Calibrating India’s inbound investment framework

Why in news?

Despite record gross FDI of $94.8 billion in FY26, administrative and State-level bottlenecks continue to slow actual project deployment.

UPSC Relevance – 

Prelims: FDI routes and caps, UNCTAD World Investment Report.

Mains, GS3: Indian Economy and issues relating to mobilisation of resources, growth and development; Effects of liberalisation on the economy; Investment models.

Investment Trends in India 

• RBI data show gross inward FDI reached a record $94.8 billion in FY26. 
• UNCTAD’s World Investment Report 2026 places India 11th among top FDI destinations after a 44% rise in inflows.
• India is expanding its FTA network. After the India-EFTA TEPA and India-UK CETA, agreements with Canada and the EU are expected to be signed in December.
• But there is a gap between commitments and actual projects. In greenfield data centre investment, India got about $7 billion in the first three quarters of 2025, far behind France ($69 billion), the US ($29 billion) and South Korea ($21 billion).

FDI: meaning and framework 

• FDI is investment by a non-resident that gives lasting interest and control in an Indian enterprise.
  • In India, investment of 10% or more of post-issue paid-up equity of a listed company is FDI or any share in equity of an unlisted company; 
  • below 10% in a listed is FPI (based on the Arvind Mayaram Committee, 2014). FDI is preferred as it is long-term and brings technology and management skills.
• Legal basis: Foreign Exchange Management Act (FEMA), 1999 and the FEM (Non-Debt Instruments) Rules, 2019.
  • DPIIT (Ministry of Commerce and Industry) frames FDI policy; 
  • RBI administers reporting.
• Two routes: Under the automatic route, no prior approval is needed. Under the government route, approval is given by the concerned ministry through the Foreign Investment Facilitation Portal, after the FIPB was abolished in 2017.
• Prohibited sectors: Lottery, gambling and betting, chit funds, Nidhi companies, real estate business and farmhouses, trading in TDRs, manufacturing of tobacco products, atomic energy and certain railway operations.
• Press Note 3 (2020): Any investment from a country sharing a land border with India (including where the beneficial owner is from such a country) needs government approval. It was brought in to prevent opportunistic takeovers during COVID and mainly affects Chinese investment.
• Top sources: Singapore, Mauritius and the US together account for a large share, partly due to tax treaties and holding structures. Singapore’s CECA (2005) has helped bring in over $195 billion since 2000.

Important sectoral caps

Why the gap between commitment and deployment?

• Centre-State fragmentation: Land, water, power, building permits and many labour approvals are with States. Even fast central clearances can stall at the State or district level.
• Labour codes rollout: 29 central laws were merged into four codes. Central Rules came in May 2026, but labour is in the Concurrent List, so each State must notify its own rules. Gujarat has done so under all four codes; others are still finalising. Companies face different timelines across States.
• Slow contract enforcement: Courts had about 48 million pending cases as of April, including around 6 million in High Courts. The Commercial Courts Act, 2015 and Mediation Act, 2023 have helped, and big firms now prefer institutional arbitration, but MSMEs still depend on courts.
• Unattractive Model BIT : The Model BIT 2016 protects the State’s right to regulate: it uses an enterprise-based definition of investment, requires investors to exhaust local remedies (5 years) before international arbitration, leaves out MFN treatment and keeps taxation out of its scope. Critics say this makes India less attractive than competitors.
• Compliance burden from QCOs: The Gauba Committee found Quality Control Orders grew from under 70 to nearly 790, covering raw materials and intermediate goods. BIS certification for imported inputs cost up to ₹20 lakh and took 6–8 months, which affects MSME supply chains.
• Uneven approval speeds: DPIIT is the nodal agency but not the final decision-maker. A revised SOP (May 2026) sets a 12-week deadline, but compliance is uneven across ministries.
• Weak investor protection in new pacts: The India-EFTA TEPA (in force from October 2025) has a $100 billion investment target over 15 years, but no independent bilateral investment dispute mechanism. Switzerland is negotiating a separate BIT.
• Weak net FDI: Gross inflows look strong, but high repatriation and disinvestment by foreign investors have kept net FDI low in recent years. Gross numbers alone can be misleading.

Reforms already in place

• Tax certainty: The Taxation Laws (Amendment) Act, 2021 ended retrospective tax demands on indirect transfers made before May 2012, settling disputes with Vodafone and Cairn Energy. The relaunched Vivad se Vishwas scheme has reduced direct tax litigation.
• Ease of doing business: National Single Window System (2021), Jan Vishwas Act, 2023 (decriminalised minor offences across 42 central Acts), and DPIIT’s Business Reforms Action Plan ranking of States.
• Manufacturing push: PLI schemes across 14 sectors and the India Semiconductor Mission. Tata Electronics’ fab in Dholera, Gujarat shows what coordinated administration can achieve.
• Mobile phones as a success story: Production grew 33 times since FY15, from ₹180 billion to ₹6.27 trillion; exports reached ₹2.59 trillion. India is the world’s second-largest mobile manufacturer by volume and meets 99.2% of domestic demand locally.

Way forward 

• Cooperative federalism in investment: A Centre-State compact on uniform timelines for land, power and labour approvals, and model rules that States can adopt quickly.
• Strengthen single window: Make the NSWS a real decision-making window, with deemed approvals if deadlines are missed.
• Rationalise Quality Control Orders: Apply them to finished consumer goods for safety, not to inputs that raise costs for MSMEs. Increase BIS testing capacity.
• Faster commercial justice: More commercial benches, trained judges and well-staffed mediation centres, especially for small enterprises.
• Balanced investment treaties: Include credible dispute settlement in FTAs and BITs while protecting regulatory space.
• Track deployment, not just inflows: Monitor net FDI, greenfield projects and jobs created, not only headline commitments.

India has shown that it can attract capital. The next step is to make sure that capital reaches the ground quickly. Most of the remaining work is domestic, and fixing it will help Indian firms as much as foreign investors.

Practice MCQ  

Q1. With reference to Foreign Direct Investment (FDI) in India, consider the following statements:

1. FDI policy is formulated by the Department for Promotion of Industry and Internal Trade (DPIIT).
2. Investment from a country sharing a land border with India requires government approval irrespective of the sector.
3. Proposals under the government route are examined by the Foreign Investment Promotion Board (FIPB).
4. An investment of 10% or more of the paid-up equity of a listed Indian company is treated as FDI.

How many of the statements given above are correct?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Answer: (c)

Explanation: Statement 3 is incorrect. The FIPB was abolished in 2017. Government route proposals are now handled by the concerned ministries through the Foreign Investment Facilitation Portal.

Q2. Consider the following statements:

Statement-I: The Taxation Laws (Amendment) Act, 2021 withdrew retrospective tax demands relating to indirect transfer of Indian assets made before May 2012.

Statement-II: The Vivad se Vishwas scheme provides for settlement of pending direct tax disputes.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement-I is correct, but Statement-II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

Answer: (b)

Explanation: Both statements are correct, but they relate to separate measures. The 2021 Act dealt with the retrospective amendment of 2012, while Vivad se Vishwas is a general dispute settlement scheme for direct taxes.

Mains Practice Question  

Q. “India’s challenge is no longer attracting foreign investment, but converting investment commitments into projects on the ground.” Discuss the key bottlenecks in this regard and suggest measures to address them, with particular reference to Centre-State coordination. (15 marks, 250 words)