India's average return on FDI remains robust at 7.3%, outperforming emerging economies: CareEdge

As per the data shared by CareEdge Ratings, the Net FDI flows have fallen from USD 44 billion in FY20 to USD 1 billion in FY25.

"While gross inflows have improved, we also observe higher repatriation of profits by investors and FDI outflows from India. This has led to a sharp decline in net FDI inflows," it said.

However, an analysis by the rating agency indicates that India's average return on inward FDI remains robust at 7.3%, outperforming many emerging and developed economies.

A foreign company's decision to reinvest or repatriate profits typically reflects its strategic priorities and capital allocation philosophy. Similarly, outward FDI growth indicates access to foreign resources and markets.

After remaining broadly stagnant at around USD 71 billion in FY23 and FY24, gross FDI inflows rose by 13% to USD 81 billion in FY25. However, a substantial rise in profit repatriation and outflows significantly weighed on net FDI inflows, which fell to just USD 10 billion in FY24 and further to USD 1 billion in FY25.

In FY25, the services sector was the largest recipient of FDI equity, accounting for 19% of total inflows, followed by the computer software and hardware sector at 16%, and the trading and non-conventional energy sectors at 8% each.

Among other major sectors, trading, non-conventional energy, automobiles, and chemicals (excluding fertilisers) recorded growth in FY25. However, FDI inflows to the drugs and pharmaceuticals and construction sectors contracted in FY25, it said.

Emerging sectors such as semiconductors, electric vehicles, battery storage, and data centres are increasingly attractive destinations for FDI

On the global FDI, the report highlighted that while a few emerging markets, such as Bangladesh, Nigeria, and Malaysia, report higher average returns, these are accompanied by significantly greater volatility.

Given heightened global economic and geopolitical uncertainties, FDI flows have been weak in recent years. Globally, FDI flows have continued to lag GDP growth.

The ratio of global FDI flows to GDP declined to 1.3% in 2024, down from the post-pandemic peak of 2.4% in 2021. The erosion in FDI's share of global GDP has been a persistent trend since the 2008 GFC, when the ratio peaked at 5.3% in 2007, it said.

There has been a decline in Europe's share of global outward FDI and stagnation in flows from the United States.

Notably, China has experienced a significant increase in its share of global outward FDI. Its share has risen from almost negligible levels in the early 2000s to an average of ~11% in the post-pandemic years.

Countries benefiting from the China+1 strategy--such as Vietnam and Mexico, as well as resource-rich nations in Africa--have experienced significant growth in inbound FDI. India's share in global FDI inflows fell to 2.4% from 2.9%, largely due to higher repatriation. (ANI)