By Ramachandran Rajeev Kumar — 2026-05-30

FDI Does Not Follow Speeches. It Follows Conditions.

India's foreign investment story is better than the pessimists admit.

It is also weaker than the cheerleaders claim.

That is the truth we need to sit with.

The gross number looks impressive. RBI data cited in May showed India's gross FDI inflows rising to about USD 94.5 billion in FY26, a record level and higher than the previous year's USD 80.6 billion. The net number also improved, from about USD 1 billion in FY25 to roughly USD 7.7 billion in FY26.

Good.

But if gross FDI is the applause, net FDI is the relationship.

The net figure is what remains after repatriation by foreign investors and outward investment by Indian firms. That is why it matters. A country can attract money and still fail to hold enough of it. A market can receive capital and still make investors leave too early, sell too much, hedge too aggressively or keep new commitments shallow.

So the right question is not whether India can attract foreign capital.

It can.

The right question is whether India can create conditions under which capital comes in, builds factories, transfers know-how, trains workers, survives political cycles, reinvests profits and stays long enough to deepen national capability.

That is a harder question.

And Bharath must answer it without propaganda.

The Record Number Is Not The Whole Story

India has genuine advantages.

It is large. It is growing. It has demand. It has engineers. It has digital public infrastructure. It has a young labour force. It has expanding roads, ports, airports, industrial corridors and power capacity. It has policy focus in semiconductors, electronics, defence, renewables, EVs, chemicals, pharmaceuticals and food processing. It is a democracy with a court system, a central bank, capital markets and a strategic location in the Indo-Pacific.

These are not small things.

Investors are not stupid. They see India.

But investors also compare India.

They compare India with Vietnam, Mexico, Indonesia, Thailand, Malaysia, China, Poland, the UAE, Saudi Arabia and Brazil. They compare land acquisition timelines. They compare customs. They compare tax stability. They compare dispute resolution. They compare power quality. They compare port dwell time. They compare the behaviour of state officials. They compare contract enforcement. They compare whether a company can bring in technicians without ceremony and exit capital without harassment.

India cannot win on market size alone.

Market size gets the meeting.

Conditions get the investment.

Gross Confidence, Net Hesitation

The FY26 data tells a mixed story. Gross inflows were strong. Net inflows recovered from the extremely weak FY25 base. But the net figure remains modest compared with earlier years. Financial Express, citing the RBI May bulletin, noted that net FDI touched about USD 43 billion in FY21, then fell to roughly USD 38 billion in FY22, USD 28 billion in FY23 and about USD 10.5 billion in FY24, before the FY25 trough.

That decline is not a small statistical wrinkle.

Some of it is natural. Foreign investors repatriate profits. Indian companies invest abroad. Mature investments get sold. Private equity exits. Global capital reallocates when interest rates, wars and valuations change.

But when net FDI stays low while gross inflows are celebrated, policymakers should not simply ask, "How do we announce more?"

They should ask, "Why does enough money not stay?"

That question is more useful because it leads to the real issues: tax certainty, approvals, dispute settlement, regulatory predictability, protection of minority shareholders, state-level delivery, infrastructure reliability and confidence that policy will not change after capital is sunk.

Foreign investors do not only price risk before entering India.

They price the risk of being trapped after entering India.

India Is Back On The Investor Map, But Not At The Top

Kearney's 2026 FDI Confidence Index places India in the global top 25, at 22nd, and in the emerging-market index behind China, the UAE, Saudi Arabia, Brazil, Mexico, Thailand and Malaysia.

The direction of travel matters more than the rank. India has slipped from fifth to eighth on Kearney's emerging-market index even as gross inflows hit a record. Gross confidence, net hesitation — the whole argument in a single line.

This is not a disaster.

It is a warning.

India is not invisible. It is attractive. But other emerging markets are also working hard. Some have smaller markets but sharper execution. Some have trade access advantages. Some have better integration with North American, European or East Asian supply chains. Some provide faster industrial land, clearer incentives, smoother customs and more predictable local administration.

India should not respond with wounded pride.

It should respond with reform.

If Mexico can move up because supply chains want North American proximity, India must ask what its own supply-chain proposition is. If Thailand and Malaysia gain because electronics and industrial investors see operating predictability, India must ask where it still overcomplicates manufacturing. If the UAE and Saudi Arabia attract capital through speed, infrastructure and sovereign coordination, India must ask why too many projects still move through slow state machinery.

Capital is not an award for potential.

Capital is a vote on execution.

The Press Note 3 Correction Shows The Right Instinct

The March 2026 amendment to India's FDI policy on investments from land-bordering countries is an example of the kind of practical correction India needs.

After the 2020 Press Note 3 framework, investment from countries sharing a land border with India, or investments with beneficial ownership linked to such countries, generally required government approval. The security logic was understandable. India had to prevent opportunistic acquisitions and protect sensitive sectors.

But overbroad restrictions also chilled legitimate capital. Global funds often have complex ownership structures. A small, passive and non-controlling beneficial interest linked to a land-border country is not the same as strategic control by an adversarial entity.

The Cabinet's 2026 decision recognised that difference. It allowed non-controlling land-border-country beneficial ownership of up to 10 percent under the automatic route, subject to sectoral caps and reporting. It also created a 60-day decision timeline for specified sectors such as capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer manufacturing.

That is the right direction.

Security and capital are not enemies. Badly designed rules make them enemies.

The state's job is to screen control, not suffocate every chain of passive capital. It should be hard for hostile control to enter strategic sectors. It should not be hard for legitimate global funds to back Indian manufacturing, deep tech and startups.

This is the reform principle India needs everywhere:

Be strict where risk is real.

Be fast where risk is manageable.

Be clear everywhere.

The Problem Is Not One Rule. It Is The Operating Climate.

India's FDI problem is not that foreign investors dislike India.

They like India.

The problem is that too many investors like India strategically and fear India operationally.

They like the market. They fear the files.

They like the talent. They fear the inspector.

They like the demand. They fear retrospective interpretations.

They like the growth story. They fear slow contract enforcement.

They like the ministerial pitch. They fear state-level inconsistency.

They like the industrial corridor. They fear land title ambiguity.

They like incentives. They fear delayed reimbursements.

They like the opportunity. They fear the exit.

This is where the real work begins.

India has improved many things. GST replaced a fragmented indirect-tax maze. Insolvency law created a framework, even if delayed cases still hurt credibility. Production-linked incentives brought focus to manufacturing. Digital compliance has reduced some friction. Infrastructure is visibly better in many corridors. Several states have become more competitive.

But investors do not experience "India" as a slogan. They experience one port, one tax officer, one power connection, one factory inspector, one state incentive claim, one land parcel, one court case, one customs delay, one environmental approval, one local political shock.

National policy can invite capital.

Local execution can repel it.

States Must Become Investment Products

India's next FDI wave will be won or lost by states.

The DPIIT fact sheet up to December 2025 shows how concentrated FDI remains. Maharashtra, Karnataka, Gujarat, Delhi, Tamil Nadu and Haryana dominate the state-wise numbers. That is not surprising. These places have deeper ecosystems, better connectivity, stronger talent pools, larger existing corporate bases and more familiar investor pathways.

But if India wants to become a manufacturing power, FDI cannot remain a narrow geography story.

Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Odisha, Rajasthan, Telangana, Assam and the North East need credible sector propositions. Not generic investor summits. Not thousands of crores in memorandums that never become factories. Real propositions.

A serious state investment product has five things:

Clear land.

Reliable utilities.

Single accountable project owner.

Time-bound approvals.

Aftercare when the factory is running.

Investors do not only need permission to enter. They need help to operate. They need workers trained, logistics connected, disputes escalated, local suppliers identified and state incentives delivered without begging.

India should rank states not by MoUs signed, but by projects grounded, jobs created, exports generated, reimbursements paid on time, disputes resolved and expansions triggered.

The real investor summit begins after the first foundation stone.

Tax Certainty Is Industrial Policy

India often talks about tax as revenue.

Investors experience tax as risk.

A competitive tax rate helps. But tax certainty matters even more. A company can model a high tax rate if it trusts the rules. It cannot model endless reinterpretation, aggressive demands, delayed refunds, transfer-pricing uncertainty and fear that tomorrow's officer will rewrite yesterday's understanding.

India has tried to move toward dispute reduction and clearer transfer-pricing rules. That is positive. But the culture must change from extraction to predictability.

Tax administration should not behave as if every successful investor is a future defendant.

The goal is not to be soft. The goal is to be credible.

Cheating should be punished. Ambiguity should be reduced. Honest disagreement should be resolved quickly. Refunds should not become working-capital punishment. Advance rulings and safe harbours should be reliable enough that boards believe them.

When tax certainty improves, FDI improves.

Not because investors are greedy.

Because capital is allergic to unknowable risk.

Contract Enforcement Is Also FDI Policy

India's legal system is a national asset, but delay weakens it as an economic instrument.

An investor does not only ask whether the law exists. It asks whether the law will work before the project dies.

If a supplier dispute takes years, the factory suffers. If land litigation drags, expansion stops. If arbitration awards become another round of court battle, contract confidence falls. If local payments are delayed without effective remedy, working capital becomes risk capital.

Contract enforcement is not a legal-sector issue. It is an FDI issue.

Commercial courts, arbitration capacity, mediation, digital case management and specialised benches should be treated as industrial infrastructure. A port moves goods. A court moves trust.

India cannot become a preferred manufacturing destination if dispute resolution remains slow enough to become a business model.

Do Not Chase Any Capital. Chase Strategic Capital.

India should not beg for FDI.

It should compete for the right FDI.

There is a difference.

The right FDI brings technology, jobs, exports, supplier development, managerial depth, R&D, design capability and long-term reinvestment. The wrong FDI merely buys existing assets, extracts market access, imports most components, captures consumer margin and exits when valuations peak.

India needs foreign capital, but not at the price of becoming a consumption colony.

The country should welcome investment in semiconductors, electronics, energy equipment, defence production, aerospace, chemicals, pharmaceuticals, food processing, logistics, medical devices, AI infrastructure, battery supply chains and advanced materials. But it should insist on supplier localisation where practical, workforce development, export commitments, domestic R&D, and a clear path from assembly to capability.

Protectionism is not the answer.

Conditional capability-building is.

India should not make rules so restrictive that investors go elsewhere. But it should also not offer market access without asking what India learns, builds and owns after ten years.

The Message To Investors Should Be Simple

India's pitch should not be emotional.

It should be operational.

Come here because the market is large.

Stay here because the rules are stable.

Build here because approvals move on time.

Expand here because states compete to serve you.

Reinvest here because tax is predictable.

Innovate here because talent is deep.

Export from here because logistics work.

Settle disputes here because courts and arbitration are credible.

That is a better pitch than any slogan.

The Next Reform Is Trust

The government is right to care about FDI. Domestic capital alone cannot build every factory, fund every technology transition, support every deep-tech bet, finance every infrastructure layer or absorb every supply-chain shift.

But FDI is not a favour from outsiders.

It is a transaction built on trust.

India has demand. India has ambition. India has talent. India has strategic relevance. The world is looking for alternatives in manufacturing and technology supply chains. That window will not stay open forever.

The question is whether India will use this moment to remove the old frictions that make capital hesitate.

Do not only celebrate the USD 94.5 billion gross inflow.

Ask why net FDI is still modest.

Do not only ask companies to invest.

Ask what they fear after they invest.

Do not only announce reforms.

Measure whether officials obey them.

Do not only sign MoUs.

Track projects grounded.

Do not only invite capital.

Build conditions.

FDI does not follow speeches.

It follows confidence.

And confidence is not declared.

It is administered.

BarathVector covers India's economy, investment climate, and reform. Subscribe for the weekly briefing.