How India can seize the foreign investment opportunity
Reducing tariffs and non-tariff barriers — especially on manufacturing inputs — would make India more competitive, boosting the Make in India agenda
India finds itself in an intensifying global competition for foreign investment to create good jobs, upskill workers, infuse technology, and ultimately fuel its economic growth. This high-stakes race is brimming with ambitious entrants, and the complacent risk being left behind.
Fortunately, India’s appeal as an investment destination is growing according to some metrics. Last December, India’s commerce ministry reported that total foreign direct investment flows climbed to $1 trillion since April 2000. According to the government, gross foreign direct investment (FDI) rose to $55.6 billion last April-November, a 17.9% year-on-year increase over the same period. World-class companies like Apple are investing more in the country’s future. Its global share of iPhones made in India is expected to surge from 15 to 25% by 2027, according to JPMorgan and Bank of America.
Yet, look more closely, and the foreign investment picture is not all roses. Gross FDI inflows have experienced only modest growth over the last decade, while net FDI inflows reportedly hit a 12-year low in April-October 2024. What does this mean? Global businesses are not investing enough in India. And, when they do, companies seem to be pulling their profits out of the country, rather than reinvesting them. According to World Bank data, FDI as a share of India’s Gross Domestic Product (GDP) declined from 2.4% in 2020 to 0.8% in 2023.
India can, and should, be a beacon of opportunity for businesses dealing with the fog of trade wars, political instability in the West, Russia’s invasion of Ukraine, and China’s economic malaise. Yet, the numbers and the eye test suggest that India is not winning its fair share of investment from overseas firms looking to diversify their supply chains from China. Why?
The laws of supply and demand help shed some light. On the supply side, India has made significant strides in improving the ease of doing business. Sustained government investments in infrastructure, efforts to modernise bankruptcy and labour laws, and fewer retroactive taxes have made doing business easier.
At the same time, the pace of India’s reforms has slowed, leaving unresolved issues. Acquiring factory land is an expensive and complicated process filled with legal — and even extra-legal — surprises for foreign businesses, not to mention securing building approvals, certificates, and insuring against electricity and water shortages.
Companies of all sizes often remain bedevilled by the appetite of India’s tax collectors. Replacing a patchwork of state border taxes with a national Goods and Services Tax (GST) was a step in the right direction, but the government should consider additional ways to streamline and simplify GST and other taxes.
When commercial disputes arise in India, firms struggle to find speedy ways to resolve them. The government’s work to digitise processes and reduce case backlogs helps reduce uncertainty, which creates a chilling effect on investment.
Reducing tariffs and non-tariff barriers — especially on manufacturing inputs — would make India more competitive, boosting the Make in India agenda. Producing higher-value goods requires inputs that crisscross national borders. Tariffs increase input costs and hamper labour and manufacturing competitiveness. The recent duty reductions on materials and equipment used for making lithium-ion batteries should strengthen the country’s emerging electric vehicle industry.
Despite a population roughly 14 times smaller, Vietnam is making progress toward becoming a global manufacturing hub. Manufacturing goods for export will require further openness to imports, especially in sectors where India enjoys competitive advantages. At the same time, continuing to cultivate India’s abiding strength in services sector exports is important
Of course, in a federalised democracy, mustering the political will to enact difficult, far-reaching investment reforms is easier said than done. But following a string of victories in state elections, the ruling government is showing signs of resolve. The Union budget announced a senior-level committee that will review non-financial sector regulations, permissions, licences, and certifications. “Rolling back regulation significantly,” as the finance ministry’s pre-budget survey of the economy suggested, would benefit Indian and overseas companies alike–and, most of all, homegrown micro, small and medium enterprises (MSMEs).
Such reforms are needed considering the demand-side challenges facing India. The private sector is not creating enough jobs. So, incomes and wages are struggling to support broad-based domestic consumption. Workers need more relief like the recent middle-class tax reductions. Tepid local demand means factory capacity can go underutilised, dampening the case for new investments, in the absence of a more compelling case for manufacturing-to-export.
In weighing investments in India versus Southeast Asian countries, Mexico, Poland, or, yes, China, businesses are assessing whether the ruling government can adopt new ideas in its 11th year. To help India become a developed economy by 2047, now is the time for an updated roadmap to attract job-creating foreign investment.
Atman M Trivedi is partner and South Asia Practice lead at the DGA-Albright Stonebridge Group and a non-resident senior fellow at the Atlantic Council’s South Asia Center. The views expressed are personal
