India's Investment Climate and Reforms

• 24 Jul 2025

This editorial is based on “India’s FDI challenge: In a world of shrinking investment, capital will come where there is confidence and clarity” which was published in The Indian Express on 21/07/2025. The article brings into picture the structural decline in global FDI to emerging markets, highlighting how India’s net FDI has collapsed despite gross inflows rising—underscoring the need for deeper reforms, trade integration, and policy coordination to truly deserve investment.

For Prelims: FDI flow to India, Special Economic Zones, Digital India initiative, Production-Linked Incentive (PLI) Scheme , Make in India, India-UAE Comprehensive Economic Cooperation Agreement, Digital Personal Data Protection Act , World Bank’s Logistics Performance Index 

For Mains: Key Factors Driving India as a Global Investment Hotspot, Hurdles Limiting India’s Ability to Attract Sustained Foreign Investment.  

Global FDI flows to emerging markets have plummeted from 5% of GDP in 2008 to just 2% today, marking a structural decline rather than a temporary blip. India mirrors this paradox—while gross FDI surged 14% to $81 billion in FY25, net FDI collapsed 96% to merely $0.35 billion due to rising repatriations. With investment decisions increasingly driven by geopolitical alignment and trade agreements, India's recent FTA momentum positions it strategically for the global reset. The imperative is clear: India must move beyond inviting investment to actually deserving it through deregulation, trade integration, and coordinated policy action. 

What are the Key Factors Driving India as a Global Investment Hotspot? 

• Macroeconomic Fundamentals 
  • Robust Economic Growth Amid Geo-economic Uncertainty: Despite global headwinds and economic slowdown, India's rapid economic growth remains a cornerstone of its appeal for global investors.  
    • India’s real GDP was estimated to grow by 6.5% in FY 2024-25. This growth trajectory is bolstered by expanding sectors like manufacturing, services, and construction.  
    • IMF data projects India's GDP to reach $4.187 trillion in 2025, surpassing Japan to become the fourth largest economy, reflecting its robust economic standing. 
  • Burgeoning Demographic Dividend: India’s young and dynamic workforce offers immense potential for foreign investors looking for long-term growth opportunities. 
    • India's working age population between 15-59 years is expected to increase to 64.9% by 2036. 
      • The median age of 28.4 years ensures a steady supply of skilled labor, making India an attractive manufacturing hub.  
    • This demographic advantage places India in a prime position for FDI inflows, particularly in labor-intensive sectors like manufacturing and technology. 
  • Enhanced Infrastructure and Logistics: India’s continued investment in infrastructure, particularly in transport and logistics, is a key factor attracting FDI.  
    • The National Infrastructure Pipeline (NIP) and the PM Gati Shakti initiative are transforming India’s connectivity, facilitating smoother supply chain operations.  
    • With about 280 operational Special Economic Zones (SEZs) and India’s position as the third-largest domestic aviation market, infrastructure development enhances the ease of doing business. 
    • Additionally, the government’s efforts in strengthening connectivity through the Sagarmala and Bharatmala initiatives are enhancing India’s logistics infrastructure. 
• Policy and Regulatory Reforms 
  • Government Reforms and Policy Support: India has made significant strides in liberalizing its FDI policies, ensuring an investor-friendly environment. 
    • The “Make in India” initiative and the Production-Linked Incentive (PLI) Scheme are key drivers, creating favorable conditions for foreign investments, particularly in manufacturing.  
    • Today, 100% foreign direct investment is permitted under the automatic route in multiple high-impact sectors, signaling both economic confidence and strategic ambition. 
    • In FY 2024-25, India saw a 14% rise in FDI inflows, amounting to USD 81 billion, highlighting the success of these reforms in attracting global capital. 
  • Rising Focus on Green Transition: Sectors such as renewable energy, and electric mobility are witnessing rising global interest, contributing significantly to FDI growth.  
    • India’s renewable energy sector alone has attracted over USD 6 billion in FDI from 2020 to 2023, driven by favorable policies and incentives.  
    • The country is also becoming a hub for electric vehicle (EV) investments, with companies like Hyundai and Foxconn committing substantial capital to expand production. 
  • Global Hub for Health and Pharma: India’s healthcare and pharmaceutical sectors have become major FDI attractors due to a combination of strong growth prospects and government-backed incentives.  
    • In FY24, hospitals in India garnered a substantial USD 1.50 billion in FDI, representing half of all healthcare FDI.  
    • Reforms like allowing 100% FDI in the greenfield pharmaceutical sector and facilitating research and development investments have made India an attractive destination for global pharma companies.  
  • Digital Transformation and Technological Advancements: India’s rapid digitalization is transforming it into a global tech powerhouse, attracting investments in sectors such as fintech, e-commerce, and AI. 
    • The government’s Digital India initiative has enabled significant strides in tech adoption, with India to host over 900 million internet users in 2025.  
    • The country’s digital economy contributed 11.74% to GDP in FY 2022-23, reflecting its vast potential for tech-based investments.  
    • Major global tech firms like Amazon and Microsoft are heavily investing in India’s digital infrastructure, capitalizing on the growing demand for online services and digital solutions. The rise of digital payment systems like UPI further cements India’s position as a digital economy leader. 
• Strategic and Geopolitical Positioning 
  • Strategic Geographic Location: India’s strategic location at the crossroads of Asia provides unparalleled access to a vast consumer market of over 3.2 billion people.  
    • As a key player in the South Asian, Middle Eastern, and African markets, India serves as a gateway for businesses seeking to diversify supply chains. 
    • Recent agreements like the India-UAE Comprehensive Economic Cooperation Agreement (CEPA) underscore India's growing importance in global trade.

What Hurdles are Limiting India’s Ability to Attract Sustained Foreign Investment? 

• Regulatory Bottlenecks and Policy Uncertainty: Despite significant reforms, India's regulatory framework still faces criticism for being complex and slow, which discourages foreign investors.  
  • Regulatory uncertainties, especially in sectors like digital laws and labor laws, increase investment risks. 
  • For instance, Draft rules for Digital Personal Data Protection Act (DPDPA), 2023 were released for public consultation in early 2025 but have not been finalized as of mid-2025, leaving businesses in a "compliance limbo" with unclear requirements. 
    • The 2025 Union Budget introduced enhanced and more frequent Registrar of Companies (RoC) and tax filing requirements, making compliance processes more demanding.  
• Infrastructure and Logistics Challenges: While India’s infrastructure has improved, it still lags behind in certain areas, particularly logistics and rural connectivity, which hampers ease of doing business. 
  • Poor road quality, congestion at ports, and slow rail networks significantly increase operational costs for businesses. 
  • The World Bank’s Logistics Performance Index ranked India 38th in 2023, far behind other emerging economies like China, making it less attractive for time-sensitive investments.  
    • As of 2025, India's logistics cost stands at approximately 14% of GDP—much higher than advanced economies. (e.g., U.S. at 7%, Germany at 8%). 
  • Such inefficiencies in logistics affect industries like manufacturing and e-commerce, further deterring investment. 
• Skilled Labor Shortages: India’s large labor force is an advantage, but a lack of advanced skills in certain sectors, especially in technology and high-end manufacturing, remains a challenge.  
  • While the country has a youthful workforce, many investors face difficulties in finding skilled labor to meet global standards, limiting India's potential in tech-heavy sectors.  
  • According to a report by Nasscom-Zinnov, India is projected to face a shortage of 14-19 lakh tech professionals by 2026.  
    • This skills gap deters investors in sectors like AI and robotics, which require specialized expertise. 
• Geopolitical Risks: Ongoing geopolitical issues, such as tensions with neighboring countries like Pakistan with the recent Pahalgam Attack, can create uncertainty around long-term investments.  
  • The rise in protectionist policies in major markets like the U.S. and China has compounded this issue, affecting global companies' investment strategies. 
  • Due to this, over 30% of global firms now cite trade and tariff policies as their top business concern—triple the level from early 2025. 
    • For example, the recent increase in tariffs on Chinese goods has made foreign investors cautious about aligning with India’s trade policies. 
• Land Acquisition and Environmental Approvals: Land acquisition issues continue to be a significant deterrent for foreign investments in infrastructure and manufacturing projects.  
  • Despite the efforts of the government to streamline the process, obtaining land for large-scale projects still faces legal and social challenges. 
  • Recent data suggest that, nearly 700 national highway projects were officially delayed, with 35% of these delays attributed to prolonged land acquisition disputes 
• Competition from Other Emerging Markets: India faces stiff competition from other emerging markets like Vietnam, Bangladesh, and Mexico, which offer lower labor costs, simpler regulations, and more favorable business environments.  
  • As its regulatory framework remains cumbersome in certain areas, these competitors are increasingly attracting FDI that India might otherwise have received.  
  • For instance, Vietnam’s FDI growth rate has outpaced India’s in 2025, with a first-half surge of over 32%, fueled by high-value projects 
• Slow Pace of Digital and Technological Adaptation: While India is making strides in digitalization, the pace of technological adoption remains uneven, particularly in rural areas and small businesses. 
  • The digital divide hampers the country's potential to attract high-tech investments, particularly in sectors like e-commerce and fintech. 
  • Recent studies show that 67% of Indian MSMEs are “digitally equipped,” using tools like ERP, CRM, cloud, and digital payments.  
    • But, integration of advanced technologies (AI, IoT, analytics) is limited, with most adoption still focused on payment, communication, and basic software 
  • This disparity limits the overall investment potential, especially for businesses targeting non-urban markets. 

How can India Transform its Investment ecosystem to Align with Global Trends and Domestic Priorities? 

• Streamline Regulatory Processes: India can significantly enhance investment by simplifying and expediting regulatory procedures.  
  • This includes accelerating approvals for land acquisition, environmental clearances, and construction permits, which are often bottlenecks for large-scale projects.  
  • The government can introduce time-bound regulatory frameworks to ensure consistency in approvals, minimizing bureaucratic delays.  
    • Additionally, setting up dedicated task forces for fast-tracking critical infrastructure and manufacturing projects can create a more investor-friendly ecosystem. 
• Strengthen Legal and Contract Enforcement: Improving the enforcement of contracts is essential for fostering investor confidence.  
  • India can establish specialized commercial courts and fast-track legal processes for disputes related to business contracts.  
  • Enhancing the efficiency of dispute resolution mechanisms and reducing judicial delays would increase India’s attractiveness as a destination for long-term investments. 
    • A well-functioning legal framework ensures that investors can rely on the stability of their agreements, minimizing perceived risks. 
• Enhanced Focus on Infrastructure Development: To attract more foreign investment, India must accelerate investments in critical infrastructure—especially logistics, transportation, and digital networks.  
  • Expanding and modernizing ports, highways, and rail systems to enhance connectivity, along with creating dedicated industrial corridors, can improve operational efficiency.  
  • Additionally, focusing on rural infrastructure and improving last-mile connectivity will enable companies to expand into untapped markets, boosting domestic and international investment prospects. 
• Develop a Skilled Workforce Through Targeted Education: India can address the skills gap by focusing on targeted skill development programs aligned with the needs of high-growth sectors like AI, biotech, and advanced manufacturing.  
  • Partnering with industry leaders to create specialized vocational training and certification programs will better prepare India’s workforce for global competition. 
  • Encouraging private-public partnerships (PPPs) in higher education, along with the promotion of research and development (R&D) institutions, will position India as a talent hub for emerging industries. 
• Simplify and Stabilize the Tax System: A streamlined, predictable, and transparent tax system is essential for enhancing India's investment appeal.  
  • India can introduce more tax incentives and exemptions for foreign investors, such as tax holidays in key sectors, and further simplify the Goods and Services Tax (GST) structure to reduce compliance costs.  
  • Stabilizing tax policies and creating a clear framework for dispute resolution in tax matters will ensure that businesses feel confident about the long-term fiscal environment. 
• Promote Green and Sustainable Investments: India can position itself as a leader in the green economy by creating attractive incentives for renewable energy and sustainability-focused investments. 
  • Introducing more green bonds, tax benefits for clean technology companies, and easing FDI regulations in sustainable industries like electric mobility and waste management can foster environmentally-conscious investments. 
  • Additionally, India can accelerate its efforts to meet global sustainability goals by attracting investments in clean energy and green infrastructure. 
• Incentivize Innovation and Start-up Ecosystem: India should adopt policies that support entrepreneurship and innovation by fostering a robust start-up ecosystem. 
  • This includes providing greater access to venture capital through tax relief, simplifying regulations for angel investors, and setting up innovation hubs in collaboration with global investors. 
  • Creating special zones for tech start-ups with easier access to funding, tax exemptions, and global market linkages would further position India as an innovation-driven economy. 
• Enhance Ease of Doing Business at State Level: While India has made significant progress at the national level in improving the business climate, state-specific reforms are crucial.  
  • Each state should be encouraged to create its own investment-friendly policies, focusing on reducing local red tape and improving infrastructure. 
  • Introducing an "Investment Friendliness Index" for states, ranking them on the ease of doing business, tax incentives, and land availability, will motivate states to compete for global capital and foster a more decentralized investment environment. 
• Encourage Digital Transformation Across Sectors: To enhance investment, India can invest in building a robust digital infrastructure that spans both urban and rural areas. 
  • The government should promote e-commerce, fintech, and blockchain technologies by creating policies that encourage digital payments, financial inclusion, and cyber security.  
  • Offering incentives for tech-based businesses that focus on digital solutions, cloud computing, and AI can further solidify India’s role in the global digital economy. 
• Strengthen Trade Partnerships and Free Trade Agreements (FTAs): India must continue to negotiate and strengthen free trade agreements (FTAs) with key global economies, focusing on sectors with high investment potential.  
  • Expanding FTAs with Canada and the EU and establishing deeper economic ties with emerging markets will provide investors with broader access to markets. 
  • Facilitating smoother cross-border trade and eliminating tariffs on key goods and services can attract more global companies looking to use India as a gateway to the broader Asian market. 

Conclusion:

India’s investment landscape presents vast potential, driven by its strong economic growth, youthful labor force, and progressive policy reforms. By streamlining regulatory processes, enhancing logistics and digital infrastructure, and focusing on targeted skill development, India can attract sustained foreign direct investment (FDI) and emerge as a leading investment destination in the global economy. 

Drishti Mains Question:

Examine the key factors and hurdles limiting India’s potential to attract sustained foreign direct investment (FDI) and suggest measures for improvement 

UPSC Civil Services Examination, Previous Year Questions (PYQs)

Prelims 

Q. Consider the following: (2021)

1. Foreign currency convertible bonds   
2. Foreign institutional investment with certain conditions   
3. Global depository receipts   
4. Non-resident external deposits   

Which of the above can be included in Foreign Direct Investments?   

(a) 1, 2 and 3   

(b) 3 only    

(c) 2 and 4   

(d) 1 and 4   

Ans: (a)

Q. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (2020) 

(a) It is the investment through capital instruments essentially in a listed company.   

(b) It is a largely non-debt creating capital flow.   

(c) It is the investment which involves debt-servicing.   

(d) It is the investment made by foreign institutional investors in Government securities.   

Ans: (b) 

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Mains

Q. Justify the need for FDI for the development of the Indian economy. Why is there a gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (2016)