NEW DELHI: Foreign direct investment (FDI), both inflows as well as outflows, declined sharply during the first quarter of the current financial year, reflecting the growing pessimism among companies that are shying away from investment.

The fall in inflows into the country was, however, more significant as companies invested $5.6 billion, net of disinvestment and repatriation, during April-June, 2012, compared to $12.2 billion a year ago, data released by the Reserve Bank of India on Friday showed (see table).

While repatriation of profits and disinvestment too suffered in the wake of weak results, on a gross basis FDI flows into India were estimated at $7.7 billion in the first quarter of the current financial year as against $16.3 billion in April-June 2011, a fall of nearly 53%. Outward investment by India Inc has also decreased as companies are shying away from setting up new plants and are acquiring new outfits overseas to play it safe amid a weak economic environment. Demand, too, has dwindled as individuals are holding back purchases and companies have cut back on discretionary expenses.

The government is hoping to reverse the falling trend by liberalizing the norms for sectors such as multi-brand retail, where investment by overseas chains is banned at present, as well as in insurance and banking, where legislative changes are pending. In addition, the government is hoping that some high-profile investment by global players such as Swedish furniture and home accessories firm IKEA and footwear maker Paver’s England in the single-brand retail segment may swing sentiments.

Poor inflows and a higher trade deficit have impacted the overall balance of payment’s picture. While policymakers can draw some comfort from a lower trade deficit in the first quarter, there was little to cheer on the foreign investment front.

On the portfolio investment side, there was a net outflow as there were few fund-raising initiatives via the depository receipts route and FIIs too withdrew from the Indian markets during April-June in the aftermath of the general anti-avoidance rules ( GAAR ) and Vodafone-related announcements by Pranab Mukherjee . There was net portfolio outflow $1.8 billion during April-June this year, compared to inflows of $2.5 billion a year ago.

Overall foreign investment — which includes FDI and portfolio flows — however, remained in positive terrain with inflows estimated to have declined nearly 83% to $2 billion, compared to $11.6 billion in April-June 2011. So far this year, however, FII investment is at record levels with net investment in equities estimated at $10.7 billion till early August.

“Even the heady days of 2007 or 2010 didn’t see such inflows over the same period. This accounts for 62% of all flows into Asia. It seems FIIs prefer India to almost any other Asian market,” BNP Paribas said in a research note on Friday.