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ARTHA

Fourth, structural patterns in FDI inflows highlight key Trade and cost-related constraints weaken
constraints. competitiveness. Infrastructure gaps persist, with around
25 per cent of container imports remaining empty. Trade
Manufacturing continues to attract a relatively lower openness declined from 58 per cent of GDP in 2012 to 46
share of FDI, accounting for only 26–27 per cent of per cent in 2023 , well below the global average and
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equity inflows in 2024-25 . This is significantly lower peers such as Vietnam. Despite FTAs with the UAE and
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than Vietnam’s 64 per cent share in 2023 and remains Australia, gains remain limited, and FDI fell from US$84.8
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a key constraint in India’s deeper integration into global billion in FY 2021-22 to US$71.3 billion in FY 2022-23,
value chains. dropping its UNCTAD ranking from seventh to eighth in
the 2023 World Investment Report .
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Addressing structural constraints that hinder India’s
overall competitiveness, particularly in scaling
manufacturing and integrating into global value chains, Weak integration into GVCs is a key constraint.
remains critical. Competing economies in Southeast Asia have seen
stronger growth in both FDI and exports, while India’s
limited manufacturing scale, fragmented value chains,
and low-value intermediate exports constrain deeper
Structural Constraints to FDI integration and technology transfer.

The decline in FDI is not unique to India, reflecting global FDI in India remains largely market-seeking rather than
uncertainties around treaties, rising costs, and the export-oriented, driven by domestic demand. Labour
‘China+1’ strategy. This also presents an opportunity to rigidities, delays in labour code implementation, skill
build resilient supply chains, provided adequate risk gaps, and sector-specific issues in electronics, defence,
capital is mobilised. The policy focus should shift towards and power have further limited inflows over the years.
attracting sustained inflows rather than managing Labour codes though introduced in 2020 and notified in
outflows, which partly reflect deeper global integration. 2025, is yet to be implemented by the states.

India’s FDI landscape remains constrained by structural
and operational bottlenecks. While services such as Conclusion
digital, IT, and finance attract strong inflows,
manufacturing and infrastructure lag due to regulatory While India’s strong gross FDI inflows signal investor
complexity, infrastructure gaps, policy ambiguity, and high confidence, the key challenge is converting them into
input costs, particularly land, capital, and energy. sustained, long-term investments that deepen global
Persistent ease of doing business challenges, including integration and strengthen ‘Brand India’. The ongoing
land acquisition hurdles, fragmented approvals, multiple ‘China+1’ shift, combined with India’s demographic
NOCs, and delays in utilities and licensing, continue to dividend and digital public infrastructure, presents a timely
deter investors, alongside state-level disparities that opportunity to anchor itself in global production networks.
concentrate FDI in a few regions.
However, policy uncertainty, weak GVC integration, and
Legal and regulatory frictions further elevate uncertainty. cost disadvantages continue to shape investor sentiment,
Delays in insolvency resolution, legacy tax disputes, rising underscoring the need for a stable, predictable, and
GST and transfer pricing litigation, and policy volatility export-oriented investment ecosystem.
including retrospective taxation, evolving GST treatment,
Press Note 3 restrictions, and Quality Control Orders Going forward, India must adopt a more strategic,
disrupt supply chains and affect investor confidence. outcome-oriented approach, with clear targets for FDI,
While the government has recently undertaken a series of particularly in export-oriented sectors, and alignment of
reforms to address these issues, sustained and central and state-level reforms. The focus should be on
consistent policy action remains essential. translating inflows into higher manufacturing scale,
stronger exports, and deeper integration into global
value chains.

16 FDI Statistics and Newsletter, DPIIT, Government of India (Mfg. excludes software)
17 Statista. (2025). Manufacturing sector in Vietnam - statistics & facts. Statista Database.
18 TheGlobalEconomy.com. (2023). India: Trade openness.
https://www.theglobaleconomy.com/India/trade_openness/#:~:text=Trade%20openness:%20exports%20plus%20imports%20as%20percent,from%2019
60%20to%202023%20is%2024.73%20percent
19 Choudhury, R. N. (2024). India should leverage FTAs to induce FDI flows. East Asia Forum.

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