New Delhi, June 25: India attracted gross FDI of $94.53 billion in 2025-26. That appears encouraging for an economy aspiring to become a global manufacturing hub. Yet the headline conceals a less comforting reality. Net FDI — after accounting for outflows — stood at only $7.65 billion, barely 8 per cent of gross inflows. If this were a temporary fluctuation, it would not be especially troubling. But the trend appears structural rather than cyclical.

FDI has long been regarded as the most desirable form of external capital for developing economies. Unlike portfolio flows, which can enter and exit quickly in search of short-term gains, FDI is assumed to reflect long-term confidence. It brings capital, technology, managerial expertise, and access to global markets. That is why net FDI matters more than the headline gross figure. It captures what remains after repatriation, disinvestment, and outward investments are taken into account. On this measure, the picture is sobering.

In 2020-21, India’s net FDI inflows were around $44 billion, equivalent to nearly 54 per cent of gross inflows. Over the next four years, they fell steadily, reaching less than $1 billion in 2024-25. Although there was a modest recovery in 2025-26, it was driven largely by higher gross inflows rather than a reversal of the underlying trend. Part of the decline reflects growing outward FDI by Indian firms. In principle, overseas investment can be a sign of corporate confidence. Yet the prominence of jurisdictions such as Singapore, Mauritius, the UAE, and the Netherlands among both India’s inward and outward FDI flows raises questions about whether all such transactions represent genuine productive investment.

More worrying is the scale of foreign investor exits. Global conditions have undoubtedly played a role. Higher interest rates, weaker growth, and geopolitical uncertainty have dampened investment flows across the world. But those explanations are only part of the story. According to World Bank data, India’s net FDI inflows declined by around 39 per cent between 2021 and 2024, while Vietnam recorded an increase of approximately 29 per cent. Looking back to 2014, the contrast is even sharper: India’s net FDI fell by nearly 21 per cent while Vietnam’s rose by about 119 per cent. The conclusion is difficult to escape. India’s FDI challenge predates current global uncertainties and is indicative of something more.

The much-discussed "China Plus Oned” strategy helps explain why. As multinational firms sought to diversify supply chains away from China, many expected India to emerge as a major beneficiary. Given its market size and labour force, that expectation seemed justified. Yet the gains have been more modest than anticipated. The reason lies in India’s limited integration into global value chains in areas where China dominates. The sectors that have benefitted most from supply-chain diversification — electronics, electrical machinery, mechanical equipment, and automobiles — are deeply embedded in international production networks. China dominates these sectors not simply because of scale but because of the dense ecosystems of suppliers and manufacturers that support them.-Agencies