UNCTAD World Investment Report 2025
Foreign Direct Investment (FDI) is a critical driver of economic growth in developing countries like India. It brings not only capital but also technology, management expertise, and access to global markets.
Over the years, India has positioned itself as an attractive investment destination. However, the recently released UNCTAD World Investment Report 2025 highlights a decline in India’s FDI inflows, raising both concerns and questions about its investment climate.
What is FDI?
Foreign Direct Investment refers to an investment made by a firm or individual in one country into business interests located in another country, typically by acquiring ownership (usually 10% or more) in a local company or establishing business operations.
Types of FDI:
- Greenfield FDI: Investing in new facilities or capacity.
- Brownfield FDI: Acquiring or merging with existing firms.
- Horizontal & Vertical FDI: Depending on whether the business is expanded at the same stage or different stages of the value chain.
Routes of FDI in India:
- Automatic Route: No prior approval required from the Government of
India or RBI.
Government Route: Prior approval required from the concerned ministry.
Key Sectors under FDI:
- 100% FDI allowed in sectors like telecom, e-commerce, construction, and railways (under automatic or government route).
- Restricted/Prohibited Sectors: Atomic energy, railway operations (core), gambling, etc.
Gross Capital Formation (GCF) – A Crucial Metric
Gross Capital Formation refers to investment in fixed assets (like plant, machinery, equipment, and infrastructure) and inventories. It is a direct indicator of a country's capacity to generate future income.
Why it matters: The FDI share in Gross Capital Formation reflects the extent to which foreign capital is contributing to productive capacity. A decline indicates weakening foreign investor participation in long-term developmental assets.
UNCTAD World Investment Report 2025: Key Highlights
Global Context:
- Global FDI flows fell by 11% in 2024 due to economic uncertainty, geopolitical tensions, and realignment of global supply chains.
India-specific Findings:
| Metric | Value |
|---|---|
| FDI inflows (2024) | US $27.6 billion |
| Change from 2023 | ↓ 1.8% |
| Global rank in FDI destination | 15th (up from 16th) |
| FDI share in Gross Capital Formation | ↓ from 8.8% (2020) to 2.3% (2024) |
- Greenfield investment announcements: Over 1,000 projects, ranking India 4th globally.
- Project Finance: 97 major deals, reflecting interest in infrastructure.
Why the Decline Despite Growth Potential?
Challenges:
- Global economic uncertainty: Post-COVID scarring, US interest rate hikes, Israel-Iran conflict, and trade fragmentation.
- Regulatory issues: Policy unpredictability, slow dispute resolution, and state-level hurdles in India.
- Ease of Doing Business vs. Implementation Gap: Procedural bottlenecks still hinder investor confidence.
- China+1 Shift: India hasn't fully capitalized on global supply chain shifts due to infrastructure and land acquisition delays.
Sector-specific Concerns:
- Technology & digital space faced regulatory scrutiny (e.g., data localization laws, crypto bans).
- Manufacturing still lags despite the Make in India and PLI (Production Linked Incentive)
The Silver Lining
Despite the dip in FDI inflow, certain metrics show strong forward momentum:
- Capex commitments were robust—over $110 billion in greenfield & infra.
- Top five globally in international project finance and strong service sector inflows (tech, finance, telecom).
- Investor sentiment in sectors like renewables, fintech, EVs, and semiconductors remains strong.
Government Measures to Boost FDI
Policy Measures:
- Liberalized FDI caps in telecom, insurance, defense, and digital sectors.
- Launch of National Single Window System for business approvals.
- PLI schemes in 14 sectors including electronics, pharma, EVs, and semiconductors.
- GIFT City initiative to attract global financial institutions.
Institutional Reforms:
- India-Japan, India-UAE, and India-EU investment dialogues.
- India actively revising Bilateral Investment Treaties (BITs) for investor protection.
Way Forward – Suggestions for UPSC Mains
- Boost investor confidence with predictable policies, tax certainty, and fast-tracked approvals.
- Accelerate structural reforms: Land, labor, and legal frameworks must be investor-friendly.
- Improve dispute resolution: Strengthen arbitration and contract enforcement.
- Promote sub-national competition: States should compete on EoDB and policy reforms.
- Enhance infrastructure and logistics: Speed up PM Gati Shakti and National Logistics Policy implementation.
The 2025 UNCTAD report is a wake-up call. While India retains strategic relevance as a major investment hub, it must align its investment climate, policy intent, and implementation rigor to sustain and grow FDI inflows. For a UPSC aspirant, understanding the interplay of FDI, GCF, policy, and global economics is essential not just for Prelims and Mains, but also for Essay and Interview.
