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Foreign direct investment

Moving beyond disappointment: India, FDI, and sustainability


Published 07 December 2021

India has not increased its share of foreign direct investment (FDI) in recent years as much as has been hoped. Risks for FDI continue to be high, especially due to growing economic nationalism and flawed dispute resolution mechanisms. Energizing sustainable finance from foreign investors will require deeper reforms to the country's political, judicial, administrative, and regulatory climate.

India’s star may be rising, but as a destination for foreign investment to help power that economic rise, not enough has changed. The government’s commitment to several sustainable sectors – from the modernization of water access to electric mobility to renewable power generation – is incontrovertible. However, an unfortunate comparison can be made to its emphasis on mass manufacturing as a destination for FDI in the years since 2014. Though India’s rhetorical commitment was compelling, actions on the ground led to the promise of increased FDI in manufacturing being belied.

In this essay, Mihir Sharma of the Observer Research Foundation examines four areas of interest regarding FDI flows into India. First, data suggests India is disappointing as an FDI destination. Second, manufacturing in India has been a particular letdown in spite of the recent government focus on encouraging FDI to the sector. Third, these issues may be caused in part by poor dispute settlement mechanisms, arbitrariness at the state level, and discrimination against foreign investors – in essence, a poor climate for FDI. And fourth, these same problems are likely holding back what would otherwise be a sizable flow of funds into sectors relevant for India’s sustainable development, including private climate finance.

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Mihir Swarup Sharma is a senior fellow at the Observer Research Foundation in New Delhi and head of its Economy and Growth Programme.

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