The $30 Trillion Question: Can India fix its investments?  

As the world discusses tariffs and related geopolitical issues, the real conversation needs to shift to investments.

The world is facing immense economic uncertainty. Donald Trump’s brand of economic conservatism, which uses tariffs or their threat to coerce economies, risks pushing the U.S. into stagflation (inflation without growth). Although Trump’s stance on tariffs has fluctuated, global markets remain vulnerable to his erratic policy shifts. Some commentators downplay U.S. protectionism by citing a modest 0.2 to 0.4 percentage point impact on Indian GDP, but others warn of lasting trade wars with harmful effects such as Chinese dumping and short-term export declines in sectors like automobiles.

Yet the tariff debate misses a deeper issue. Even if tariffs have an impact, India’s core challenge—and the key to becoming a $30 trillion Vikasit Bharat—lies in fixing its investment landscape. Removing bottlenecks in emerging sectors and areas of comparative advantage is vital. While global conditions matter, they are not fully determinative. India must urgently raise its growth rate from 6.5% to above 8%, especially while its demographic dividend, peaking by 2036 with a workforce of nearly one billion, still lasts. This requires more than incremental gains—it calls for a major boost in capital flows.

The State of India’s Fixed Investments

In India, investments (measured by ‘Gross Fixed Capital Formation’ or GFCF) have hovered around 30 to 32 percent of GDP since 2016. Meanwhile, countries like Bangladesh are catching up, and China consistently exceeds 40 percent. Economist Martin Wolf argues that India needs a GFCF of at least 40 percent just to become Greece, the poorest among high-income nations, by 2047. Alarmingly, the private sector’s contribution to investment dropped to a decade-low 33 percent in FY24, while in China it exceeds 50 percent.

This imbalance overburdens public finances. Collecting each rupee through taxes imposes a societal cost of almost two rupees, due to inefficiencies in administration and compliance (known as the marginal cost of public funds). Coupled with delays and corruption in public projects, this makes public spending a costly and slow-moving engine of growth.

Within the private investment stream, foreign direct investment (FDI) accounts for 9 to 10 percent of fixed business capital. It has historically brought not just funds, but technical know-how and spillover benefits. For example, the Suzuki-Maruti partnership in the 1980s transformed India’s auto industry. While India remains a top FDI destination, global volatility and a worldwide dip in FDI flows pose challenges. FDI equity inflows fell by 3.5 percent to $44.2 billion in FY24, and net FDI dropped to a 12-year low of $10.6 billion. This happened despite several business-friendly reforms such as the Production Linked Incentive (PLI) scheme. However, global supply chain shifts—such as Apple moving iPhone assembly to India—signal recovery potential, and FDI has already climbed to $42 billion in the first half of this fiscal.

Given the inefficiencies of public funding and the uncertainties around foreign capital, revitalizing domestic industry, which has remained sluggish since its FY12 peak, is central to India’s next phase of growth.

Investment Bottlenecks

A major reason for weak private investment is the lack of strong domestic demand, held back by high food inflation, rising youth unemployment, and stagnant wages. Without robust consumer demand, businesses remain hesitant to expand. Demand may improve soon, supported by the RBI’s likely monetary easing, income tax relief in the 2025 budget, and softer commodity and oil prices. Capacity utilization is already rising, suggesting a potential rebound. To prepare for this, three key supply-side constraints must be addressed as global supply chains shift and India gains from the “China plus one” strategy.

The first bottleneck is policy inconsistency, which undermines investor confidence. Long-term investment requires predictability. But frequent reversals, like sudden import restrictions on laptops, the retroactive 28 percent tax on online gaming, windfall taxes on oil, export bans on rice and wheat, and earlier moves like demonetization, have created instability. Second, India’s regulatory landscape remains overly complex. Over 100 overlapping labor laws across central and state governments deter firms from scaling operations. Many Quality Control Orders (QCOs) also act as non-tariff barriers to foreign companies. In contrast, Vietnam, which is emerging as a key export-led manufacturing hub, has benefited from clear and consistent reforms. Third, a shortage of public goods such as modern infrastructure and legal enforcement adds to business costs. Logistics in India consume 14 to 16 percent of GDP, compared to 8 to 9 percent in China. Port turnaround times are roughly double those in Vietnam. Even basic commercial dispute resolution may take years. Weak intellectual property protection also discourages innovation-led foreign investment.

Some Indian states offer useful lessons. Tamil Nadu, Maharashtra, Telangana, Karnataka, and Gujarat have emerged as investment magnets by designing more effective business and trade policies. Telangana’s Investment Promotion Agency (TS-iPASS), which allows self-certification and enforces approval deadlines, attracted over ₹17,000 crore in FY22. Maharashtra’s vast industrial land bank has simplified land acquisition, making it one of the top FDI recipients.

Reviving Private Investment: The Way Forward

Efforts to boost investment, particularly domestic private investment, have delivered mixed results. While the PLI scheme attracted ₹1.3 lakh crore in committed investment, it fell short of its target to raise manufacturing’s share of GDP to 25 percent by 2025. It remains stuck at around 17 percent.Ideally, what India needs is a transformative “1991 moment.” Private investment has slowed since 2011, mirroring the decline in major reforms. However, politically, the space for deep reform is limited today. A divisive information environment, widespread mistrust, and poor communication have made reforms harder to push through. The backlash against the 2021 farm laws, despite their economic merit, reflects this challenge.

In this context, focusing on ease of doing business is the better path. Instead of running too many fragmented schemes, the government should let firms choose where to invest, supporting selectively through tools like viability gap funding. There are clear opportunities across sectors. Emerging areas such as Green Hydrogen, the AVGC sector, and Electric Vehicles show early promise. Industry leaders  have committed significantly in some of these spaces like Green Hydrogen. High-growth segments like Electronics manufacturing are also gaining traction, with a target of $300 billion in production by 2026. Electronics exports have become the fastest-growing among India’s top 10 export categories. Traditional strengths like textiles, steel, and pharmaceuticals also need targeted support through schemes such as PM-MITRA.

To build investor trust, sudden or retroactive policy changes must be avoided. A transparent, consultative policymaking approach is essential. Simplifying GST into a flat rate could ease compliance. The Jan Vishwas Act, which decriminalizes minor offences, is a positive step. However, wider reforms, such as implementing the Labor Codes after addressing contentious issues, are still needed.

On the international front, India should use the tariff debate to its advantage. Lowering average tariff rates, currently around 17 percent, to under 10 percent could push Indian firms to compete more aggressively on a global scale. This would foster innovation, especially from large companies, which currently account for only a third of India’s R&D spending. These firms often prioritize wealth preservation over entrepreneurial risk. This innovation push should be directed toward emerging technologies like AI.

India must also pursue opportunities through Free Trade Agreements (FTAs). Several FTAs, including one with the UK, are under negotiation. These must be carefully structured to maximize long-term export gains and reverse the trend of unproductive FTAs in the past.

Final Word

India must get the basics right—stable policies, simplified regulation, reliable infrastructure, and a business environment that inspires confidence. With global dynamics shifting, the country has a rare opportunity to reposition itself as an investment magnet. The real challenge lies not just in managing external risks like tariffs, but in addressing internal barriers. If tackled thoughtfully through consistent policy and better delivery of public goods, India can unlock its private sector’s true potential and move confidently toward its 2047 goals.

Article authored by Rajesh Mehta and Nikhil Kalia. Rajesh Mehta is a leading international affairs expert and Nikhil Kalia is a researcher on geopolitics and trade.