To attract foreign capital, reforms must be deeper, not cosmetic
The Indian Express · IE Online ·
Restrictions on capital carry costs that emerge slowly, as investments not made and firms not built. India’s approach must internalise this through a first-principles overhaul of its primary foreign exchange statute
Written by Niharika Yadav
Net FDI in India has gone down from $40 billion in FY2021 to effectively zero in FY2025. There are attempts to address this, including a rationalisation of the foreign investment framework through the draft Foreign Investment Rules (FI Rules) released by the RBI. The draft Rules are a mixed bag, with some positive changes such as shorter sections, an investee-centred framework and harmonised definitions. However, these are operational revisions that are in themselves insufficient for achieving the RBI’s objective of creating a “contemporary, user-friendly investment framework” or materially improving India’s investment climate. The binding constraint is India’s suspicious approach towards foreign capital, and it requires a deeper, first-principles overhaul of the Foreign Exchange Management Act (FEMA).
To make progress on global economic engagement, the Indian state needs to do two things. One, it should signal, loud and clear, to foreign funds evaluating competing emerging market options that capital is welcome in India. Two, it should keep the friction between a commercial decision and its execution near zero. These objectives are hard to reconcile with the present law. Under Section 6 of FEMA, capital account transactions remain prohibited unless specifically permitted by the RBI or the government, so everything built above it, including the draft FI Rules, essentially serves as a schedule of exceptions to a default state of restriction.
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