FDI inflows: Tariff uncertainty and a rotation within emerging-market portfolios have drained foreign interest in India. By July, dedicated emerging markets funds had sharply cut India weights and turned to North Asia. Nomura’s review of 45 large funds shows a 1.1 percentage point month-on-month reduction in India exposure; 41 of the 45 funds pared holdings, leaving India a 2.9 percentage point underweight versus the MSCI EM benchmark. Allocations to Hong Kong/China and South Korea rose by 80 bps, 70 bps and 40 bps, respectively, and the share of funds underweight India climbed to 71% from 60% in June.
The August Bank of America fund manager survey confirms the turn: India has slipped from investors’ top Asian pick in May to the least-preferred market, while optimism for China has improved and Japan holds first place. The tariff backdrop and rich valuations loom large in that reassessment. Recent earnings downgrades have reinforced caution, with India seeing the sharpest cuts in Asia as new US tariffs cloud the outlook.
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The global backdrop
Worldwide, FDI has cooled for a second straight year: UNCTAD estimates a further 11% decline in 2024 to roughly $1.5 trillion (once conduit economies are netted out), with digital-economy investment increasingly concentrated in barely ten countries.
International project finance—critical for infrastructure and SDG sectors—remains subdued after a 26% drop in 2023, and early-2025 readings point to a 14% quarter-on-quarter slide.Regionally, flows are uneven: Europe slumped even as North America rose and Southeast Asia logged near-record levels, underscoring a tighter, more selective global capital cycle.
Net FDI: the bigger worry
Portfolio swings are volatile by nature; the more concerning signal is net FDI. In 2024–25, net FDI inflows collapsed to $0.4 billion—a 96% drop—driven by higher outward investment and repatriations, including through IPOs by multinationals exiting or trimming stakes. The government has acknowledged the problem but lacks a comprehensive plan that matches the scale of competitive industrial policies elsewhere.
New investment facilitation is being aimed at specific areas—electronics system design and manufacturing (ESDM), non-leather footwear, toys, EVs, chemicals and medical devices—often via refreshed PLI-style incentives and value-chain mapping with states. The electronics components push is gathering applications under an April–May 2025 scheme to localise sub-assemblies and parts and draw global suppliers, including from China, Korea and Taiwan. These are sensible moves, but they do not by themselves offset rising execution risk and administrative friction.
The reform gap
Global investors prize predictability and exit clarity. Here, India still lags. The IMF’s 2025 Article IV notes that labour-market reforms could lift employment, but implementation remains pending and uneven across states. BNP Paribas adds a sterner diagnosis: since 2017, infrastructure has improved, but corruption has worsened and governance remains fragile; crucially, the 2020 labour-law overhaul is still not in force and may not be implemented before 2026. Land acquisition continues to be a binding constraint.
Three priorities stand out. First, reduce policy risk: give a multi-year tariff cadence, commit to stable indirect-tax and duty regimes, and avoid ad-hoc export curbs. Second, finish the basics—single-window approvals that actually bind agencies, time-bound clearances, and predictable dispute resolution—so greenfield investors can plan capex cycles with confidence. The Economic Survey’s call to “pull out all the stops” on FDI, especially in renewables, AI and semiconductors, is right; it now needs delivery through skills pipelines and R&D incentives that outlast political cycles. Third, close the factor-market gap: implement the labour codes with state buy-in and realistic transition rules, and modernise land and contract-enforcement frameworks.
India’s long-term case—scale, growth, and a deep digital stack—remains intact. But in a world where capital is footloose and industrial policy is back in fashion, relative advantages matter. Unless execution improves and policy uncertainty is pared back, foreign flows will continue to chase clarity in North Asia while India’s net FDI underwhelms. The opportunity is still there; the window is narrowing.