India’s Record FDI Figures Mask Reality as Only 30% Represents New Capital, Reveals Former IMF Official

India’s Record FDI Figures Mask Reality as Only 30% Represents New Capital, Reveals Former IMF Official​

India recorded a record gross Foreign Direct Investment (FDI) inflow in FY26, but the underlying data suggests a complex narrative regarding actual capital injection into the domestic economy. Surjit Bhalla, former Executive Director at the International Monetary Fund (IMF), revealed that only 30 percent of these inflows represented fresh money from overseas.

The remaining 70 percent of the gross FDI figure is comprised of retained earnings from foreign companies already operating within India. This shift in data reflects the IMF's revised methodology introduced between 2017 and 2020, which now counts retained earnings as part of the total FDI tally.

Minimal Net Impact of Record Foreign Investment Flows​

Despite the headline-grabbing growth in gross figures, the actual net impact on India’s investment landscape remains marginal. Bhalla emphasized that the argument regarding India recording highest-ever FDI in FY26 lacks significant weight because the net effect is close to zero.

Reserve Bank of India (RBI) data confirms this discrepancy, showing that while gross FDI inflows rose 17 percent year-on-year to a record $94.53 billion in FY26, net FDI stood at just $7.65 billion. This highlights the stark difference between total reported inflows and actual new capital entering the country.

Concerns Over Domestic Investment Attractiveness​

The data also points toward a concerning trend regarding where Indian corporations are choosing to deploy their capital. Bhalla noted that Indian companies are increasingly investing significant amounts overseas, which raises questions about the current appeal of domestic investment opportunities.

He questioned why firms would seek international ventures if the domestic landscape offered truly attractive prospects. This trend suggests a potential cooling of interest in internal growth compared to global expansion for major Indian corporate entities.

Structural Barriers Within Bilateral Investment Treaties​

The current framework governing foreign investment remains a point of contention, with Bhalla describing India's Bilateral Investment Treaties (BIT) as uniquely restrictive on a global scale. He argued that the current system benefits specific large industrialists while failing to provide an open environment for broader competition.

Bhalla asserted that in many other countries, foreign investors are permitted to invest and operate freely without such restrictions. He suggested that a more investor-friendly BIT framework would be essential to genuinely boosting FDI inflows and improving the ease of doing business.

Government Initiatives to Revamp Investment Frameworks​

In response to these challenges, the government is expected to introduce a new BIT Model in the coming months. This upcoming framework aims to improve the investment climate and includes a specific framework for the treatment of foreign portfolio investors (FPIs), which were excluded from previous agreements.

Finance Minister Nirmala Sitharaman previously stated during her Budget 2025 speech that the current model would be revamped to be more investor-friendly in the spirit of 'first develop India'. This is a significant shift from the 2015 Model, which explicitly excluded portfolio investments from its scope.