Is outbound FDI rising at the expense of domestic capex?

By N Chandra Mohan

India’s net foreign direct investment (FDI) inflows merit serious attention as they dramatically plunged to $353 million last fiscal. This is due to record levels of repatriations and disinvestments and rising outbound FDI despite healthy gross inflows. Net FDI inflows were as high as $44 billion in FY21 and have been sharply reducing since then, especially over the last two fiscals. While repatriations and dividends have been commented upon, less attention has been paid to India Inc’s investments abroad which rose almost threefold to $29 billion in FY25 from $11 billion in FY21. The concern is that Indian firms are expanding globally — which should be welcomed — while they are hesitant to invest domestically. At a time of adverse global headwinds due to policy-related uncertainties, a private sector-led investment push will no doubt bolster India’s GDP growth but there is no evidence so far of a virtuous capex upswing. In this milieu, India’s outbound FDI is intriguingly gathering strength.

The question naturally is the whys and the wherefores of this process. The global expansion of India’s conglomerates, however, is not of recent provenance as in the late 1960s and 1970s the Aditya Birla Group made pioneering forays into Thailand and other economies of the Association of Southeast Asian Nations (ASEAN). Analysts consider this as part of a first wave of investments by India Inc during the pre-liberalisation era. The group later targeted the US with investments of $15 billion including a $4-billion green-field expansion plan currently underway. Post-liberalisation, the Tata Group acquired London-based Tetley Tea in 2000, Anglo-Dutch steel manufacturer Corus in 2007, and Jaguar and Land Rover in 2008. Pharma and information technology companies, too, have made acquisitions overseas.

India Inc has no doubt developed a global footprint but the top destinations for outbound FDI are tax havens like Singapore and Mauritius. As for Singapore, it would be tempting to infer that India’s investments in the city-state are a base to foray into the rest of ASEAN. But that doesn’t seem to be the case as there is a receding FDI footprint. The Tata Group, for instance, has exited from its manufacturing presence. It took over NatSteel in Singapore in 2004 and two years later Millennium Steel in Thailand. To sell its pick-up trucks in the region, Tata Motors chose Thailand for its entry point in 2008. Seventeen years later, it has sold its stake in NatSteel while retaining the wire business. In July 2018, Tata decided to stop assembly operations in Thailand.

Policy attention is certainly warranted by rising outbound FDI while corporates are not investing in the country. Last fiscal, official data highlights the continued subdued growth in private investments. So, too, does data of the Centre for Monitoring Indian Economy. The portents for an upswing in the private capex cycle are not bright. The Union finance ministry’s latest monthly review cites the results of the ministry of statistics and programme implementation’s forward-looking survey on private sector capex investment, according to which intended capex is lower in FY26 than in FY25 — attributed to a “cautious approach by respondents in declaring future investment plans”. Corporates are not driving overall growth as there is still a lot of excess capacity in the system as the demand environment remains highly challenging.

In manufacturing, capacity utilisation rates rose marginally to 75% in Q3 FY25 from 74.7% a year earlier. They need to go up much further to a point where private industry requires additional capacity. Private investments also depend on a more stable policy and regulatory framework. A cyclical upswing cannot be set in motion so long as investors, both domestic and foreign, face serious difficulties in doing business on the ground, especially in the various states. So, while the animal spirits of India Inc remain depressed for domestic investments, their rapidly growing overseas investments together with the disenchantment of foreign investors who are disinvesting have impacted net FDI flows.

The writer is an economics and business commentator based in New Delhi.

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