India’s FDI Paradox: Robust 7.3% Returns Mask a Troubling Exodus of Profits 

India’s FDI Paradox: Robust 7.3% Returns Mask a Troubling Exodus of Profits 

India’s investment landscape presents a stark contradiction: foreign companies are enjoying some of the world’s most stable and attractive returns, yet they are simultaneously withdrawing their profits from the country at an unprecedented rate. 

In the last five years, India’s annual gross foreign direct investment (FDI) has consistently ranged between $70 and $85 billion. However, a deeper look reveals a more concerning trend: net FDI—the actual fresh capital remaining in the country after accounting for outflows and profit repatriation—has plummeted from $44 billion in FY20 to a mere $1 billion in FY25. This dramatic decline is not due to a lack of new investment but is instead driven by a massive increase in investors pulling their earnings out of India. 

Despite this capital flight, an analysis by CareEdge Ratings confirms that the fundamental profitability of investing in India remains exceptionally strong, with an average return on inward FDI of 7.3%. This performance outpaces many developed and emerging economies and underscores a critical story: India is a highly profitable market for global corporations, but current global uncertainties and strategic corporate decisions are leading them to harvest those profits rather than reinvest them for future growth. 

1 Decoding India’s FDI Dichotomy: Gross Inflow vs. Net Reality 

The most critical story in India’s recent FDI narrative is the growing chasm between headline-grabbing gross inflows and the sobering reality of net flows. Understanding this distinction is key to diagnosing the health of foreign investment. 

Gross FDI inflows represent the total new equity and capital flowing into the country from foreign entities. From FY23 to FY25, these inflows showed resilience, rising by 13% to reach $81 billion in FY25 after a period of stagnation. This indicates that India’s market size, reform trajectory, and growth story continue to attract fresh commitments from multinational corporations. 

Table: India’s FDI Trends (FY20-FY25) 

In stark contrast, net FDI inflows have collapsed. This metric deducts outflows—primarily repatriated profits (dividends and earnings sent back to home countries) and disinvestment—from the gross figure. The drop to $1 billion in FY25 reveals that nearly all the new incoming capital is being offset by money leaving the country. 

As CareEdge notes, this sharp decline is directly attributable to “higher repatriation of profits by investors and FDI outflows from India“. A foreign company’s choice to repatriate profits is a significant strategic signal; it often reflects a desire to shore up global balance sheets, reward shareholders at home, or allocate capital to other markets perceived to have different risk-return profiles. In a climate of global economic uncertainty and high interest rates, this conservative cash management strategy has become pronounced. 

2 Sectoral Spotlight: Where Investment is Flowing and Why 

India’s FDI profile is not monolithic; it reveals a dynamic and shifting landscape of sectoral winners and laggards, pointing to where global capital sees the most compelling opportunities. 

In FY25, the services sector emerged as the largest recipient of FDI equity, capturing 19% of total inflows. This broad category, encompassing financial, professional, and IT-enabled services, benefits from India’s deep talent pool and the global shift towards digital and knowledge economies. Close behind was the computer software and hardware sector at 16%, a testament to India’s entrenched position in the global technology supply chain. 

Significant growth was also recorded in sectors aligned with India’s strategic industrial and green transitions. The non-conventional energy sector (8%), automobiles, and chemicals all saw increased FDI. This aligns with global investment trends towards clean technology and complex manufacturing. Notably, emerging sectors like semiconductors, electric vehicles (EVs), battery storage, and data centres are highlighted as increasingly attractive destinations. India’s proactive policy push, such as the $10 billion India Semiconductor Mission, is designed to catalyze investment in these critical, capital-intensive fields. 

However, the picture is mixed. While cumulative data since 2000 shows massive historical inflows into telecommunications ($40.16 billion) and the automobile industry ($39.43 billion), recent years show some sectors contracting. Specifically, FY25 saw a decline in FDI into the drugs and pharmaceuticals and construction sectors. 

Table: Key FDI Recipient Sectors in FY25 

Geographically, investment remains concentrated in India’s economic powerhouses. Maharashtra, Karnataka, and Gujarat together account for over two-thirds of cumulative equity inflows, attracting capital with their developed infrastructure, industrial clusters, and large markets. The primary sources of FDI continue to be Singapore, Mauritius, and the United States, which together channel a major portion of foreign capital into India, often leveraging historic treaties and financial networks. 

3 The Global Context: India in a Shifting World Order 

India’s FDI story cannot be divorced from the powerful undercurrents reshaping global capital flows. Worldwide, FDI as a share of global GDP has been on a persistent decline since the 2008 financial crisis, falling from a peak of 5.3% in 2007 to just 1.3% in 2024. Heightened geopolitical tensions, economic fragmentation, and global uncertainty have made corporations more cautious with long-term, cross-border investments. 

Within this sluggish environment, significant geographical shifts are occurring. There is a notable decline in Europe’s share of global outward FDI and a stagnation in flows from the United States. Conversely, China has transformed from a negligible player to a major source of global capital, its share of outward FDI rising to an average of 11% in the post-pandemic years. This marks a fundamental shift in the architecture of global investment. 

The much-discussed “China+1” strategy, where companies diversify supply chains away from exclusive reliance on China, has created clear winners. Countries like Vietnam and Mexico, as well as resource-rich nations in Africa, have experienced significant growth in inbound FDI. Vietnam, for instance, has seen its trade and investment trends align perfectly, offering a compelling cost advantage for manufacturing. 

While India is a logical beneficiary of this diversification, the CareEdge report notes that its share of global FDI inflows actually fell to 2.4% from 2.9%, largely due to the high repatriation dampening net figures. This suggests that while India attracts interest, competition for mobile capital is fierce. Countries offering perceived stability, faster execution, or specialized trade advantages are capturing a disproportionate share of the “+1” investments. 

Furthermore, global trends show a rise in megaprojects (investments over $1 billion), particularly in data centres, semiconductors, and renewable energy, which are lifting average project sizes globally. For India to capture more of these transformative investments, it must compete not just on market potential but on the ease of executing large, complex projects. 

4 The 7.3% Return: A Signal of Stability in a Volatile World 

Amid the worrying net outflow figures, India’s 7.3% average return on inward FDI stands out as a powerful, positive signal. This metric measures the profitability of existing foreign investments in the country, and its robustness is a core testament to the underlying strength of the Indian economy. 

This return outperforms many developed and emerging economies, but its true value is revealed through comparison and context. The CareEdge report observes that while a few emerging markets like Bangladesh, Nigeria, and Malaysia may report higher average returns, those are “accompanied by significantly greater volatility”. For global CFOs and investment committees, predictability and stability of returns are often as valuable as the headline yield. India’s performance suggests a market where investments can yield solid profits without exposure to extreme economic or political swings. 

This stability is a direct function of several factors: 

• Large and Growing Domestic Market: A consumption base of hundreds of millions provides a reliable revenue stream for foreign companies. 

• Diversified Economy: Unlike commodity-dependent economies, India’s mix of agriculture, industry, and services offers multiple avenues for profit. 

• Institutional Framework: A functioning legal system, democratic governance, and an independent central bank provide a level of long-term predictability that volatile markets lack. 

The strong return is also a validation of the government’s broad policy direction, including the implementation of the Goods and Services Tax (GST), increased FDI limits in sectors like insurance, and production-linked incentive (PLI) schemes aimed at boosting manufacturing. It indicates that, operational challenges notwithstanding, the structural reform agenda is creating a viable environment for business profitability. 

5 Strategic Crossroads: Policy Responses and the Path Ahead 

The current FDI data presents Indian policymakers with a clear challenge: how to convert strong investment profitability into sustained, long-term capital retention and expansion. The strategic response will determine whether India becomes a true global investment hub or remains a market where profits are harvested and exported. 

A key focus is the active negotiation of new-generation Bilateral Investment Treaties (BITs). As of mid-2025, India is engaged in talks with over a dozen countries, including Saudi Arabia, the European Union, Switzerland, and Australia. The goal is to create a modern framework that provides strong legal protection and dispute resolution mechanisms for foreign investors, thereby boosting confidence and encouraging reinvestment. Recent treaties with the UAE and Uzbekistan are steps in this direction. 

To counter the “China+1” competition, India must sharpen its value proposition beyond a large market. This means: 

• Doubling down on emerging sectors like semiconductors, EVs, and data centres through consistent, transparent policy support. 

• Improving operational ease—simplifying land acquisition, speeding up environmental clearances, and ensuring stable sub-national governance to attract megaprojects. 

• Leveraging its innovation ecosystem, as reflected in its jump to 38th in the Global Innovation Index 2025, to attract high-value R&D investments. 

Finally, the government must analyze the drivers of profit repatriation. While part of a global trend, understanding whether it stems from regulatory friction, tax considerations, or a simple lack of compelling reinvestment opportunities in India is crucial. Policies that incentivize the reinvestment of profits into new Indian projects or expansion, rather than their extraction, could help reverse the net FDI decline. 

India stands at a pivotal moment. The robust 7.3% return is a formidable asset, proving the nation’s economic potential is real and bankable. The task now is to build an ecosystem where global capital feels compelled not just to visit for profit, but to put down roots and grow for the long term. The choices made in the coming months will define whether the current narrative of profitable flight evolves into one of profitable partnership and shared growth.