Foreign Direct Investment in India 2025: Trends and Returns – Economic Survey 2025-26
Foreign Direct Investment (FDI) plays a crucial role in India's economic development, bringing not just capital but also technology, management practices, and global market linkages. The Economic Survey 2025-26 discusses FDI trends, the returns generated by foreign investors, and the broader implications for India's integration into Global Value Chains. This article examines FDI dynamics and their significance for India's growth strategy.
FDI Inflows: Strong Recovery in 2025
According to the Economic Survey 2025-26, FDI inflows grew by 17.9 per cent year-on-year to reach $55.6 billion. This recovery follows a period of muted flows during global uncertainty and marks renewed investor confidence in India's growth story.
The strong FDI performance is attributed to several factors: India's robust GDP growth, stable macroeconomic fundamentals, ongoing reforms improving ease of doing business, and the global search for alternatives to China-concentrated supply chains.
India has positioned itself as a destination for both market-seeking FDI (accessing India's large consumer market) and efficiency-seeking FDI (using India as a manufacturing base for global exports). Both motivations have strengthened in recent years.
Sector-wise Distribution
FDI flows are concentrated in certain sectors reflecting global investment trends and India's competitive advantages:
Services Sector: Financial services, IT, and business services continue to attract significant FDI. Global Capability Centers represent a key channel for services FDI.
Manufacturing: Electronics, automobiles, pharmaceuticals, and chemicals have seen increased FDI, particularly under PLI schemes that provide production incentives.
Telecommunications: 5G deployment and digital infrastructure have attracted telecom investments.
Retail and E-commerce: Despite regulatory restrictions, this sector attracts substantial investment through permitted routes.
Renewable Energy: Solar and wind projects have attracted growing FDI as India pursues clean energy targets.
Returns on Inward FDI
The Economic Survey 2025-26 discusses an important but often overlooked aspect: the returns earned by foreign investors on their India investments. This analysis matters because FDI is beneficial only if the returns it generates are commensurate with the capital brought in and the technology transferred.
Returns on FDI manifest in several forms: profits repatriated by foreign subsidiaries, royalties and technical fees paid to parent companies, and capital gains on eventual divestment. If these returns significantly exceed what foreign investors bring in, the net benefit to India diminishes.
The survey's examination of FDI returns provides a nuanced perspective, suggesting that policy should focus not just on attracting FDI volumes but ensuring that FDI contributes to domestic capability building and technology transfer.
Global Value Chains: The Strategic Imperative
The Economic Survey 2025-26 emphasizes the importance of FDI for integrating India into Global Value Chains (GVCs). GVCs involve production processes spread across multiple countries, with different stages of manufacturing occurring where they can be done most efficiently.
Participation in GVCs requires:
Quality and Reliability: Meeting exacting specifications consistently, which FDI companies often bring through their established processes.
Scale: Large-volume production capabilities that justify inclusion in global supply networks.
Logistics: Efficient transportation and customs procedures enabling just-in-time delivery.
Support Ecosystem: Local suppliers capable of meeting global standards.
FDI from multinational corporations that are already embedded in GVCs can help Indian operations gain entry into these networks.
FDI Policy Liberalization
India has progressively liberalized FDI policy, with most sectors now allowing majority or 100 per cent foreign ownership through the automatic route. The Economic Survey 2025-26 mentions that insurance was opened to 100 per cent FDI during the year.
Key liberalization measures include:
Automatic Route Expansion: More sectors now allow FDI without government approval, reducing delays and uncertainty.
Sectoral Caps Raised: Insurance increased from 74 per cent to 100 per cent; defense allows higher FDI for strategic cases.
Simplified Procedures: Single-window clearances and digitized processes have reduced red tape.
However, some sectors retain restrictions: multi-brand retail, media, agriculture, and certain strategic sectors have FDI limits or approval requirements.
Source Countries
FDI into India comes from diverse source countries:
Singapore: Often the largest source, partly reflecting routing of investments from other countries.
United States: Major investor particularly in technology and services.
Mauritius: Historically significant due to tax treaty benefits, though its importance has reduced after treaty renegotiation.
Netherlands, Japan, UAE: Growing investors across various sectors.
The geographic diversification of FDI sources enhances India's resilience against dependence on any single country.
Outward FDI: Impact on Home Country
The Economic Survey 2025-26 also discusses outward FDI – Indian companies investing abroad. While outward FDI might seem to reduce domestic investment, research suggests it can benefit the home country by:
Access to Markets: Establishing presence in foreign markets that Indian exports alone cannot reach.
Technology Acquisition: Acquiring companies with technological capabilities.
Resource Security: Investments in natural resources ensuring supply chain security.
Indian companies have made significant overseas acquisitions in sectors like steel, automobiles, pharmaceuticals, and IT.
UPSC Relevance: FDI
FDI is a core topic for UPSC:
- GS-III: Foreign investment, external sector
- Economy Optional: Balance of payments, investment flows
- Current Affairs: Policy changes, investment trends
Practice MCQs on FDI India - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, FDI inflows grew by:
(a) 10.9%
(b) 15.5%
(c) 17.9%
(d) 22.3%
Answer: (c) 17.9% year-on-year
Q2. FDI inflows in 2025 reached approximately:
(a) $35.6 billion
(b) $45.6 billion
(c) $55.6 billion
(d) $65.6 billion
Answer: (c) $55.6 billion
Q3. According to Economic Survey 2025-26, which sector was opened to 100% FDI?
(a) Retail
(b) Agriculture
(c) Insurance
(d) Media
Answer: (c) Insurance
Q4. GVCs stand for:
(a) Global Virtual Corporations
(b) Global Value Chains
(c) Government Venture Capital
(d) Gross Valued Credits
Answer: (b) Global Value Chains
Q5. The automatic route for FDI means:
(a) Investment is automatic
(b) No prior government approval required
(c) Automatic tax exemption
(d) Immediate repatriation allowed
Answer: (b) No prior government approval required
Conclusion
FDI has been a vital component of India's economic growth, as the Economic Survey 2025-26's analysis demonstrates. The 17.9 per cent growth to $55.6 billion reflects India's attractiveness as an investment destination amid global realignment. However, the survey's nuanced examination of FDI returns reminds us that quantity alone is not the goal – quality FDI that transfers technology, builds capabilities, and integrates India into GVCs is what matters most. Policy must continue to balance openness with strategic direction to ensure FDI delivers sustained benefits for India's development.