The government has consistently held that India remains an attractive destination for foreign direct investments (FDI) as it is the world’s fastest-growing large economy with unmatched market growth opportunities. Last fiscal till February, gross inflows were up year-on-year by 18% to $88.3 billion and expected to top $90 billion “with a northward bias” for the fiscal as a whole, according to Chief Economic Advisor V Anantha Nageswaran.
The grounds for the optimism are based on the fact that in FY26 till February, FDI inflows were also higher in net terms—rising four-fold to $6.3 billion—as gross inflows rose despite elevated levels of profits repatriated and sales of equity by foreign companies and overseas investments made by Indian companies. Net FDI in February turned positive after remaining negative during the previous six months as gross inflows were higher amidst lower repatriations and outbound FDI.
Service-Led Momentum
This good news stems from an uptick in investments in various services, including financial, information technology, and manufacturing which accounted for more than two-thirds of total equity inflows during FY26 till February. Japanese investors have been major investors in financial services with the Mitsubishi UFJ Financial Group making a $4.4-billion investment in Shriram Finance as part of a broader $8.8-billion FDI by Japan Inc in India last year.
Geopolitical factors are also responsible for their heightened interest as they are investing more in India than China for two consecutive years, according to the Japan External Trade Organization. Google has also just broken ground on its proposed artificial intelligence (AI) hub in Andhra Pradesh with cumulative investments of $15 billion—the largest FDI in India’s digital infrastructural space.
While all of this is to be welcomed, the warrant for concern is that rising gross inflows cannot be sustained amidst global headwinds. India’s prospects for attracting FDI are not bright in a milieu when America First sort of policies influence global investment flows that are already beginning to fragment along geopolitical lines, broadly into US-centric and Sino-centric blocs. Overall inflows are likely to remain subdued despite a mad ongoing rush for mega projects in data centres and semiconductors that are highly concentrated geographically.
At the Express Adda on Tuesday, global investment analyst Ruchir Sharma argued that India will not be a beneficiary of such investments because of the perception that it is a “loser” in the AI context. That’s something that is helping America to continue to get away with. India, unfortunately, is not seen to have any AI plays at this stage although it is in an early stage of adoption, he added.
AI Divide
How India leverages the opportunities thrown up by global fragmentation has a major bearing on its drive to attract FDI. It can certainly further its AI ambitions by vastly stepping up research and development which is just 0.6% of GDP, while the biggest beneficiaries of the AI boom like Taiwan and South Korea spend about 4-5% of GDP. The need is for improvements in its FDI regime. Sharma also highlighted how India is “still a very difficult place to do business on the ground. Whether it is the regulatory framework, investigative agencies, it is a difficult place”. A non-adversarial and transparent regime that doesn’t resort to retrospective taxation will also send the right signals to prospective investors. Above all, there is a need for big-ticket land and labour reforms.