India is now the world’s second biggest destination for greenfield FDI, behind only the U.S. Even despite that progress, it has some very big challenges ahead in retaining that capital. The country continues to contend with a rigid labor market and a burdensome business environment. Due to disinvestment, many fear for the economic sustainability of its growth.
The legal and regulatory landscape governing foreign investment in India has changed drastically in the last few years. Gross FDI inflows increased by 1.3 times from 2017–2024. Yet, net FDI inflows as a percentage of GDP crashed down to only 0.7% in 2024—the lowest level since 2012. This troubling trend underscores the plight of India’s inability to keep long-term foreign investments flowing in entrance, despite early wins.
India’s labor market is an essential aspect of the disinvestment trend. It still is far more inflexible compared to those of its Southeast Asian neighbors. The country has gone through difficult moments in governance and structural obstacles that make it hard for foreign companies to develop. Perhaps the most significant has been an increase in corruption levels, making an already difficult investment climate even more challenging.
2020 was an anomaly as the Indian government pushed the labor law reforms onto the agenda. These reforms were intended to liberalize the labor market and respond to major issues. Yet, all of these reforms, great as they are, have not been implemented and likely won’t be implemented until 2026. Until these changes are realized, foreign companies will probably continue to be skeptical about setting up operations long-term in India.
The outer layer of complexity comes from the geopolitical landscape. FDI flows from China, the region’s most significant source of investment, are likely to remain well below previous highs. This decline is the consequence of the increasingly tenuous political relations between China and India. Experts forecast that “connector” countries will continue to be the biggest beneficiaries of Chinese FDI. That will occur so long as they provide better tax environment in comparison to other countries supplying the U.S., noted BNP Paribas.
India’s structural economic boom continues to soar – outpacing growth in the surrounding Southeast Asian nations region in perpetuity. Unlike in 2017, where infrastructure quality was the clear driver of the count’s substantial growth, the need for reforms is as pressing as ever.
The challenge for India is clear: it must implement reforms that create more favorable conditions for foreign companies if it hopes to retain and enhance its position as a leading destination for investment. The current tightening of U.S. trade policy is creating headwinds to U.S. investments in India right now. This makes things even worse for foreign companies who are already facing daunting hurdles.
Like all investors, we’re watching these developments with great interest as the Indian government hopes to maintain rapid growth while ensuring the structural reforms are undertaken.