India's next FDI challenge: Turning $1 trillion-plus capital into impact
From cost of doing business to state-level coordination, India now needs jobs, exports and deeper local integration to show for its rising foreign fund inflows
India’s foreign direct investment (FDI) story is entering a new phase. After attracting more than $1 trillion in cumulative FDI over the past 25 years, the focus is shifting from how much capital the country can bring in to what that capital does once it arrives.
India received about $1.16 trillion in total FDI between FY2000-01 and FY2025-26, including $791 billion in FDI equity, according to data cited by the Associated Chambers of Commerce and Industry of India (Assocham), from the Department for Promotion of Industry and Internal Trade (DPIIT) and Reserve Bank of India (RBI).
Annual inflows have risen sharply from around $4 billion in FY2000-01 to about $95 billion in FY2025-26. FDI equity inflows, meanwhile, increased from roughly $2 billion to $59 billion during the same period, said Assocham. The scale of the increase reflects India's deeper integration with the global economy and the gradual liberalisation of its investment regime. But the next leg of growth could be more complicated.
Capital attraction to economic impact
Assocham's latest working paper, India’s FDI Policy: Evolution, Challenges and the Way Forward (Beyond US$1 Trillion Towards the Next Phase of FDI), argues that attracting capital should no longer be viewed as the sole measure of success. The bigger question is whether FDI translates into domestic value addition, jobs, exports, technology transfer and stronger links with Indian businesses.
That distinction is becoming increasingly important as India seeks to strengthen its manufacturing base, integrate into global supply chains and build capabilities in sectors such as electronics, renewable energy and advanced industrial production.
Services and computer software and hardware account for nearly a third of cumulative FDI equity inflows, while automobiles, pharmaceuticals, chemicals, infrastructure, electronics and renewable energy have also attracted significant investment.
Assocham's working paper, 'India’s FDI Policy: Evolution, Challenges and the Way Forward', argues that attracting capital should no longer be viewed as the sole measure of success.
For India, therefore, the challenge is not simply to compete with other economies for investment announcements. It is to create conditions in which companies that enter the country find it commercially viable to stay, expand capacity and deepen their local operations.
Cost of doing business remains central
Industry executives continue to point to the cost and complexity of operating in India as an important part of that equation.
Assocham has called for stronger investor aftercare, faster and more effective single-window approvals, better availability and affordability of land, and improvements in logistics, utilities, compliance and access to finance.
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These issues matter beyond the initial investment decision. A company may be willing to establish a facility in India, but decisions on whether to add another plant, increase local sourcing or develop a research and development operation depend on the conditions it encounters after the initial investment.
Greater coordination between the Centre and states is therefore another priority identified by the industry body. Since several factors affecting investment—from land and local infrastructure to clearances and utilities—fall within state-level jurisdiction, the investment environment can vary significantly across locations.
Next test: deeper integration
The evolution of India's FDI regime over the past two decades has largely been about opening sectors, simplifying entry and attracting larger pools of global capital. The next stage could increasingly revolve around quality and integration.
Why federal issues matter
♦ Centre-state coordination is a key industry priority
♦ Companies investing here need local sourcing, R&D ecosystem, etc
♦ Land, clearances, utilities also fall under state jurisdiction
That would mean encouraging investment that brings not just money but also technology, global customers, management expertise and connections to international supply chains. It could also mean designing investment policies around the broader industrial ecosystem: suppliers, skilled workers, logistics networks, research institutions and domestic manufacturers.
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For policymakers, that creates a more demanding objective. FDI policy would need to work alongside industrial, infrastructure, trade and skilling policies rather than operate as a standalone investment-attraction exercise.
India's $1 trillion-plus FDI milestone is therefore less an endpoint than a marker of how far the economy has travelled. The harder task now is ensuring that the next trillion dollars is embedded more deeply in the country's productive capacity—and generates economic value well beyond the initial flow of foreign capital.
