the PM Gati Shakti National Master Plan and the National Single Window System (NSWS). Since these programmes are a relatively recent introduction, most of them launched between 2020 and 2022, it would be a fallacy to ascertain their success at this early stage. While they must be given at least a decade to show any transformative results, the government must, in the meantime, work toward bringing reforms to improve the ease of doing business to ultimately achieve the goal of ‘Viksit Bharat’ by 2047.
Written By: Arnika Solanki Edited By: Priya Panday
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