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Prime Minister Narendra Modi called for the creation of an “investment-friendly charter’ during the ninth Governing Council Meeting of the Niti Aayog on 27 July. This charter will outline policies, programmes and processes to attract more investments.
Despite India’s potential, foreign direct investment (FDI) data shows that the country has not fully capitalized on its opportunities. Strategic reforms are needed to enhance India’s appeal among global investors.
Drawing from successful investment models in China and Vietnam and feedback from various firms, we propose that an ‘investment-friendly charter’ should consider a four-step plan to make India a top global investment destination.
Use FDI data insights: India attracted $44.4 billion of FDI in 2023-24, only 1.1% of its GDP. In 2022, India was the world’s seventh largest FDI recipient with $49.4 billion, but it lagged significantly behind countries like China ($189.1 billion), Brazil ($86.1 billion), Australia ($61.6 billion) and Canada ($52.6 billion).
Data reveals that India’s FDI predominantly comes from Singapore and Mauritius, which accounted for 49% of cumulative FDI from April 2001 to March 2024. Most of this was disproportionately directed at trading, services, malls and real estate development.
This raises the concern that a chunk of FDI inflows might have been merely to exploit India’s double tax avoidance agreements (DTAAs) and reduce tax liabilities.
While manufacturing attracted an estimated 30% of India’s FDI, significant sectors like electronics and technology remain underfunded, with telecom receiving only $713 million in 2022-23 and $282 million in 2023-24.
Foreign investments in food processing are also disappointing from the perspective of what India needs. An FDI trend assessment is necessary to help ensure that it contributes to the country’s economic development.
Reduce the cost disadvantage of firms ready to relocate to India: The country must offer a more competitive cost base to attract businesses looking to shift from China or other locations.
In India, raw material costs are higher for non-traditional production, given the high import dependence of local units and high tariffs. China’s advantage stems from lower costs due to large-scale domestic production and efficient supply chains, while Vietnam offers competitive costs with low or zero tariffs on imports.
Moreover, the cost of industrial electricity in India ranges from $0.08 to $0.10 per kWh, higher than China’s $0.06 to $0.08 and Vietnam’s $0.08 to $0.09 per kWh.
Infrastructure and logistics in India, despite significant investment, still lag in efficiency. China’s advanced infrastructure as well as efficient transport networks and Vietnam’s notable investments in ports and roads give them an advantage. And then credit is expensive in India, with lending rates around 9-10%. Chinese rates are lower, at 4-5%, and Vietnam’s are moderate at 7-8%.
Enhance the ease of doing business: This has several key dimensions. First, it’s essential to identify priority sectors where India’s manufacturing and export capabilities are weak—such as electronics, computers, telecom, precision equipment and factory machinery.
The Centre’s production-linked incentive (PLI) scheme needs to be recast, so as to play a supporting role for higher value addition and deep manufacturing in these sectors.
Second, we must invite top global firms as anchor manufacturers. This can drive technological innovation and improve productivity across sectors.
Suzuki’s entry to our automobile sector in the 1980s significantly boosted the industry’s overall productivity. Similarly, smartphone makers like Samsung and Apple may be beneficial to the ‘India story’ as local value addition goes up.
Third, the government must coordinate effectively with lead investors. Direct communication between investors and senior government officials will help, especially if dedicated officers are assigned to projects for assistance. Prompt government responses would prevent disputes and build investor confidence.
Another important step is to provide ready-to-manufacture space. This can be done by establishing operation-ready industrial zones with pre-approved permissions, allowing investors to start production quickly.
The budget’s proposal to create 100 “plug and play" industrial zones is a significant move in this direction. Additionally, we must ensure quick factory-to-ship movement through dedicated freight corridors and strategically located industrial zones near ports.
India also needs to assure global investors a degree of policy predictability, with arbitrary changes kept to a minimum. Last but not least, efficient dispute resolution systems are vital to minimize protracted legal battles.
Create a framework to evaluate FDI proposals: Foreign investments must align with our national interests and protect the country’s strategic autonomy. FDI should be incentivized in industries that can boost exports and enhance Indian technological capabilities, such as electronics, telecom and precision machinery.
It is important to protect micro, small and medium enterprises from any adverse impact of FDI, so that employment and economic diversity do not suffer. The framework must also include strict checks to prevent risks to national security, particularly in fields like defence, telecom and infrastructure, which must be safeguarded.
FDI scrutiny through a national-security lens has been growing across the US, EU, Australia, Japan and elsewhere, where robust frameworks for it have been put in place. India’s FDI scrutiny also needs to go beyond investment from countries with which the country shares a land border. It will help preserve India’s strategic autonomy in key sectors.
This comprehensive approach will not only boost our FDI inflows, but also contribute to sustainable economic development.
These are the authors’ personal views.
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