The flurry of investment announcements by global technology majors is a ringing endorsement of the Indian market. At a time when foreign direct investment (FDI) into the country has been subdued for nearly two years, the latest commitments—Google’s $15 billion, Microsoft’s $17 billion, and Amazon’s $35 billion—offer timely reassurance. India can certainly use this capital—and a lot more. Gross FDI inflows were largely stagnant at around $71 billion in FY23 and FY24, according to CareEdge, before rising modestly to $81 billion last year. Even so, it is creditable that amid global political turbulence and a deteriorating business climate, India attracted $50 billion in inflows in the first half of the current fiscal—a 16% year-on-year increase. Globally, FDI flows have shrunk sharply. Heightened geopolitical risk, supply-chain realignment, and protectionist impulses have pushed the global FDI-to-GDP ratio down to 1.3% in 2024 from a post-pandemic high of 2.4% in 2021. The biggest beneficiaries of the China+1 strategy in recent years have been countries such as Vietnam and Mexico, as well as resource-rich economies in Africa.
Core Problem
India’s bigger worry is not inflows, but outflows. Besides profit repatriation, net FDI has been hit by private equity and venture capital firms selling down stakes and multinationals exiting subsidiaries. CareEdge estimates that net FDI has collapsed from $44 billion in FY20 to just $1 billion in FY25, though the tide appears to be turning, with net inflows of $7.6 billion in the first half of the current year. Part of the explanation lies beyond India’s control. Global capital is more cautious amid geopolitical tensions, fragmented supply chains, and rising protectionism. But India’s problems are not merely cyclical; they are structural. If India has to sustain 7.5-8% growth, it must attract far larger volumes of long-term foreign capital. For that, regulation must not just be easy but predictable. Policy stability and regulatory neutrality are critical. Frequent rule changes—often perceived as favouring domestic players—have destroyed value for foreign investors and dented confidence. Foreign investment in defence remains minuscule, reflecting unattractive terms. Allowing greater voting rights for foreign banks in private-sector banks would also revive interest in the financial sector.
Required Structural Reforms
Red tape and execution challenges on the ground continue to deter global companies. This partly explains why FDI is skewed towards services, while manufacturing remains a struggle. Setting up and running factories in India is still far harder than it needs to be. With the exception of electronics, the production-linked incentive scheme has delivered limited results, with only a small share of its promised outlay actually disbursed. Labour reforms are a welcome start, but deeper changes are essential. Despite its scale, skills, and cost advantage, India has yet to fully capitalise on the China+1 opportunity.
India must also confront the widening gap between intent and execution. While clearances are faster on paper, the ground reality across states remains uneven. Foreign firms report delays in land acquisition, environmental approvals, and local permits. Finally, India must court long-term investors, not just hot money. Pension funds, sovereign wealth funds, and global insurers bring stability, patience, and scale. They need clear contracts, credible enforcement, and dispute resolution that works. Ironically, profitability is not the problem: India offers an average return of 7.3% on inward FDI—better than many emerging and developed markets. The short point is that Apple’s success, while impressive, is not yet a trend. One swallow does not make a summer.