Opinion: India’s Investment Conundrum — Why Good Policies Aren’t Enough

India’s economic trajectory has been a subject of global fascination and optimism. With a GDP growth rate consistently outpacing most major economies, a young and aspirational population, and a government seemingly committed to reform, the country appears poised to become a global investment magnet. Yet, the reality is far more complicated. The recent 6 percent dip in foreign direct investment (FDI) in the October-December quarter of 2024-25, from $11.5 billion to $10.9 billion, is a stark reminder that something is fundamentally amiss in India’s economic governance. While the government has made commendable efforts to improve the business environment, these measures have not translated into the kind of investment surge one would expect. The reasons for this disconnect lie not in a lack of intent or policy frameworks, but in deeper structural and institutional issues that continue to erode investor confidence.

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The Promise And The Paradox  

On paper, India’s economic fundamentals are strong. The government’s commitment to fiscal prudence, as reflected in Budget 2025-26, is laudable. By aiming to reduce the fiscal deficit from 4.8 percent in 2024-25 to 4.4 percent in 2025-26, the government has signaled its intent to maintain macroeconomic stability. The government plans to allocate a significant portion of its borrowing towards capital expenditure, with the effective capex of Rs 1,548,282 crore accounting for nearly 98.7% of the fiscal deficit, compared to 60% in 2023-24. This indicates that most of the government's borrowing will be used to fund long-term infrastructure projects.

These numbers, coupled with India’s status as the fastest-growing major economy, should ideally make it a prime destination for global capital.  

Moreover, the government has rolled out a slew of reforms to attract investment. The reduction in corporate tax rates in 2019 — from 30% to 22% for existing companies, and from 25% to 15% for new manufacturing firms — was a bold move aimed at boosting private investment. Initiatives like the Business Reforms Action Plan and the production-linked incentive (PLI) scheme were designed to enhance the ease of doing business and promote domestic manufacturing. Prime Minister Narendra Modi’s repeated exhortations to investors, urging them to seize the opportunities presented by India’s growth story, further underscore the government’s commitment.  

Yet, despite these efforts, investment flows remain tepid. The manufacturing sector, which was expected to be the cornerstone of India’s economic transformation, continues to languish. The National Manufacturing Policy of 2011 aimed to increase the sector’s contribution to GDP to 25% and create 100 million jobs. Over a decade later, manufacturing’s share of GDP remains stagnant at around 17%. This stagnation is not just a statistical anomaly; it reflects a deeper malaise in India’s economic governance.  

The Trust Deficit  

One of the most significant barriers to investment in India is the pervasive trust deficit between the government and the private sector. While the government has taken steps to improve the ease of doing business, its actions often send conflicting signals. The most glaring example of this is the issue of retrospective taxation. The Vodafone case, where the government overturned a Supreme Court verdict through retrospective legislation, remains a blot on India’s investment landscape. Although the government eventually withdrew the retrospective tax amendment, the damage to India’s reputation as a stable and predictable investment destination was done.  

The recent reintroduction of retrospective taxation in the Safari Retreats case suggests that the lessons of Vodafone and Cairn have not been fully internalised. Such actions not only tarnish India’s image but also create an environment of uncertainty, where investors are never sure if the rules of the game will change midway. This unpredictability is a significant deterrent for both foreign and domestic investors.  

Adding to this is the fear of arbitrary enforcement actions by central agencies. While it is essential to curb corruption and ensure compliance, the perception that these agencies are often used as tools of political vendetta has created a chilling effect on investment. Business leaders are increasingly wary of expanding their operations, fearing that they could become targets of overzealous investigations. This climate of fear is antithetical to the spirit of entrepreneurship and innovation that the government claims to champion.  

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The Missing ‘Animal Spirits’ 

Veteran banker Uday Kotak’s recent observation about the fading “animal spirits” in India’s economy is particularly telling. He pointed out that the next generation of business families is more focused on managing investments through family offices than building new businesses. This trend is symptomatic of a broader issue: the lack of confidence in the economic environment. When entrepreneurs prefer to play it safe rather than take risks, it is a sign that the ecosystem is not conducive to growth.  

While it is easy to blame business leaders for lacking ambition or patriotism, such moralising misses the point. The onus is on the government to create an environment where entrepreneurs feel empowered to take risks and innovate. This requires not just policy reforms but also a fundamental shift in the way the government interacts with the private sector. Trust-based governance, as Finance Minister Nirmala Sitharaman has often emphasised, cannot remain a mere slogan; it must be reflected in action.  

India’s inability to attract investment is not due to a lack of potential or policy intent. The problem lies in execution and governance. To address this, the government must take urgent steps to restore investor confidence. First, it must unequivocally commit to ending retrospective taxation and ensure that such measures are never reintroduced. Second, it must rein in the arbitrary use of central agencies and establish clear guidelines for their functioning. Third, it must engage in meaningful dialogue with the private sector to address their concerns and build trust.  

The government’s efforts to improve macroeconomic indicators and ease of doing business are commendable, but they are not enough. Without addressing the underlying issues of trust and governance, India’s dream of becoming a global investment hub will remain just that, a dream, and India’s economic potential will remain unfulfilled.

The writer is a technocrat, political analyst, and author. 

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