According to data released by the Reserve Bank of India (RBI), India's net foreign direct investment (FDI) turned negative in August, recording an outflow of $616 million.

Net FDI refers to the gross inflows into India minus the funds remitted abroad by foreign companies through repatriation or disinvestment, as well as Indian companies' outward investments.

The rare decline reveals a sobering reality behind the glittering labels of "the world's fastest-growing economy," "the most populous nation" and "India's Gilded Age"—that capital is quietly flowing out of the country.

The withdrawal of foreign investment is no accident. In the 2024-25 fiscal year, India's net FDI plunged by more than 96.5 percent to just $353 million compared with $10.1 billion in the previous fiscal year, according to the RBI.

By May 2025, net FDI stood at only $35 million, 98 percent lower than the $2.2 billion recorded in May 2024.

The sharp fall was mainly due to large-scale disinvestment and profit repatriation by foreign companies. The RBI, however, interpreted the trend as a sign of "a maturing market mechanism" and "enhanced liquidity"—an explanation that in effect obscures the deeper problem of waning long-term investor confidence in India and the increasingly short-term nature of foreign capital.

Unmake 'Make in India'

The answer to the downturn perhaps lies in the gap between the grand narrative of "Make in India" and the reality behind it.

Launched on September 25, 2014, the "Make in India" initiative was designed to promote manufacturing, foster innovation and transform India into a global manufacturing hub. The program aimed to boost economic growth by attracting both foreign and domestic investment while improving the ease of doing business.

Over the past decade, the Indian Government has worked to improve the business environment, roll out industrial incentive policies and upgrade infrastructure, hoping to leverage its demographic dividend, market potential and the restructuring of global supply chains to realize its dream of becoming "the world's factory."

Yet 10 years on, that dream remains elusive. The manufacturing sector's share of GDP has not increased but declined, job creation has fallen short of expectations and the problem of foreign investment "coming in but not staying" has become increasingly evident. The root cause lies in the structural barriers embedded in India's economic ecosystem and governance system, which together form deep-seated flaws in its investment environment.

India's legal and regulatory environment remains highly uncertain. While its legislation is sound on paper, violations of law and selective enforcement are common. The legal system is complex and ambiguous, with many business and economic laws carrying potential criminal penalties, greatly increasing compliance costs and operational risks for companies. On the policy side, frequent changes in tariffs, foreign ownership limits and environmental standards, along with differing interpretations between central and local authorities, make it difficult for investors to form stable expectations. More worryingly, selective law enforcement in cases involving foreign enterprises has become increasingly common, with several well-known multinational companies facing regulatory challenges in India. This has undermined the government's credibility and deepened investor concerns over asset security and returns.

Administrative inefficiency and red tape further exacerbate the problem. To set up, operate or expand a business in India, companies must navigate numerous approval procedures and obtain multiple no objection certificates from different departments. The lengthy procedures, potential delays and corruption risks considerably raise both time and compliance costs for foreign investors.

The Indian Government's $23-billion Production Linked Incentive scheme, introduced in 2020 to spur domestic manufacturing through financial incentives and reduce reliance on imports, has faced criticisms for slow approvals and delayed subsidy payments.

According to The Economic Times, around 750 companies, including Apple supplier Foxconn and Reliance Industries, joined the scheme, which offered cash incentives tied to specific production goals and timelines. However, many firms struggled to start production, while others that met their targets reported long waits for the promised payouts.

An Indian official, speaking on condition of anonymity, told the newspaper that red tape and bureaucratic caution have continued to stymie the program's effectiveness.

According to the World Bank's 2020 Doing Business Report, India ranked 136th in "Starting a Business." It required 10 separate procedures and around 18 days to complete them—though in practice, the process often takes much longer due to bureaucratic complexity and low administrative efficiency. Exiting the market is equally difficult: Winding up or closing a subsidiary involves lengthy and complicated legal procedures. Between 2014 and 2021, 2,783 foreign companies ceased operations in India. From 2018 to 2022, the number of foreign firms leaving the country even exceeded those entering it—over 550 companies shut down operations, while only about 470 new ones set up business, according to The Hindu.

Finally, India faces massive structural constraints in basic production factors, particularly in land acquisition and labor management. Land ownership records are often unclear and disputed, and India's strict land acquisition laws make it extremely difficult to obtain industrial land. The process frequently triggers legal disputes and public protests, which has become one of the major obstacles to manufacturing investment.

On the labor side, India's labor laws impose strict limits and complicated procedures on dismissals, layoffs and factory closures. These rules raise the threshold for labor protection but also deprive enterprises of flexibility in times of economic fluctuation or capacity adjustment, discouraging new fixed assets investment.

In addition, India's infrastructure bottlenecks, including unreliable electricity supply, underdeveloped transport systems and outdated port facilities, further constrain industrial growth. Many foreign companies are forced to install their own power generators or repair access roads, which ends up increasing their operational costs.

Despite its vast demographic dividend and enormous market potential, India's multiple structural barriers and weak business environment continue to limit its attractiveness to foreign investors. In an era of increasingly fierce global competition, unless India can swiftly improve its investment climate and rebuild investor confidence, the ambition of "Make in India" may remain little more than a slogan. BR

The author is an assistant research professor of the Institute of South Asian Studies at China Institute of International Studies

Copyedited by G.P. Wilson

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