India’s external buffers are strong, but rupee depreciation exposes vulnerabilities. Dependence on imported fossil fuels worsens current account deficits. Geopolitical turmoil and oil shocks cause inflation and currency depreciation. Market volatility can lead foreign investment to reverse, putting more pressure on the rupee. Temporary measures help briefly, but cannot replace structural reforms.
is chairperson, Fairfax Centre for Free Enterprise, former G20 Sherpa and former CEO, Niti Aayog.
India’s external buffers are strong, but rupee depreciation exposes vulnerabilities. Dependence on imported fossil fuels worsens current account deficits. Geopolitical turmoil and oil shocks cause inflation and currency depreciation. Market volatility can lead foreign investment to reverse, putting more pressure on the rupee. Temporary measures help briefly, but cannot replace structural reforms.
The durable response is to attract stable foreign direct investment (FDI) and grow exports. For India’s external sector, the most valuable FDI is that which embeds India in global value chains (GVCs), builds export capacity, transfers technology and creates competitive domestic supply chains. From nearly 2.1% of GDP in 2015, net FDI inflows have fallen to around 0.7-1.0% of GDP over the last two years.
Our goal must be to attract at least $100 billion a year in net FDI. We must also ask how much of it helps India become a larger, more reliable production base for the world.
Policy predictability is key: The Vodafone and Tiger Global taxation cases show that prospective rules, credible grandfathering and time-bound advance rulings matter. Policy uncertainty is seen as an additional tax or cost of doing business in India. Inconsistency and ambiguity lead investors to litigation and hurt perceptions of India as an investment destination. Investors must know the rule, timeline and authority responsible for resolving a dispute.
Reduce tax litigation and disputes: Currently, nearly ₹30 trillion is tied up in tax disputes. These disputes divert working capital and undermine confidence. Prioritizing reduction of tax litigation is crucial. Advance rulings can help but take inordinate time to institute. They must be given top priority.
Make Press Note 2 work: Replacing Press Note 3 of 2020—which tightened investment from countries sharing land border with India—with Press Note 2 of 2026 is a welcome recalibration. The remaining uncertainties must now be eliminated. Legacy investments below the relevant threshold should be grandfathered. The methodology for computing beneficial ownership must be codified. Distinguish passive limited partners from investors exercising material ownership or control. Repeat private equity and venture-capital investors already vetted by the government should have an expedited green channel for minority investments in non-sensitive sectors.
Attract global capital to monetize assets: With a potential of ₹16.7 trillion, asset monetization can attract significant global capital. However, for global investors to invest in real estate and infrastructure investment trusts, the process is cumbersome. They must register domestically and navigate local rules. The Securities and Exchange Board of India must allow the issue of depositary receipts in global markets by listed trusts. This would make it easier for global funds to invest in India.
FDI must build export capacity: GVCs have propelled Vietnam’s export rise. It did not wait to build every component domestically before seeking export scale. Vietnam reduced input tariffs to zero or near-zero for export manufacturing. This also helped limit customs classification disputes, interpretation friction and repeated arguments over the tax treatment of inputs. To export competitively, India must also import competitively.
Scale first, value addition follows: Vietnam also offers an important lesson on domestic value addition. In the early years of its integration with GVCs, it prioritized scale. It recognized that domestic value addition increases as volumes, suppliers, skills and technical capabilities grow and deepen. Insisting on high domestic value addition at the outset can prevent the scale required to build that ecosystem.
Turning globally competitive to join value chains requires reform action on many key fronts simultaneously
Reduce the cost of inputs: Import tariffs on intermediate goods have steadily risen. Duties on purified terephthalic acid and mono ethylene glycol, key inputs to make synthetic fibres, have been re-introduced. While a cloth quality control orders were abolished last year, nearly 600 remain. These must not act as barriers to trade. Import duties on intermediate goods must be lowered.
Vie for global manufacturers: India’s experience with mobile manufacturing demonstrates that with appropriate incentives, prompt action and trust, a robust manufacturing ecosystem can be developed. Led by an appointee of the Prime Minister, an empowered task force should be constituted to engage with top global firms and design incentive schemes. The body should have a fixed mandate, defined sectoral targets and most importantly, the authority to coordinate across ministries and states.
Make states compete for FDI: States should compete to host these anchor firms through a challenge-based process, with priority given to those offering the fastest approvals, suitable land and infrastructure. States must also be ranked on their ability to attract FDI.
Reduce the cost of doing business: India has made significant progress on the ease of doing business. The next challenge is to lower the cost of doing business. This requires cheaper, deeper credit, competitive power and input costs, faster customs clearances, more predictable land markets and proportionate, risk-based regulation.
India must compete relentlessly for anchor GVCs, review them at the highest level, prioritize scale before premature localization and offer policy predictability. We must compete for GVCs with speed, certainty and persistence.