Foreign investment in India

The first principle

Capital moves to where it expects the best return for its risk, and a poor country gains when it arrives because it brings not only money but also technology, management and access to markets. The country's choice is about the kind of capital it invites: long term owners who build factories and stay through bad years, or short term holders of shares and bonds who can leave in a day. Foreign investment policy is therefore a balance between openness, which brings capital and know how, and control, which guards strategic sectors and financial stability.

The core

Two kinds of foreign investment

• Foreign direct investment (FDI) is investment with a lasting interest and a say in management. Under the Foreign Exchange Management (Non Debt Instruments) Rules 2019, a holding of 10 per cent or more of the equity of a listed Indian company, or any holding in an unlisted company, counts as FDI. It arrives as fresh equity, reinvested earnings and loans from a parent company.
• Foreign portfolio investment (FPI) is a holding below 10 per cent of a listed company per investor, or a holding of Indian bonds, by an investor registered with the Securities and Exchange Board of India (SEBI). If a portfolio investor crosses 10 per cent, it must sell down or have the holding treated as FDI.
• Why the difference matters. FDI is slow to leave because a factory cannot be sold in a day, so it is stable financing for a current account deficit. FPI deepens the stock and bond markets and lowers the cost of capital, but it can reverse quickly when global interest rates rise, as it did in 2013, 2022 and 2025-26.

How FDI is allowed

• The automatic route. In most sectors a foreign investor needs no approval; it invests and then reports to the Reserve Bank of India (RBI). Since the Foreign Investment Promotion Board was abolished in 2017, proposals that need approval go to the ministry concerned through the Foreign Investment Facilitation Portal, under the Department for Promotion of Industry and Internal Trade (DPIIT).
• Sectoral caps. Some sectors allow FDI only up to a limit, or only up to a point under the automatic route. Defence allows 74 per cent under the automatic route and more with approval, telecom 100 per cent under the automatic route, multi brand retail 51 per cent with approval, and insurance companies 100 per cent after the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act 2025. Satellites, launch vehicles and components were opened in 2024 with separate automatic limits for each.
• Prohibited sectors. FDI is not allowed in lottery, gambling and betting, chit funds, nidhi companies, trading in transferable development rights, real estate business, manufacture of tobacco cigarettes and cigars, atomic energy and railway operations other than the activities that are opened.
• Press Note 3 of 2020. Issued on 17 April 2020, when Indian firms were cheap during the pandemic, it requires government approval for any investment from an entity of a country that shares a land border with India, or whose beneficial owner is from or in such a country. It was aimed mainly at China.

A worked example: gross and net FDI

• The arithmetic. In 2025-26 gross FDI into India was US$94.5 billion. Foreign investors took back US$53.6 billion by selling stakes and repatriating capital, so net FDI to India was 94.5 − 53.6 = 40.9 billion. Indian companies invested US$33.3 billion abroad, so net FDI was 40.9 − 33.3 = 7.6 billion, which the RBI reports as 7.7 billion after rounding of the parts (RBI Annual Report 2025-26, May 2026). The balance of payments release of 8 June 2026, a later compilation, puts net direct investment at US$6.9 billion, which is the figure used in the balance of payments note.
• The lesson. A small net figure does not mean foreigners stopped investing. It means mature investors, such as private equity funds, are selling profitable stakes in a strong stock market, and Indian firms are buying assets abroad; both are signs of a maturing market as well as a warning about financing.

Dimensions

• Growth and jobs. FDI adds to investment and brings technology; electronics assembly, automobiles and software services show how foreign firms pull Indian suppliers into global value chains.
• Balance of payments. FDI finances the current account deficit without creating debt, but dividends and royalties flow out for years, so the net gain depends on how much the firm exports.
• Security. Investment in telecom, ports, power and data from hostile states can create leverage, which is why Press Note 3 and security clearances exist.
• Tax and round tripping. Money routed through Mauritius and Singapore once enjoyed exemption from capital gains tax in India; the treaties were amended in 2016 so that India taxes such gains on shares acquired from April 2017, which reduced Indian money returning disguised as foreign investment.
• Federal. States compete for investment through land, power and incentives, and a few States receive most of it, which widens regional gaps.

In practice

• Inflows. FDI rose in 2025-26 on both gross and net basis. Singapore, the United States, Mauritius, Japan, the Netherlands and the United Arab Emirates together supplied about four fifths of equity inflows, and services took the largest share, followed by manufacturing (RBI Annual Report 2025-26). Cumulative FDI since April 2000 crossed US$1 trillion in 2024 (DPIIT).
• Portfolio flows. Net portfolio investment was an outflow of US$16.4 billion in 2025-26 and a further US$9.6 billion in April to June 2026, which, with small net FDI, made reserves fall (RBI, 8 June and 1 September 2026).
• Outward investment. Indian firms invest abroad under the Overseas Investment Rules and Regulations of 2022, which let a company commit up to four times its net worth under the automatic route, and individuals may send up to US$250,000 a year under the Liberalised Remittance Scheme. Large Indian groups have bought steel, automobile, pharmaceutical and software firms abroad to gain brands, technology and markets.
• Treaties. India terminated most of its old bilateral investment treaties after adopting a Model Bilateral Investment Treaty in 2015, which narrows investor claims against the state, and has since signed new treaties, including one with the United Arab Emirates in 2024. The agreement with the European Free Trade Association carries a commitment to aim for US$100 billion of investment over fifteen years.

Issues and way forward

• Low net FDI. Gross inflows are healthy but net FDI is small because of exits and investment abroad. A predictable tax regime, quicker contract enforcement and deeper markets for exits keep capital in for longer.
• Concentration. Most FDI goes to services and to a few States, while manufacturing, where jobs are needed, receives a smaller share. Plug and play industrial parks, reliable power and the production linked incentive schemes aim to correct this.
• Policy uncertainty. Retrospective taxation, abandoned in 2021 after the Vodafone and Cairn arbitration losses, and sudden changes in rules have hurt India's image. Stable rules announced well in advance matter more than incentives.
• Balancing security and capital. Press Note 3 protects strategic sectors but also delays investment in electronics and batteries that depend on Chinese partners. Clear timelines and a list of sensitive sectors, rather than case by case approval, would serve both aims.
• Volatile portfolio money. India's inclusion in global bond indices from 2024 brings steady flows but also exposure to global shocks, so adequate reserves and a flexible rupee remain the buffers.

Common confusions

• FDI and FPI. FDI is a lasting stake of 10 per cent or more with a say in management; FPI is a smaller, tradable holding.
• Automatic route and no limit. The automatic route means no prior approval, not unlimited investment; caps still apply.
• Gross and net FDI. Gross FDI counts all money coming in; net FDI subtracts repatriation and investment abroad by Indian firms, and the two can differ by more than ten times.
• Overseas direct investment and the Liberalised Remittance Scheme. The first is investment by Indian companies in businesses abroad; the second is the annual limit on money that individuals may send abroad.

For the exam

• Keyword bank: lasting interest, 10 per cent threshold, automatic route, government route, sectoral cap, Press Note 3, beneficial ownership, net FDI, repatriation, overseas direct investment, round tripping, double taxation avoidance agreement, bilateral investment treaty, global value chains, hot money.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: Gross FDI into India reached US$94.5 billion in 2025-26, yet net FDI was only about US$7.7 billion (US$6.9 billion in the later balance of payments data), because foreign investors sold stakes and Indian firms invested abroad (RBI Annual Report 2025-26).
  • Introduction with a rule: Press Note 3 of 2020 requires approval for any investment whose beneficial owner is from a country sharing a land border with India, showing how security now shapes investment policy.
  • Conclusion: India should seek capital that stays, so stable taxes, quick dispute resolution and manufacturing ready infrastructure matter more than further raising caps.
  • Conclusion: Openness and security can coexist if sensitive sectors are named clearly and approvals have firm timelines.