India needs to win back foreign investors. Three things to do, Pg10

Key Highlights:

• Foreign equity portfolio investors have withdrawn over Rs 2 lakh crore from India in 2026.
• The current account deficit is projected to potentially double to 2% of GDP due to rising oil prices.
• UNCTAD reported that global FDI rose by 14% in 2025, with developed economies seeing a 43% increase while developing economies experienced a 2% decrease.
• Proposed tax reforms include a shift to a residence-based capital gains tax system, potentially exempting foreign investors from long-term capital gains tax.
• The government is considering revisiting FDI ownership caps, potentially allowing 100% automatic foreign investment in remaining sectors.
• Efforts are being made to curb imports of oil and gold, aligning with the Prime Minister’s appeal for demand-side adjustments.

Detailed Insights:

• India's balance-of-payments surpluses, previously supported by remittances, capital inflows, and exports, are now facing deficits for the third consecutive year.
• Global capital is becoming more fragmented and politicized, favoring developed economies over developing countries, impacting FDI flows.
• A shift to a residence-based capital gains tax system could remove a major deterrent for foreign portfolio investors, offering immediate relief without bilateral negotiations.
• Allowing European UCITS funds direct access to India could provide a passport into the market, though implementation may take time.
• FCNR bonds should be used cautiously as a fire extinguisher rather than a primary defense, to avoid higher costs and distortion of capital allocation.
• Easing Press Note 3 norms and adopting a screening system similar to CFIUS could further attract FDI while managing geopolitical risks.
• Labour reforms, with states expected to finalize rules by the second half of 2026, aim to raise labor force participation to 65% through incentives and job creation.
• Judicial reforms, including AI-enabled case management and fast-track commercial courts, could expedite dispute resolution and amplify the impact of other reforms.
• Long-term economic transformation requires trade liberalization, integration into global value chains, tariff cuts with ASEAN and the EU, and extension of PLI incentives.
• Broader policy reforms should target energy security, distribution reforms, and the inclusion of the energy sector under GST to enhance financial resilience.

Key Concepts Involved:

• FDI (Foreign Direct Investment): An investment made by a firm or individual in one country into business interests located in another country.
• FCNR (Foreign Currency Non-Resident) Bonds: Fixed-term deposits held in a bank in a currency other than the country's domestic currency, typically by non-resident Indians.
• UCITS (Undertakings for Collective Investment in Transferable Securities): A regulatory framework for investment funds in the European Union, allowing them to be marketed across member states.
• PLI (Production-Linked Incentive) Scheme: A scheme that aims to give companies incentives to boost domestic manufacturing.