India faces stiff capital-flow challenge

India confronts a significant challenge in attracting capital flows, as highlighted in the India Monthly Economic Review report published by the Finance Minister. The global investment landscape is undergoing transformation due to the rapid growth of artificial intelligence, renewed manufacturing pursuits in developed nations, and the weaponization of global supply chains, according to the report. This has led to nations prioritizing supply chain security, intensifying competition for global capital resources.

India, similar to other developing economies, is grappling with the difficulty of attracting capital flows, as indicated by the report. The report suggests that foreign direct investment (FDI) inflows on a net basis are expected to perform better in the current financial year compared to the previous year. However, short-term fluctuations in Indian assets, such as the currency, persist, the report adds.

The AI boom continues to stimulate capital investment and flows globally, while developed countries are vying to secure investments to support their reinvigorated manufacturing efforts, the report notes. The geopolitical and geoeconomic uncertainty further complicates India's position, making it impossible for the country to rely on its post-Covid growth achievements.

As the report emphasizes, “Geopolitical and geoeconomic uncertainty mean that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter.” This challenge necessitates constant effort from policymakers, the report concludes.