FDI and FPI in Post-Pandemic India: A Recovery Perspective

Abstract

The COVID-19 pandemic has been disrupted global economic activities at an unprecedented scale, significantly it has affected cross-border investment flows. India, like many other emerging economies, experienced substantial volatility in both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). This paper explores the impact of the pandemic on FDI and FPI inflows in Indian economy and evaluates the effectiveness of the government’s recovery strategies in stabilizing and revitalizing foreign investments during the post-pandemic period. The study integrates quantitative time-series analysis of FDI and FPI data from 2017 to 2023.Quantitative data sourced from the Reserve Bank of India (RBI), Ministry of Finance, and SEBI reveals a sharp contraction in FDI and FPI inflows in 2020 due to investor uncertainty, lockdowns, and supply chain disruptions. However, a recovery trend has been observed post-2021, particularly in sectors such as digital services, healthcare, renewable energy, and fintech. Thematic analysis of qualitative data highlight that while investor sentiment was initially cautious, transparency in policy, macroeconomic stability, and targeted incentives encouraged a resurgence in long-term FDI. FPI inflows, being more volatile, responded quickly to global monetary policies and domestic reforms. This paper contributes to the broader discourse on investment resilience in crisis contexts. It highlights sector-specific trends, policy effectiveness, and offers actionable recommendations to strengthen India\'s position as an attractive and stable destination for foreign capital in the evolving post-pandemic global economy.

Introduction

Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two key drivers of capital inflows into India, shaping its economic development. While FDI involves long-term investment in productive assets and offers technology transfer, job creation, and managerial expertise, FPI focuses on short-term financial assets like stocks and bonds and is highly sensitive to market volatility and economic indicators.

The COVID-19 pandemic significantly disrupted global and Indian investment flows, causing sharp declines in both FDI and FPI due to heightened uncertainty, lockdowns, and supply chain breakdowns. Post-pandemic, India implemented strategic reforms (e.g., Atmanirbhar Bharat, labor law changes, FDI liberalization) to restore investor confidence and attract foreign capital, leading to a rebound in investment inflows, particularly in technology, healthcare, and digital sectors.

???? Key Insights by Section

I. Overview of FDI vs. FPI

• FDI: Long-term investment involving operational control; promotes industrial growth, employment, and tech transfer.

• FPI: Short-term investment in financial markets; highly volatile and return-driven.

II. Impact of COVID-19

• FDI projects were delayed or canceled.

• FPI experienced heavy outflows due to global risk aversion.

• India’s key sectors (hospitality, real estate) were hit hardest, while digital services, e-commerce, and healthcare remained resilient.

III. Literature Review

• Studies highlighted regional disparities, sectoral shifts, and investor risk aversion.

• Theoretical frameworks:

  • OLI Model (Dunning): Explains FDI through ownership, location, and internalization advantages.

  • Modern Portfolio Theory (Markowitz): Explains FPI behavior through diversification and risk-return tradeoffs.

IV–V. Impact on Investment Flows (India & Global)

• Global FDI contracted by 30–40% during 2020–21.

• Emerging markets faced record capital outflows (~$83 billion).

• In India, FDI and FPI fell in 2020 but showed a strong recovery post-2021, particularly in growth sectors like IT, pharma, and logistics.

VI. Investor Reactions

• FIIs: ‘Fire-sale’ behavior in early COVID phase.

• DIIs: Conservative ‘flight to quality’ response.

• Retail investors: Initially risk-tolerant, later moved to safer stocks.

• MNC affiliates reported sharp drops in income and investment activity.

VII–VIII. Research Focus & Questions

• Analyzed FDI/FPI inflows from 2018–2023.

• Explored India’s policy responses and recovery.

• Key questions:

  • How did the pandemic affect foreign investment?

  • What policy steps were taken to counter the downturn?

IX. Government Measures

• Atmanirbhar Bharat Abhiyan: Credit support, sectoral reforms, ease of doing business.

• Labor Law Reforms: Consolidated 29 laws into 4 codes to modernize labor regulation.

• FDI Policy Adjustments:

  • Scrutiny of investments from bordering countries.

  • Sectoral FDI caps increased in defense and insurance.

X. Post-Pandemic Recovery

• FDI rebounded strongly by 2021 and remained stable through 2023.

• FPI remained volatile but improved with global liquidity.

• Tech, healthcare, and digital sectors led the investment resurgence.

• India performed better than peers like Brazil, though behind China in mega-projects.

XI. Gaps in Existing Literature

1. Lack of sector-specific FDI/FPI analysis.

2. Few longitudinal studies covering data beyond 2021.

3. Inadequate assessment of policy effectiveness.

4. Limited focus on ESG and geopolitical risks.

5. Absence of investor sentiment research.

XII. Analysis & Findings

???? Pandemic Impact

• FDI fell from $50B (2019) to $40B (2020); FPI outflows reached -$4.5B.

• Shift in investment from physical to digital sectors.

???? Post-Pandemic Trends

• FDI stabilized; FPI volatility persisted.

• Manufacturing, IT, and e-commerce sectors drove recovery.

???? Recommendations

Short-Term:

1. Improve infrastructure in smaller cities.

2. Simplify tax and compliance.

3. Strengthen trade treaties.

4. Incentivize green FDI.

5. Promote sector-specific investment zones.

Long-Term:

1. Ensure regulatory transparency.

2. Improve financial market infrastructure.

3. Invest in upskilling and education.

4. Digitize investor services and approvals.

Conclusion

The COVID-19 pandemic temporarily disrupted India’s FDI and FPI inflows, but proactive policy interventions and structural reforms have facilitated a strong recovery. While challenges remain, India has positioned itself as a resilient and reform-oriented economy. This article contributes to understanding the dynamics of international investment in times of crisis and recovery, with a focus on actionable policy and sectoral insights. This study examined the trends and recovery of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in India in the context of the COVID-19 pandemic. The findings reveal that -The pandemic initially caused a sharp decline in both FDI and FPI inflows due to global uncertainty, lockdowns, and investor risk aversion. Recovery began in 2021, driven by government reforms, increased global liquidity, and sector-specific growth in technology, healthcare, and manufacturing. FDI showed a more stable and sustained recovery, while FPI remained volatile, reflecting its sensitivity to macroeconomic and geopolitical developments. This paper contributes to the understanding of investment behavior in emerging markets during periods of crisis and recovery. It highlights the importance of responsive policy measures, sectoral strengths, and institutional readiness in attracting foreign capital during uncertain times. The study is subject to certain limitations-Limited access to real-time data for the latest fiscal year (2024–2025).The research primarily focuses on India and may not be generalizable to other developing economies.

References

[1] Department for Promotion of Industry and Internal Trade (DPIIT). (2023). FDI statistics. Ministry of Commerce and Industry, Government of India. https://dpiit.gov.in/statistics/fdi-statistics [2] India Law Offices. (2020). Changes in foreign direct investment rules in India due to COVID-19 impact. https://www.indialawoffices.com/legal-articles/changes-in-foreign-direct-investment-rules-in-india-due-to-covid19-impact [3] Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974 [4] Ministry of Finance. (2023). Economic Survey 2022–23. Government of India. https://www.indiabudget.gov.in/economicsurvey/ [5] Reserve Bank of India (RBI). (2023). Handbook of Statistics on Indian Economy. https://rbi.org.in [6] Sahoo, S., & Dash, A. (2023). Investor behavior during COVID-19: Evidence from Indian stock markets. Journal of Behavioral Finance and Economics, 14(2), 58–75. [7] Sahoo, P., & Bhunia, A. (2020). COVID-19 and the investment climate in India. Asian Development Bank Institute Working Paper Series. https://www.adb.org/publications [8] UNCTAD. (2021). World Investment Report 2021: Investing in Sustainable Recovery. United Nations Conference on Trade and Development. https://unctad.org/webflyer/world-investment-report-2021 [9] World Bank. (2021). Impact of COVID-19 on foreign investors: Global pulse survey results. https://blogs.worldbank.org/psd/impact-covid-19-foreign-investors-evidence-second-round-global-pulse-survey

Copyright

Copyright © 2025 Shweta Kumari, Dr. Narendra Singh. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.