The central government, BJP leaders and several Union ministers, including Prime Minister Narendra Modi, have claimed over the past week that India had received the highest foreign direct investment (FDI) inflow of $83.57 billion in FY 2021-22. While this is not incorrect, the full picture about foreign investment in India is much bigger than this.

The Ministry of Commerce & Industry, in a press release dated May 20, 2022, said India is rapidly emerging as a "preferred investment destination".

Few days later, PM Modi, at the convocation ceremony of Indian School of Business in Hyderabad, said, "India is emerging as a major centre of growth today. Last year, the highest ever recorded FDI came into India. Today the world is realizing that India means business. Our youth has proved that they can become global leaders."

Several Union ministers and BJP leaders followed in unison. While BJP National President JP Nadda attributed the record FDI inflow to Modi's "diplomatic efforts on the international stage", party's National Vice President DK Aruna said it was the result of "minimum government, maximum governance".

The Reserve Bank of India defines FDI as "the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company".

FDI Inflow Growth Slow

The FDI inflow growth slowed down in 2021-22 as it increased by $1.6 billion than a $7.58 billion hike in 2020-21. This means the growth dropped to 1.95% in 2021-22 from 10.19% in 2020-21 and 19.98% in 2019-20.

Instead, the ministry, in the May 20 press release, highlighted that, "India's FDI inflows have increased 20-fold since FY 2003-04, when the inflows were USD 4.3 billion only."

"Implicit in this rhetoric, which exaggerates the significance of selectively chosen numbers, without placing them in context, is a belief that propaganda can trump a reality that is easily obscured," wrote Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, and CP Chandrasekhar, research fellow at Political Economy Research Institute and former economics professor at Jawaharlal Nehru University, in an article published in The Hindu Business Line.

Inflow Increased, So Did Outflow

The FDI inflow amount of $83.57 billion that the ministry is focusing on is the "gross" FDI inflow. This means that from these inflow figures any outflow on account of repatriation or disinvestment of past inflows by foreign investors or investment abroad by resident entities have not been netted out.

"The net number takes into account two more things: the foreign money which had come into India earlier as FDI and is leaving [repatriation/ disinvestment] and the Indian money which is going abroad as FDI," Vivek Kaul, author and economic commentator, told FactChecker.

Once these two are deducted from the gross FDI, the net FDI computed shows a 10.61% decline from the previous year — $39.29 billion in 2021-22 from $43.95 billion in 2020-21.

"I think we should be looking at the net inflow since these flows are important for supporting a balance of payments. We run a huge merchandise trade deficit, which is made up of two components: service exports and foreign investments. That is how you accumulate foreign exchange reserves. But we must look at how much is actually coming in," said Alok Sheel, RBI Chair Professor in Macroeconomics at the Indian Council for Research in International Economic Relations (ICRIER).

There has been a significant increase in the volume of repatriated or disinvested foreign capital over the years and this points to a tendency that foreign direct investors who had a lasting interest in India opted out of their investments and exited.

"Between 2019-20 and 2021-22 gross FDI inflows rose despite the effect of the pandemic, net inflows fell mainly because of repatriation or disinvestment by existing direct investors," wrote Ghosh and Chandrasekhar.

Such disinvestment grew to $28.6 billion in 2021-22 from $27.04 billion in 2020-21 and $18.38 in 2019-20. Similarly, FDI by India also registered an increase of 42.9% — from $10.97 billion in 2020-21 to $15.68 billion in 2021-22.

According to Sheel, even reinvested earnings should be netted out. "If you look at foreign currency coming in, reinvestment should not be counted as it is money earned in India and reinvested here. This is an accounting adjustment and does not involve any foreign currency inflow. Likewise, reinvested earnings of Indian investors abroad also do not involve an outflow of foreign currency," the ICRIER professor told FactChecker.

According to his calculation, if such reinvestments are excluded, the net FDI foreign currency inflow comes to $30.03 billion in 2020-21 and $23.38 billion in 2021-22, which is an even sharper decline (22.14%) than the earlier computed 10.61%.

Portfolio Investments Volatile

There are two types of foreign investments. One is direct investment and the other is portfolio flows, under which foreign investors buy stocks and shares in futures of companies. Portfolio investment is the money that foreign institutional investors bring to India to invest in primarily stocks.

Net portfolio flows have been volatile in the past few years. In 2020-21, India recorded a net portfolio investment inflow of $36.1 billion and a net outflow of $17.3 billion in 2021-22. This means that when combined with net FDI inflow, the aggregate net foreign investment flow stood at $22.06 billion in 2021-22, as compared to $80.09 billion in 2020-21.

Sheel explained that this is not good for India's reserves. "India runs a current account deficit as the merchandise trade deficit is higher than the invisible trade surplus. Despite this deficit, India was adding reserves owing to foreign investment flows, both by way of FDI and portfolio. If these inflows go in negative, India will bleed reserves. This means there aren't enough foreign inflows to finance the current account deficit," concluded Sheel.

When FactChecker contacted the Ministry of Commerce & Industry, Anant Swarup, Joint Secretary, Department of Commerce, said "concerned officials" were in Department for Promotion of Industry and Internal Trade (DPIIT). We then emailed and called several officials from DPIIT, but had not received a response by the time of publishing this article. If and when we do, it will be updated here.