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Foreign capital going. Can India lure investors back?

By Sohail Khan 1 October 2026, 2:16 pm

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Business News›News›Economy›Policy›Foreign capital is slipping away. Can India lure investors back?

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Foreign capital is slipping away. Can India lure investors back?
Synopsis

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.

India must compete harder as global capital shifts towards AI, chips and manufacturing

Contrary to what many may be thinking, India is not facing a wholesale flight of foreign capital. Its foreign direct investment prospects remain relatively firm, while a series of temporary measures have brought large foreign-currency inflows into the country.

But portfolio investors have been much less convinced. The September Monthly Economic Review of the Union Finance Ministry has noted how portfolio investment flows remain volatile. The deeper issue is that India is no longer competing only with other emerging markets for capital. It is competing with the United States, East Asia and increasingly with developed economies for investment in the technologies and industries expected to drive the next growth cycle.

Also Read: India faces stiff capital-flow challenge amid global AI, manufacturing race

The problem is bigger than FPI selling

The September review does not suggest that investors have lost faith in India. Investor interest in India is "not low but cautious,” it says.

Foreign investors bought nearly $6.85 billion of Indian equities between mid-June and late August before reversing course in September. By September 29, foreign outflows from Indian equities had reached $26.75 billion for 2026, putting India on track for a record year of withdrawals. Higher crude prices, rising US Treasury yields and currency concerns have all made Indian assets less attractive at the margin.

But the problem cannot be reduced to global risk aversion. A significant part of the money is going somewhere else. The AI investment boom has pushed global capital towards markets such as Taiwan and South Korea, where investors see more direct exposure to semiconductors and AI infrastructure. This shift has become an important reason for India's weaker foreign portfolio flows.

That raises a more difficult question for India — what does it have to offer when the world's biggest pools of capital are chasing a new tech investment cycle?

India needs to upgrade its story

India's growth story remains powerful, but foreign investors increasingly want exposure to businesses that can become globally competitive. That means moving beyond the idea that India's huge domestic market will itself be sufficient to attract capital.

The September review points directly to this problem. Moreover, developed economies are simultaneously trying to secure investment for manufacturing as supply chains are reorganised. India therefore faces a stiff challenge to attract capital flows.

This is where industrial policy needs to become more focused on competitiveness rather than simply announcing incentives and generally being business friendly.

Also Read: India can't take growth for granted, FinMin warns

India has made progress in semiconductors. The chips ecosystem had attracted around Rs 1.34 lakh crore in equity funding, while the government said industry interest under Semicon 2.0 had reached roughly $11-12 billion.

But individual projects are not enough. Investors need suppliers, skilled workers, reliable power, efficient logistics and predictable access to imported components. India's manufacturing ambitions still face structural problems involving land and labour rules, complicated tariffs and bureaucratic red tape.

Policy certainty has to become an investment advantage

The review's prescription is that sustained high-quality, consistent and reasonably swift decision-making will reassure investors.

Foreign investors can price in high wages or expensive real estate. They can even price in some currency risk. What is much harder to price is uncertainty over taxes, regulation or the interpretation of rules after an investment has already been made.

The government has indeed recognised this. The 2026 tax amendments seek to simplify rules for offshore investment funds and fund managers while providing greater tax certainty. The changes are explicitly intended to make India a more predictable destination for global capital.

But legislation alone will not solve the credibility problem. Investors judge a country by what happens after the announcement. Frequent changes, retrospective disputes or unclear administrative decisions can make even an attractive incentive package less valuable.

The same principle applies to regulation. Foreign investors remain concerned about India's dispute-resolution framework, particularly the requirement to pursue remedies in Indian courts before accessing international arbitration. For a multinational deciding where to put billions of dollars, the ability to exit or resolve a dispute matters almost as much as the tax rate.

India needs to rethink what “business-friendly” means

The review says India must become “more competition-friendly rather than business-friendly,” which is a more demanding goal. Being business-friendly can mean giving selected companies incentives or relaxing a particular rule. A competition-friendly economy creates conditions in which many companies can enter, compete, scale and challenge incumbents.

It requires simpler compliance, faster approvals and fewer arbitrary barriers. It also means resisting the temptation to protect domestic producers so aggressively that foreign companies cannot build efficient supply chains in India.

The goal should not be to eliminate protection overnight but to make protection temporary and compatible with globally competitive production. A factory that can manufacture cheaply only because imports are expensive is not necessarily a successful manufacturing investment.

India cannot ignore the AI problem

There is also a more strategic issue. India cannot simply wait for the global AI cycle to pass and expect capital to return automatically. Foreign investors have been moving money towards Taiwan and South Korea because those markets offer clearer exposure to the AI investment boom.

India has strengths in software, engineering talent and digital services. But these strengths need to translate into investable companies and infrastructure in AI, semiconductors, data centres and advanced manufacturing. Though the government has already begun building that pipeline, the question is whether India can create enough private-sector opportunities around it.

Trade policy is part of the capital-attraction strategy

Foreign capital increasingly follows trade access. A manufacturer does not invest billions merely to sell inside India but also wants India to be an efficient export base. This makes India's trade relationships important to investment policy. The Review flags uncertainty around the US relationship and tariffs as a shadow over India's attractiveness.

If an investor cannot be reasonably confident about the tariff regime facing exports from an Indian factory, the value of locating that factory in India falls.

India therefore needs stable trade arrangements alongside domestic reforms. The February US-India trade agreement, for example, was welcomed by investors because lower US tariffs on Indian goods improved the export economics of sectors such as textiles, engineering and chemicals.

The objective should be stickier capital

India cannot and should not try to stop every FPI outflow. Portfolio capital will always respond to global interest rates, valuations and risk appetite. The more important objective should be to attract capital that stays.

That means stronger FDI, deeper domestic supply chains, globally competitive manufacturing and more investable technology companies. It also means making foreign investors confident that the rules will not unexpectedly change after they commit money.

The September review has warned that India is past its previous achievements and now needs to be more competitive. “India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter,” it said. That's the real foreign-capital challenge. India already has a compelling growth story but what it needs now is an investment environment that makes global capital believe that the growth story can be converted into durable, competitive returns.

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