Opinion India’s FDI challenge: In a world of shrinking investment, capital will come where there is confidence and clarity
India’s fundamentals — demographics, digital depth, and democratic stability —are attractive
than many, finds itself caught in the crosscurrents of this global rebalancing and its FDI experience mirrors the global trend, albeit with unique twists. 
-
Share -
-
-
The global economy is witnessing a seismic shift in foreign direct investment (FDI) flows, with emerging markets and developing economies (EMDEs) bearing the brunt of the decline. According to the World Bank (WB), FDI inflows to EMDEs have weakened steadily as a share of their GDP since the global financial crisis, plummeting to around 2 per cent of GDP in recent years. To put this in absolute terms, EMDEs received $435 billion in FDI in 2023, the lowest level since 2005. During the heydays of the 2000s, FDI inflows to EMDEs had jumped five times in nominal terms, equivalent to about 5 per cent of their GDP in the typical economy at the peak in 2008. But, with the world seemingly shutting down for business with the imposition of barriers on trade as well as investment flows and cross-border investment, trade agreements have slowed sharply. Between 2010 and 2024, just 380 new investment treaties came into force, less than half of the 870-odd treaties between 2000 and 2009. Thus, the global FDI slowdown is no longer a blip, but is now morphing into a persistent trend, dragged by structural headwinds, geopolitical uncertainty, policy inertia and regime shifts.
India, while better placed than many, finds itself caught in the crosscurrents of this global rebalancing and its FDI experience mirrors the global trend, albeit with unique twists. While gross FDI inflows rose to a robust $81 billion in FY25 — a 14 per cent increase, net FDI plunged 96 per cent year-on-year to just $0.35 billion, its lowest level in nearly two decades. This was due to rising repatriations, booming outward FDI and low reinvestment of profits.
Globally, services, construction, and clean energy are dominating new greenfield FDI, overtaking traditional manufacturing. In India too, manufacturing and financial services remain strongholds, but there’s rising interest in energy and communication. Also, FDI remains geographically skewed — Maharashtra, Karnataka, and Tamil Nadu have improved their standings, while Gujarat and Delhi have seen sharp declines.
With a global reset in policy making and changing rules of engagement, there is a need for a comprehensive framework enabling policy makers to insert India into the international economy, and use investments to diversify exports, create more and better jobs and thus improve the standards of living of citizens. India must adopt a proactive strategy that attracts foreign investment and maximises its benefits.
According to the WB, FDI inflows have a positive impact on economic output in EMDEs, but the magnitude of the impact is conditional. In the average EMDE, a 10 per cent increase in FDI inflows is estimated to increase GDP by 0.3 per cent after three years. However, the effect is much stronger — up to 0.8 per cent – in economies with greater trade openness, stronger institutions, better human capital development, and lower informality.
India’s path forward under these circumstances is rather obvious. By creating a favourable investment climate and opening up to trade further, India can unlock its growth potential and attract FDI that can drive economic development. There are several things the country can do.
First, with its eyes trained on raising its competitive advantage, India must continue to move away from the erstwhile scepticism over trade deals towards signing deals with willing and more trade-friendly countries and blocks. That, along with a probable US trade deal, could be the icing on the cake to top off the flurry of FTAs and early-harvest deals, signed with Australia, the UAE, and the UK lately. The latest trends show that firms want to locate FDI only in countries that are geopolitically aligned with the country of origin and FTAs could reinforce that. The WB avers that an investment treaty tends to raise FDI flows between signatory states by more than 40 per cent. Also, economies with higher trade integration receive more FDI inflows — an extra 0.6 per cent for each percentage-point increase in the trade-to-GDP ratio and an extra 0.3 per cent for each percentage point increase in value-added trade as a share of exports, a measure of participation in global value chains.
Second, as highlighted by the Economic Survey, it must take deregulation in right earnest and move quickly on to ideas such as the Deregulation Commission. Cutting red tape and enforcing contracts swiftly are a prerequisite. Reducing regulatory burden certainly makes it easier for firms to invest in and improve upon the efficiency of investment.
Third, logistics and trade bottlenecks should be addressed with alacrity. Trade-facilitation reforms, including digitisation and other inefficiencies that raise clearance times at ports etc must be prioritised. For example, the Kolkata port has the highest import clearance time across all seaports, averaging over 140 hours.
Fourth, in an increasingly globalised world, characterised by rising levels of international production, trade, competition and interaction, the need to “connect the dots” between international rulemaking, domestic reforms, ministries and agencies becomes increasingly evident. The Centre, states and all related agencies must work in unison.
Last, but not the least, states must take the lead in creating a conducive framework. FDI into states is generally influenced by the ease of doing business, government support in land acquisition, logistics, availability of infrastructure, and requisite manpower. As projects are usually established within states, more effort is required at their level to attract FDI.
most read
However, investment policy is dynamic – there is no “one size fits all” solution. An approach that works within one state for one type of investment at one particular time may need to be continually revised, adapted, and improved upon to take into account the underlying dynamics, the transformation of different types of business, and the circumstances.
India’s fundamentals — demographics, digital depth, and democratic stability — are attractive. But in a world of shrinking investment appetite and rising competition, capital will chase clarity and confidence. The ball is in India’s court. It’s time to not just invite investment, but to deserve it.
The writer is group chief economist, L&T. Views are personal
-
Share
-
-
-
Share
