‘Investment Climate Not in Great Shape’: Former PM Modi Advisor Urges FDI Reforms as Outflows Surge in FY26

Why It Matters

The call for policy overhaul comes as net FDI inflows have slipped from $59.6 bn in 2020‑21 to $47.8 bn in 2025‑26, threatening India’s growth prospects and external financial stability. Addressing regulatory rigidity could revive capital flows and support the country’s ambition to be a global investment hub.

Key Takeaways

• FDI outflows hit $27 bn in FY26, prompting reform calls
• BIT changes force local remedies before arbitration, raising legal uncertainty
• Press Note 3 eases border‑state investments, allowing automatic route under caps
• Investor confidence hinges on tax incentives, deregulation, and dispute‑resolution speed

Pulse Analysis

Surjit Bhalla’s recent interview underscores a growing anxiety among global investors about India’s regulatory environment. While the country still attracts sizable capital—evidenced by $27 billion in FDI outflows this fiscal year—the surge reflects a shift from inbound to outbound investments, signaling eroding confidence. Bhalla points to the 2015 Bilateral Investment Treaty amendment that mandates exhausting domestic courts before seeking international arbitration, a provision that adds layers of delay and legal risk. In a market where speed and certainty are premium, such constraints can deter multinational firms from committing long‑term capital, especially in sectors like manufacturing and deep‑tech where project timelines are tight.

The government’s recent relaxation of Press Note 3 for neighboring countries offers a glimpse of a more open stance, allowing investments with less than 10% non‑controlling ownership to flow through the automatic route. This move aims to attract capital for startups and high‑tech manufacturing, and it introduces a 60‑day approval window for critical sectors. However, Bhalla argues that piecemeal adjustments are insufficient without a comprehensive overhaul of the BIT framework, clearer tax incentives, and streamlined dispute‑resolution mechanisms. Aligning India’s investment rules with global best practices could reposition the nation as a preferred destination for foreign capital, counterbalancing the recent dip in net FDI inflows.

For policymakers, the stakes are high. Declining FDI inflows—from a peak of $59.6 billion in 2020‑21 to $47.8 billion in the latest period—compound pressures from rising oil import bills and a weakening rupee, which was Asia’s worst‑performing currency in 2025. A stable, investor‑friendly regime could not only boost capital inflows but also support broader economic objectives, such as job creation in high‑value sectors and the development of a robust startup ecosystem. By addressing regulatory uncertainty and offering tangible fiscal incentives, India can reinforce its growth narrative and sustain its appeal to the global investment community.