The geopolitical upheavals since the launch of Operation Epic Fury on February 28 have brought out India’s stark dependency on fuel imports, critical supply chain raw materials, and the “fickleness” of private capital. To be sure, this isn’t the first time that the world (and India) has witnessed this state of affairs as evidenced by numerous such events — both related to energy security as well as financial stability — over the last few decades. Moreover, to India’s advantage, the macroeconomic fundamentals are in far better shape than on the cusp of all such past global crises. Nevertheless, India needs to confront the myriad economic challenges precipitated by this latest disruption with short- as well as long-term measures.
‘FDI trajectory: Gross FDI since 2021 has remained steady and crossed $80 billion in three of the last five years (including FY26). However, net FDI in FY26 was a mere $6.3 billion, indicating a steadily increasing outflow from exits of previous investments and outbound FDI by Indian companies. While successful and profitable exits by foreign investors are actually a positive factor, the increasing trajectory of outbound FDI could signal derisking impulses of ultra-high net worth individuals and Indian corporates.
A sector-wise break-up reveals that on a cumulative basis in this period, computer software, telecommunications, and services have dominated (44% of gross FDI). While this trend is a recognition of India’s services talent, there is an urgent need (and opportunity) to replicate and broad-base recent successes in mobile and semiconductor sectors. A close look at the utilisation of performance-linked incentive schemes reveals that while schemes for electronics and semiconductors have been successful, disbursement for green energy and rare earths have lagged. Thus, a laser-focused approach with time-bound improvements based on feedback from the stakeholders concerned is required to attract and accelerate FDI in critical areas of the economy. A responsible nodal agency like DPIIT with experts should be tasked with monitoring and taking corrective steps on a real-time basis.
Bridging Capital Chasm
National Monetisation Pipeline (NMP): NMP 1.0, launched in FY22 with an outlay of `6 lakh crore, has met with great success (89% of target realised). NMP 2.0 (FY26-30) has an even more ambitious target of `16.72 lakh crore across sectors such as highways, power, railways, mining, telecom and aviation. Here again, a concentrated approach by a nodal agency tasked with ensuring completing milestones in a time-bound manner will ensure much needed capital in the economy is steadily injected under NMP 2.0.
MSME credit expansion: Contrary to popular perception, credit growth in the MSME sector has witnessed a healthy trend (from Rs 28.5 lakh crore in FY20 to `67.6 lakh crore in FY25 with a CAGR of 17%). This has been facilitated by an even stronger CAGR of 32% in lending by the non-banking financial company (NBFC) sector through digital channels. Hearteningly, delinquency in FY25 was at a record low of 1.87%, denoting strong repayment discipline. Given that MSMEs are at the heart of India’s economic engine, regulatory processes should continue to facilitate quality growth in MSME credit.
Tax-GDP trajectory: This is another area where, contrary to popular perception, the combined tax-GDP ratio (Centre and states) in India has been climbing steadily (from 16% in FY15 to 19% in FY25) on an ever-increasing GDP base. Moreover, despite a prominent sector like agriculture remaining exempt from tax, India’s current (combined) tax-GDP ratio compares favourably with its ASEAN peers. Clearly, the digitisation and simplification initiatives in the last decade have borne fruit and time has now come for the next big leap in tax policy transformation, primarily aimed at attracting capital investments.
Fiscal Architecture
Tax policy enablers: Currently, dividends, interest, and capital gains earned by sovereign wealth funds and pension funds on “eligible” investments in infrastructure and NBFCs made before March 31, 2030, are tax-exempt. Restricting this exemption to “eligible” sectors crimps similar investment opportunities in other equally important areas which also need patient and long-term capital. Moreover, these entities are tax-exempt in their home countries so any tax in India results in a higher hurdle rate of return for such investors. Hence, it is desirable to open up the exemption for all sectors and extend the time period of investment till March 31, 2047, to provide long-term stability and certainty.
Interest on bonds listed on a recognised stock exchange in IFSC: Currently, a tax rate of 9% (plus surcharge and cess) applies to interest paid to a non-resident purchaser of bonds listed on a recognised stock exchange in IFSC. In order to incentivise such bond listings in IFSC and also attract large-scale bond investments by foreign investors, such interest should be made tax-exempt.
Reduced tax rate on interest on external commercial borrowings (ECBs) by Indian entities: A reduced tax rate of 5% on such interest should be applicable on ECBs regardless of end use. This will significantly enhance the inflow of foreign currency funds and also make the process easier and frictionless.
Tax exemption for interest income on municipal bonds: With increasing focus and empowerment of local municipalities to facilitate investments and renewal of urban areas, interest on such bonds should be exempt for foreign investors to attract large pools of committed institutional capital in a critical area of the economy.
Enabling seamless amortisation on pre-set up expenses for capital projects: A frictionless and litigation-free mechanism should be provided to allow amortisation of all expenses incurred in pre-set up stage of a capital project. This will remove an insidious tax cost currently incurred due to a severely restricted regime of amortisation.
There is a dire need to transform mindset across layers of government bureaucracy, especially at the state and local governance levels. Presently, the notorious “inspection raj” keeps resurfacing through interactions with multiple government agencies at the local level. A political clarion call for positive action is required to exhort all levels of bureaucracy to reframe the question — from “let me check what wrong have you committed this summer” to “let me help remove any regulatory or tax friction that you may be encountering to make your job of running your business smoothly in all seasons”.
By Sudhir Kapadia, Senior board advisor and former President, Bombay Chamber of Commerce and Industry
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.