FDI needs policy certainty, not weathercock optimism

The headwinds may finally be turning into tailwinds for foreign investment flows into India. This assertion by Finance Minister Nirmala Sitharaman has the ring of political rhetoric, but it also contains a grain of truth. She made the remark while responding to the announcement of a trade deal between New Delhi and Washington.

In an interview with a newspaper, Sitharaman said: “You can see the weathercock. Look at the big funds… Also see the environment now having a different air... So I think that change of wind—headwind becoming a tailwind—is probably happening.”

One hopes this proves true, but the Central government’s efforts to attract Foreign Direct Investment (FDI) over the past two decades have been far from impressive.

According to official data, India received $97.7 billion in FDI during 2004–14, which rose to $165.1 billion in 2014–24. By contrast, China alone attracted $344 billion in 2021. India has simply not been able to draw in foreign investment at the scale required.

The trend becomes starker when viewed as a share of GDP. In 2014, FDI inflows stood at 1.7 per cent of GDP; by 2024, they had fallen to just 0.7 per cent. After the turn of the century, the peak came in 2008, when FDI touched 3.6 per cent of GDP, followed by 2.4 per cent in 2020. The Covid-19 pandemic evidently dealt a severe blow to India’s ability to attract foreign capital.

Sitharaman also spoke about undertaking another round of customs clean-up, suggesting that the rationalisation announced in the Budget was not comprehensive enough. The government, she said, has deliberately sequenced reforms rather than executing them in a single sweep, given the multiple layers in the customs ecosystem. “Some changes could even be introduced through treasury amendments. But it will happen… the sooner the better,” she said. This is a sensible approach, as there is little value in grand announcements when reforms must, in reality, proceed gradually.

However, Sitharaman and other economic ministers need to remain alert to statist elements within the system that persistently impede reforms and periodically revive anti-business ideas such as price controls and retrospective taxation. History shows that even a hint of such measures can inflict lasting damage on investor confidence.

Retrospective taxation, in particular, stands out as one of the most damaging episodes in India’s recent economic history, creating an image of policy unpredictability that took years to partially undo. While the government has formally moved away from such practices, the underlying instinct has not entirely disappeared.

Foreign investors are sensitive not only to existing policies but also to the risk of policy reversal. Stability, transparency and predictability matter above all else. A country can have higher taxes or stricter regulations than its peers and still attract investment if the rules are clear and consistently applied. What investors find hardest to tolerate is uncertainty—especially sudden, ideologically driven interventions that ignore commercial realities.

If the promised tailwinds for foreign investment are to materialise, reform efforts must be shielded from internal sabotage. Political leadership must send an unequivocal signal that India is committed to being a rules-based, market-friendly economy.

This means resisting populist temptations, pushing back against anti-business rhetoric, and ensuring that regulatory agencies act with accountability and restraint. If the government succeeds in cleaning up customs procedures, simplifying regulations and keeping statist impulses firmly in check, Sitharaman’s weathercock may yet prove accurate.