FTAs, Lower Import Duties, Better Business Environment to Boost Net FDI Flows: ADB Chief Economist

Why It Matters

Reviving FDI is critical for sustaining India’s high‑growth trajectory and financing its ambitious manufacturing and infrastructure agenda. Policy shifts that lower trade barriers and improve the business climate could re‑energize capital inflows and support broader economic expansion.

Key Takeaways

• India's net FDI fell from $38.6B (2021‑22) to $3B (FY26 YTD)
• ADB urges lower tariffs and industrial zones to attract foreign capital
• FTAs seen as catalyst for reviving India's inflow trajectory
• Higher oil prices expected $96/barrel 2026, pressuring inflation and growth
• Middle‑East tensions could shave 0.6% off India's GDP, to 6.3%

Pulse Analysis

India’s foreign direct investment has entered a steep decline, dropping from a peak of $38.6 billion in 2021‑22 to a single‑digit $1 billion in FY 25 before modestly recovering to $3 billion in the first half of FY 26. The Asian Development Bank’s chief economist, Albert Park, links this trend to a combination of high import duties, fragmented manufacturing infrastructure, and heightened geopolitical risk. By expanding free‑trade agreements and cutting tariffs, policymakers can lower the cost of entry for multinational firms and restore confidence among investors who have been wary of regulatory uncertainty.

Beyond trade policy, Park emphasizes the strategic importance of building integrated industrial zones that bundle logistics, utilities, and skilled‑labor pools. Such “smart urbanism” reduces transaction costs and streamlines supply‑chain coordination, making India a more compelling destination for capital‑intensive projects. The ADB’s broader agenda includes better city governance, which aligns with India’s recent labour and GST reforms, and aims to create a cohesive ecosystem where foreign enterprises can operate efficiently from a single hub.

The macroeconomic backdrop adds urgency to these reforms. ADB projects oil prices averaging $96 per barrel in 2026 and $80 in 2027, a level that will sustain inflationary pressure and erode real consumption. Coupled with a 0.6‑percentage‑point drag on GDP from the ongoing Middle‑East crisis, growth could slow to 6.3 percent this year, down from the 6.9 percent forecast for FY 27. Accelerating FDI through trade liberalisation and infrastructure upgrades will be pivotal for offsetting these headwinds and keeping India’s growth engine humming.