Foreign capital is slipping away. Can India lure investors back?
India faces a tougher battle for foreign capital as FPI outflows rise and global investors shift money towards AI, semiconductors and manufacturing hubs in Taiwan and South Korea. India’s FDI prospects remain resilient, but policy uncertainty, tariffs, regulation and weak manufacturing competitiveness could determine whether it can attract long-term global investment.
Contrary to popular belief, India has not experienced a significant exodus of foreign capital. In fact, foreign direct investment opportunities in the country remain relatively strong, while a series of temporary measures have attracted substantial foreign-currency inflows. However, global investors have shown less enthusiasm. The Union Finance Ministry's September Monthly Economic Review highlights the volatility of portfolio investment flows.
The broader concern is that India is now competing with the United States, East Asia, and developed economies for capital, not just with other emerging markets. This shift has intensified the challenge of attracting foreign investment in the technologies and industries expected to drive the next growth cycle.
The issue extends beyond foreign portfolio investors (FPI) selling their holdings. Between mid-June and late August 2026, foreign investors bought nearly $6.85 billion worth of Indian equities, but by September 29, outflows had reached $26.75 billion for the year, indicating a record year of withdrawals. Factors such as higher crude prices, rising US Treasury yields, and currency concerns have contributed to Indian assets becoming less appealing.
Yet, global risk aversion is not the sole culprit. A significant portion of the capital is flowing to other markets instead, such as Taiwan and South Korea, where investors perceive greater exposure to semiconductors and AI infrastructure. This shift has proven instrumental in explaining the decline of India's foreign portfolio flows.
The question now becomes what India can offer when the world's largest pools of capital are gravitating towards a new tech investment cycle. India's growth story remains robust, but investors seek exposure to businesses that can become globally competitive. This necessitates advancing beyond the notion that India's vast domestic market alone will suffice to attract capital.
The September review underscores this predicament. Furthermore, developed economies are concurrently focusing on securing investment for manufacturing as global supply chains are being reorganized. Consequently, India faces a considerable challenge in drawing foreign capital.
To attract investments, India's industrial policy should prioritize competitiveness rather than merely announcing incentives and offering general business-friendly policies. While India has made strides in the semiconductor sector, attracting around Rs 1.34 lakh crore in equity funding, individual projects are insufficient. Investors also require suppliers, skilled workers, reliable power, efficient logistics, and predictable access to imported components.
India's manufacturing sector still grapples with structural issues such as land and labor rules, complex tariffs, and bureaucratic red tape. Establishing policy certainty as an investment advantage is crucial to reassuring investors. Consistent, high-quality, and relatively swift decision-making can assure investors about India's investment environment.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
