India attracts capital. Why can’t it keep it?

March is being read in three different ways by three serious observers. The RBI governor, at a round-table in New York in April 2026, described net FDI outflows and rupee movements as “cyclical” and “short-term fluctuations”.

Chief economic advisor V. Anantha Nageswaran has warned that the West Asia crisis poses a multi-channel shock to India's economy in FY27—through energy prices, Gulf trade, logistics and remittances. He projects the current account deficit widening to 2-2.5 % of gross domestic product (GDP), from below 1 % in FY26, requiring external financing of $80-120 billion. Inflation, previously expected below 5%, could now settle in the 5-6% range depending on monsoon and oil prices.

The Asian Development Bank, in its April 2025 outlook, projected India's growth at 6.8% in FY27, while flagging downside risks from geopolitical uncertainty and elevated energy prices, and noting that net FDI has moderated sharply in recent years.

One number, three explanations. The governor calls it a cycle. The CEA calls it a structural shock. The ADB calls it a moderating trend. None of these readings is wrong. But a retention ratio that has fallen from 50% to 8% over five years is asking a question that “cyclical” alone cannot answer.

Second, sectoral inversion. The two largest sectoral recipients of FDI in India in 2025-26 are not factories—they are computer software and hardware ($13.9 billion) and services ($10 billion), together accounting for nearly a third of all equity inflows. The automotive sector, by contrast, received $2.5 billion; software attracted nearly six times that amount. India is, according to the UN Trade and Development's (UNCTAD) World Investment Report 2025, the largest recipient of greenfield digital-economy FDI in the entire Global South.

This is a striking success but sits in tension with a decade of industrial policy designed to attract manufacturing capital. India has succeeded most clearly in the category for which no comparable framework was written.

Third, the outbound surge. Indian companies invested $33.3 billion abroad in FY26, nearly double what they invested four years ago, with a further $5.6 billion committed in April 2026. This outbound capital is concentrated in financial services, manufacturing and energy, categories where the US has deployed significant industrial policy incentives through the Inflation Reduction Act and the CHIPS Act.

The scale of these subsidies—production credits for battery manufacturing, investment incentives for semiconductor facilities—is difficult for any developing country to match or replicate. Whether Indian capital is explicitly drawn by these incentives or simply finds better risk-adjusted returns in stable regulatory environments is an open question. The direction of flow, however, is not.

Fourth, the corporate-capex paradox—the CEA's sharpest public criticism of the private sector, read in reverse. Profits of top-listed firms have grown 30.8% annually since the pandemic; corporate capex has remained weak. Speaking at Ashoka University in May 2026, Nageswaran told industry leaders that companies had chosen to accumulate cash profits and set up family offices elsewhere rather than investing in real assets on the ground. Read alongside the outbound surge, these are two faces of the same phenomenon.

Indian companies have generated record cash flow since the pandemic and invested it less in domestic capacity than at any point in the last decade. Domestic capital, in surplus, is selecting destinations other than the domestic economy. This is a relative-return judgement, and such judgements do not reverse in a quarter. Domestic capital, in surplus, is selecting destinations other than the domestic economy. This is a relative-return judgement, and such judgements do not reverse in a quarter.

These are not small moves. But they are moves aimed at the door—how capital enters—not the drain, which is how much stays. The 12-week timeline reduces waiting. The FEMA easing removes a country barrier. The insurance opening lifts a sectoral ceiling. None of these asks the harder question: why is domestic capital itself increasingly selecting destinations outside India? That question does not have a regulatory answer. It has a returns answer, and returns are not fixed by approval timelines.

Two analytical reforms might help. First, the RBI could publish, alongside its gross and net series, an indicator of average residence time—how long a typical dollar of FDI stays in India before repatriation or sell-down. The patience of capital is at least as important as its volume, and India does not currently track it. Second, the FDI scorecard at the Centre and in states needs reorientation. Maharashtra, Gujarat, Karnataka, and Tamil Nadu have retained their FDI more successfully than other states because they have built industrial cluster ecosystems with deep supplier networks. Subsidy regimes without underlying institutional capacity show diminishing returns.

The $94.53 billion headline is not wrong. It is, in 2026, simply incomplete. India spent three decades after 1991 building itself as a reservoir for global capital. The data now suggest something closer to a river: impressive volume passing through, modest accumulation left behind. The three official voices that responded to March 2026 will set the policy direction for the next several years. The data suggests the readings furthest from “cyclical” are the ones to take most seriously—and that the boundary between volume and retention, between flow and stock, is where the most useful policy questions for the next decade now lie.

Amarbahadur Yadav is an assistant professor of economics at Zakir Husain Delhi College (Evening), University of Delhi.

Pummy is an assistant professor of economics at Indraprastha College for Women, University of Delhi, New Delhi.