India's FDI Retention Challenge: Policy Gaps in Global Value Chain Integration

Indian Express - Opinion · 26 Jun 2026 · 2 min read
Prelims · Economy Mains · GS3 Economy High relevance

India's net FDI plummeted to 8% of gross inflows in 2025-26, exposing structural weaknesses in retaining foreign capital despite 'China Plus One' opportunities, with Vietnam outperforming India in global manufacturing integration.

Key points

Net FDI collapse: India's net FDI fell to $7.65 billion (8% of gross inflows) in 2025-26 from $44 billion (54% of gross) in 2020-21, indicating capital flight despite high gross inflows.

Comparative disadvantage: Vietnam's net FDI grew 119% since 2014 while India's declined 21%, highlighting systemic competitiveness issues beyond global economic conditions.

Round-tripping concerns: Significant FDI flows through Singapore, Mauritius, UAE, and Netherlands suggest possible tax optimization rather than genuine productive investment.

Value chain integration gap: India lags in electronics, electrical machinery, and automotive component ecosystems despite Apple/Samsung assembly operations, while Vietnam dominates these sectors.

[GS3-Economy] Current account pressure: Persistent deficits make stable FDI retention crucial for rupee stability, but RBI interventions indicate thin net FDI cushions.

China Plus One limitations: India captured only modest gains from supply chain diversification due to shallow manufacturing ecosystems compared to China's supplier networks.

Policy predictability deficit: Foreign investor exits signal erosion of confidence in India's regulatory environment despite production-linked incentive schemes.

This connects to GS2-Governance as it highlights the need for institutional reforms in investment climate, contract enforcement, and bureaucratic efficiency.

Way Forward: India should establish special economic zones with global-standard dispute resolution, accelerate logistics infrastructure under PM Gati Shakti, and create sector-specific supplier development programs with Japanese/Korean technical partnerships.

Key terms

Net FDI

Net Foreign Direct Investment calculates inflows minus outflows (repatriation, disinvestment). For UPSC, it's a critical indicator of sustainable external capital absorption and economic stability, unlike volatile portfolio flows. Relevant to balance of payments (BoP) in GS3-Economy.

China Plus One

Corporate strategy to diversify supply chains beyond China post-pandemic. For UPSC, this represents India's missed manufacturing opportunity despite demographic advantages, testing Make in India's effectiveness in GS3-Economy.

Global Value Chains (GVCs)

International production networks where different stages occur across countries. For UPSC, India's low GVC participation (ranked 43rd by OECD) explains export stagnation despite FDI, linking to trade policy in GS2-International Relations.

Production-Linked Incentive (PLI)

Performance-based subsidy scheme for 14 manufacturing sectors. For UPSC, its mixed results in electronics versus pharmaceuticals exemplify industrial policy challenges in GS3-Economy and technology absorption.