From Promise to Potential: How India Can Lead in the Evolving FDI Landscape

The global environment for foreign direct investment (FDI) is experiencing a profound transformation, marked by slower growth, economic fragmentation and rising geopolitical tensions.

Emerging markets and developing economies (EMDEs), once considered the powerhouses of global investment, now face a stark reality, FDI inflows to these nations fell to just $435 billion in 2023, their lowest in nearly two decades.

This decline has brought FDI’s share of GDP in these economies down from around five per cent in the early 2000s to only two per cent today. Far from being a short-term fluctuation, these figures point to deeper structural issues facing the global investment system.

This shift is taking place in an era of declining multilateral cooperation, fewer bilateral investment treaties and a retreat from globalisation. While over 870 investment treaties were signed between 2000 and 2010, far fewer  have been concluded since 2010. Rising protectionism and economic nationalism have disrupted global supply chains and deterred cross-border investment.

Yet amid these headwinds, India stands as a notable exception, offering a rare combination of economic resilience, demographic strength and digital momentum.

Even as the world trades and invests less, India continues to position itself as a beacon of opportunity in an otherwise uncertain investment climate.

The importance of FDI cannot be overstated. For EMDEs, it is a key source of external finance, infrastructure development, job creation and productivity enhancement.

Research shows that a ten per cent increase in FDI inflows can raise GDP by 0.3 per cent over three years and the impact is especially strong in countries with good governance, openness, skilled labour and lower informality. As such, a decline in FDI represents not only a lost opportunity but also a risk to future development.

India, however, remains one of the few EMDEs bucking this trend, as evidenced by its steady gross inflows and growing investor interest in high-potential sectors.

In FY25, India attracted gross FDI inflows of $81 billion, a commendable figure that underscores sustained global confidence in the country’s long-term prospects.

This reflects not only India’s large and growing consumer market, but also its expanding digital economy, reforms in key sectors and increasing integration with global supply chains.

Although net FDI declined sharply to $353 million due to higher profit repatriation, outward investment by Indian firms and cautious reinvestment by some investors, these trends also reveal a maturing economy with companies increasingly investing abroad and foreign investors realising returns on their earlier commitments.

This shift in net flows, while important, should be seen in context. The ability of Indian companies to invest globally indicates rising competitiveness and confidence.

Simultaneously, many foreign firms are participating in India’s capital markets via IPOs, a healthy sign of the growing sophistication of India’s financial ecosystem.

As such, India must now work to convert short-term capital volatility into long-term investor retention by refining its policy framework and addressing structural challenges.

FDI sectoral trends in India, mirror global dynamics. Worldwide, new greenfield investments are moving towards services, construction and clean energy, and away from traditional manufacturing.

India has been a beneficiary of this realignment. Renewable energy, digital infrastructure and communications have emerged as key focus areas, attracting growing investor interest.

These sectors align with India’s own development priorities, including its ambitious climate goals, Digital India initiative and smart infrastructure projects. While manufacturing and financial services remain important, the future of FDI lies increasingly in sectors that blend technology, sustainability and service delivery.

However, India’s FDI story also highlights regional differences. States like Maharashtra, Karnataka and Tamil Nadu have emerged as consistent top performers, thanks to effective governance, quality infrastructure and forward-looking policies.

These states exemplify how subnational leadership can drive investment outcomes. Maharashtra alone attracts a significant share of the country’s FDI, while Karnataka’s tech ecosystem and Tamil Nadu’s industrial base offer robust platforms for investor engagement.

Meanwhile, states like Gujarat and Delhi, though historically strong, have experienced modest declines, underscoring the need for continual policy adaptation and competitiveness at the state level.

To sustain and enhance its attractiveness, India must now refine its investment framework. First, greater trade integration is essential.

India’s more proactive stance on free trade agreements (FTAs) in recent years marks a strategic shift. New agreements with Australia, the UAE and the UK offer fresh avenues for trade and investment.

Continued negotiations with the European Union and the United States could further integrate India into global value chains and attract higher-quality FDI.

Evidence suggests that FTAs, when combined with reduced trade barriers and regulatory alignment, can significantly boost investor confidence and cross-border capital flows.

Second, regulatory reforms must continue. Simplifying tax and compliance procedures, digitising government services and improving the ease of doing business are crucial.

The proposed Deregulation Commission could serve as a centralised mechanism to streamline processes and eliminate inefficiencies.

Improved contract enforcement and dispute resolution mechanisms would also go a long way in enhancing investor trust. The emphasis should be on creating a predictable, transparent and investor-friendly regulatory environment.

Third, infrastructure upgrades must be prioritised. While India has made notable progress through initiatives such as Gati Shakti and the Bharatmala programme, trade logistics remain a bottleneck.

Port inefficiencies, cumbersome customs procedures and underdeveloped hinterland connectivity impede the smooth movement of goods and services.

A concerted push to modernise infrastructure, invest in multimodal logistics and digitise trade processes can position India as a globally competitive manufacturing and export hub.

Fourth, coherence in policymaking is critical. In a complex and interconnected world, inter-agency coordination is vital. Ministries, regulatory authorities and state governments must work in sync to offer clarity and certainty to investors.

Aligning domestic standards with global norms will not only facilitate smoother investment but also help India emerge as a key player in resilient supply chains. Greater collaboration and data sharing across agencies can help identify bottlenecks and implement targeted reforms.

Fifth, states must play a larger role. Since most investment projects are state-based, subnational policies matter immensely.

Streamlined land acquisition, single-window clearances, skilled manpower and infrastructure support are all state-level deliverables that influence investor decisions.

States that demonstrate policy stability, administrative responsiveness and a commitment to continuous improvement are more likely to attract long-term FDI. Tools like the Business Reform Action Plan and state-level investment promotion agencies can help institutionalise best practices.

Importantly, India’s investment policy must remain dynamic. No single model will work across sectors or time periods. With the rapid evolution of technologies, investor preferences and geopolitical alignments, India must continuously adapt.

A feedback loop of evaluation, consultation and policy adjustment is essential. Encouraging public-private dialogue, engaging with industry bodies and leveraging academic expertise will be critical in keeping reforms relevant and forward-looking.

India’s fundamentals remain its strongest assets. Its youthful demographic profile, expanding middle class, deepening digital transformation and democratic institutions present a compelling case for investment.

Global investors continue to see India as a destination of choice, even as they become more selective with capital allocation. By enhancing administrative efficiency, maintaining macroeconomic stability and deepening international partnerships, India can not only weather the global FDI downturn but emerge stronger from it.

Ultimately, the challenge before India is one of execution. The opportunity exists, the interest is real and the fundamentals are strong. Now, the focus must shift to implementation.

India must demonstrate its readiness to convert potential into performance, ensuring that foreign investors not only arrive but also choose to stay, grow and reinvest.

With bold reforms, coordinated action and a sustained commitment to openness, India can set the benchmark for how emerging economies navigate the complex world of international investment.

In this rebalanced global order, India has a unique opportunity, not just to attract foreign capital, but to lead by example. The moment is ripe. The world is watching. And the ball, indeed, is in India’s court.