The Core Report

#906 Why India’s FDI Is Falling Despite Its Growth Story | Govindraj Ethiraj | The Core Report

46 min

India's net foreign direct investment (FDI) has turned negative in recent years, with a net outflow of $15 billion in FY25-26, despite strong gross FDI inflows. Experts Sudeep Kapadia and Keitan Dalal discuss the nuanced reality behind the headlines, highlighting that while the regulatory architecture is welcoming, on-ground issues like land availability, high logistics costs, and bureaucratic friction hinder large-scale manufacturing investments. They emphasize the need for a pro-business political narrative, sector-focused strategies, and simpler tax regimes to attract long-term, strategic FDI.

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✨ Key Takeaways

1

India's net FDI turned negative in FY25-26 at -$15 billion, with gross FDI stagnating over five years; about 50% of recent FDI is via secondary buyouts by private equity, not primary capital for manufacturing.
2

Key on-ground barriers include scarcity of large, clean-title land parcels, high logistics costs (11-12% of GDP vs China's 8%), and a weak ecosystem for industrial clusters (India rated 5 vs China's 10 on cluster maturity index).
3

Tax friction remains a concern: the Vodafone and Tiger Global cases have eroded trust, while the sunset of the concessional 5% withholding tax on external borrowings adds costs. Experts advocate for a simple, permanent 10% tax rate for foreign investors to eliminate treaty dependency.
4

Political signaling matters: India's reluctance to publicly court business leaders contrasts with Trump's US, where a clear pro-business narrative is attracting capital back home. A dedicated 'Minister for FDI' is proposed to coordinate cross-ministerial efforts.
5

To reverse the trend, experts suggest focusing on 4-5 high-potential sectors (like green energy, semiconductors) and addressing soft issues such as judicial delays (64 lakh cases pending in high courts) and skill development to improve productivity.

💬 Notable Quotes

"The mindset should be not to come and say, 'What wrong you did this summer.' The mindset should be to say, 'What frictions I can remove so that your business can prosper even better than it is today.'” — Sudeep Kapadia"
"Ease of doing business, unfortunately, sometimes the way the bureaucracy approaches it, I think the net result is reducing *unease* as opposed to creating ease.” — Keitan Dalal"
"Why would political leaders go to foreign countries, but businesses don't go with them? I think we should change it from our narrative point of view.” — Sudeep Kapadia"