India Urged to Relax Foreign Direct Investment Regulations to Revitalize Growth

India Faces Challenge in Attracting Foreign Investment

India should liberalize its rules for overseas investors by easing dispute-resolution procedures and offering tax incentives to revive foreign inflows and support economic growth, according to a former adviser to Prime Minister Narendra Modi.

Surjit Bhalla, who was a part of the Prime Minister's Economic Advisory Council, stated that the investment climate is not in great shape due to a restrictive policy approach. He emphasized the need to review the bilateral investment treaty, particularly rules requiring foreign firms to seek remedies in Indian courts before pursuing international arbitration. This has discouraged investors as it is seen as delaying settlements and adding to regulatory uncertainty.

India's net foreign direct investments have been declining in recent years, despite the economy being one of the world's fastest-growing. FDI equity inflows fell from a high of $59.6 billion in 2020-21 to $47.8 billion in the April-Dec. period of 2025-26, according to data from the industry department.

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The decline in inflows has added to concerns over India's external finances, particularly at a time when rising oil prices are pushing up the country's import bill and increasing pressure on the currency. The higher cost of fuel imports has boosted demand for dollars, weighing on the rupee in recent months. The rupee was the worst-performing currency in Asia in 2025 and held that position into 2026 until the Reserve Bank of India introduced measures to deter speculative trading on March 27.

Bhalla argued that India should offer more incentives and accelerate deregulation at the state level, as higher returns and predictable rules would attract both foreign and domestic capital. He stated that investors respond to incentives and that good profitability would attract investment.

The former IMF executive director also noted that abrupt policy interventions, including export bans and quality-control restrictions, have hurt investor confidence by increasing regulatory uncertainty and complicating long-term capital commitments.

India currently has a rare political window to push through reforms, thanks to the ruling Bharatiya Janata Party's electoral dominance. Bhalla stated that the country has never been at a more opportune moment to bring about economic reforms.

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