India remains the world’s fastest-growing major economy in 2025. Despite robust GDP growth, foreign capital inflows have not matched expectations. This paradox raises important questions about investment patterns and economic sustainability.
Recent Economic Growth Trends
India’s GDP growth averaged 8.2% annually from 2021 to 2024. Recently, the economy continued strong with 7.4% growth in Q1 and 7.8% in Q2. This outpaced other major economies such as China, the US, and the EU. Growth is driven by domestic demand, services exports, and government reforms.
Foreign Portfolio Investment Patterns
Despite growth, foreign portfolio investors (FPIs) have largely withdrawn funds. Only in 2023-24 did India see net FPI inflows of $25.3 billion. Other years recorded net outflows, including $14.6 billion in 2024-25. FPIs have sold equity shares but invested in government bonds and debt instruments.
Foreign Capital Inflows and Their Decline
Net capital flows into India fell to $18.3 billion in 2024-25, the lowest since the 2008-09 global financial crisis. This includes foreign direct investment (FDI), commercial borrowings, and remittances. External commercial borrowings increased, but overall foreign investment has slowed sharply.
Reasons Behind the Capital Flow Paradox
Much of the earlier FDI was private equity and venture capital from 2015 to 2021. Investors have been exiting by selling shares or through IPOs to realise profits. These exits reached $33 billion in 2024. Domestic investors replaced FPIs in equity markets, maintaining valuations.
Balance of Payments and Trade Deficits
India’s merchandise trade deficit reached $287.2 billion in 2024-25. However, surpluses from services exports and remittances have kept the current account deficit manageable, below $50 billion annually. This balance is critical for maintaining foreign exchange reserves.
Challenges from Global Trade and Investor Sentiment
US tariffs on Indian goods threaten exports, especially to a key market worth $86.5 billion. Investor concerns focus on corporate earnings sustainability rather than GDP alone. High market valuations and policy uncertainties cause cautious foreign investment behaviour.
Government Reforms to Boost Investment
To counter outflows and improve business climate, the government reduced goods and services tax rates. It also proposed a task force for next-generation reforms aimed at enhancing ease of doing business and boosting corporate earnings.
Currency Impact and Outlook
Capital outflows and trade tensions contributed to the rupee hitting a record low near 88.3 per US dollar in 2025. Currency depreciation reflects external vulnerabilities but also supports export competitiveness. The government’s reform push seeks to stabilise investor confidence.
Questions for UPSC:
- Taking example of India’s economic growth and foreign capital flows, discuss the relationship between GDP growth and foreign direct investment in emerging economies.
- Examine the causes and consequences of trade deficits in developing countries. How can services exports and remittances help manage these deficits?
- Analyse the impact of international trade policies, such as tariffs, on the export performance of major economies. Discuss in the light of India-US trade relations.
- Critically discuss the role of government reforms in attracting foreign investment and improving ease of doing business, with examples from India and other countries.
