Relevance (UPSC): GS-III – Indian Economy (External sector, Balance of Payments)

India’s net foreign direct investment (FDI) fell by 159% in August, turning negative—that is, more money flowed out than came in, according to the Reserve Bank of India’s October bulletin and media summaries. Gross inward FDI cooled from July’s four-year peak to about 6 billion dollars, while repatriation/disinvestment by foreign companies rose, tipping the monthly balance below zero.

What changed in August?

• Gross inflows moderated after a strong July, reflecting a pause in large deals and softer risk appetite.
  
• Outflows picked up as companies took profits or exited, and as Indian firms raised outward FDI commitments, a trend the central bank has flagged through 2025.
  
• Result: Net FDI recorded a small outflow (around 0.6 billion dollars) versus a sizeable inflow in July.
  

Why this matters

• Net FDI supports current account financing, technology transfer and stable jobs; a negative month is not a crisis, but repeated months would weigh on the balance of payments and investment pipeline.
  
• Sector-wise, India still attracts capital into manufacturing, computer services, construction and financial services, but volatility in exits can overwhelm month-to-month tallies.
  

Policy signals to watch

• Contract enforcement and dispute resolution: speed up commercial courts and arbitration timelines.
  
• Stable tax and trade policy: predictable customs and clear rules on related-party pricing and royalties.
  
• Deepen manufacturing ecosystems: link Production-Linked Incentive beneficiaries to local supplier development and quicker land, power and logistics clearances.
  
• After-care for investors: single-window grievance redress and state-level facilitation so firms expand rather than exit.
  

Key terms

• Gross FDI: total money invested by foreign firms in a period.
  
• Net FDI: gross inflows minus outflows (repatriation/disinvestment and outward FDI).
  
• Repatriation: profits or capital sent back by foreign investors after selling or downsizing.
  
• Outward FDI: investments Indian firms make abroad.
  

Exam hook: Use gross vs net FDI and repatriation to explain why headlines can diverge from long-term investor interest.

UPSC Prelims question:
With reference to India’s external sector, consider the following statements:

1. Net FDI becomes negative when repatriation and outward investments exceed gross inward FDI.
   
2. A fall in gross FDI automatically implies a fall in net FDI.
   Which of the statements given above is/are correct?
   (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
   Answer: (a)
   

One-line wrap: Read the fine print—August’s negative net FDI is a timing mix of softer inflows and higher exits; the cure is steady rules, quick courts, and stronger manufacturing linkages.