Free Trade Agreements (FTAs), lower import tariffs and an improved business environment are critical to boosting foreign capital inflows into India, which have moderated in recent years, according to Asian Development Bank Chief Economist Albert Park.
Speaking in an interview, Park emphasised that sustained policy efforts to enhance trade openness and competitiveness would help revive foreign investment momentum. He noted that India’s net Foreign Direct Investment (FDI) inflows have declined sharply over the past few years, falling from USD 38.6 billion in 2021–22 to USD 28 billion in FY23 and further to USD 10.2 billion in FY24.
Net FDI — calculated as inflows minus outflows — dropped to just USD 1 billion in FY25 before showing modest recovery to USD 3 billion during the April–December period of FY26.
Park underscored the need for continued tariff rationalisation to ensure India remains an attractive destination for global investors. He also highlighted the importance of strengthening the manufacturing ecosystem through well-developed industrial zones equipped with robust infrastructure and integrated facilities.
Such zones, he said, would enable foreign companies to efficiently meet their operational requirements in a single location, thereby enhancing ease of doing business and supporting higher investment inflows. FTAs, in particular, could play a significant role in expanding market access and encouraging multinational firms to increase their presence in India.
Focus on Urban Governance and Reforms
The ADB has also been advocating improved governance of cities through integrated planning that aligns logistical, regulatory and human capital needs of businesses. Park described this as “smart urbanism”, which can help address key challenges faced by the business community.
He acknowledged India’s progress on structural reforms, including labour law changes and the implementation of the Goods and Services Tax (GST), and stressed the importance of maintaining reform momentum to sustain investor confidence.
Global Uncertainty Weighs on Capital Flows
Park noted that heightened global uncertainty typically triggers a flight of capital to safer markets, a trend currently visible across Asia. He added that the region is particularly vulnerable to shocks stemming from West Asia, which continue to disrupt global economic stability.
On crude oil prices, he said they are likely to remain elevated for an extended period due to the prolonged geopolitical crisis. The ADB’s latest reference scenario projects average oil prices at USD 96 per barrel in 2026, easing to around USD 80 per barrel in 2027, but still remaining relatively high.
Higher oil prices, combined with supply constraints, are expected to maintain a premium in spot markets compared to futures, reflecting ongoing shortages.
Impact on India’s Growth and Inflation
The continued West Asia crisis is expected to shave off around 0.6 percentage points from India’s GDP growth, bringing it down to approximately 6.3 per cent in the current financial year, while also exerting upward pressure on inflation.
Earlier, the ADB had projected India’s GDP growth at a robust 6.9 per cent for the current fiscal year, with an acceleration to 7.3 per cent by FY28, supported by strong domestic demand. Inflation was estimated at 4.5 per cent for the year.
Overall, the outlook suggests that while India retains strong growth fundamentals, external risks and declining foreign investment flows necessitate continued reforms and strategic policy interventions to sustain long-term economic momentum. |
