Economists Debate India's Reliance on Foreign Capital for Growth

During the Business Standard BFSI Insight Summit held in Mumbai on Monday, economists expressed differing views on India's dependence on foreign capital to drive its ambitious growth plans. The panel, moderated by Tamal Bandyopadhyay, featured prominent voices including Aastha Gudwani from Barclays, Sonal Varma of Nomura, and Samiran Chakraborty representing Citibank.

Gudwani, who serves as India's chief economist at Barclays, emphasized that foreign financial inflows are crucial for India to reach its goal of becoming a developed nation by 2047. She highlighted the role foreign capital plays not only in funding growth but also in stabilizing the currency, a key factor in maintaining financial stability. "India's journey from here to the Viksit Bharat goal that we have for 2047 cannot happen without participation of foreign financial capital," she said.

Gudwani also weighed in on the ongoing debate about taxation policies affecting foreign portfolio investors (FPIs) in equities. She suggested that while tax changes alone might not constitute major reforms, easing tax burdens on FPIs could eliminate barriers to investment, especially at a time when market valuations are less attractive and India is not leading in emerging sectors like artificial intelligence hardware. She proposed that tax exemptions for FPIs coupled with efforts to enhance currency stability should be priorities for policymakers.

In contrast, Sonal Varma, Nomura's managing director and chief economist for India and Asia excluding Japan, urged caution in relying heavily on foreign capital. She pointed to the increasing volatility and geopolitical tensions shaping the global economy, arguing that dependence on foreign funds exposes India’s growth to external risks. "We live in a world of increased volatility and uncertainty and geopolitical tensions are here to stay," Varma remarked. She advocated for reforms aimed at reducing this reliance over time.

Echoing some of these concerns, Samiran Chakraborty from Citibank outlined the scale of India’s investment needs, referencing a study projecting a rise from $1.5 trillion currently to $3.2 trillion over the next decade. He noted that approximately $600 billion of this total—around $60 billion annually—would need to be sourced from foreign capital. Chakraborty pointed out that while the average foreign capital inflow over the past 15 years has been about $80 billion annually, recent years have seen minimal net capital account surpluses, indicating a decline in foreign investments.

Varma highlighted three global shifts impacting capital flows: the emergence of artificial intelligence as a capital driver, ongoing geopolitical disruptions causing supply chain disturbances, and a trend where foreign direct investment decisions increasingly depend on geopolitical considerations rather than just cost or ease of business. Developed economies are drawing more capital back, making it tougher for emerging markets like India to meet their financing requirements.

Chakraborty also stressed that discussions often focus too much on capital supply and not enough on demand. He raised the question of how India can make its projects more appealing and bankable for investors and lenders. "We tend to always think of the supply of capital: How banks will supply capital, how foreigners will supply capital. We don't discuss enough about the demand for capital," he said.

The economists agreed that India’s strategy must balance current and capital account management with domestic reforms to sustain investment and growth despite global uncertainties. Gudwani suggested efforts to increase foreign direct investment (FDI), which represents a more stable form of capital, and improving the liquidity and tradability of Indian securities to attract foreign portfolio investors.

Varma added that India should focus on attracting investment in labor-intensive, low-technology sectors, noting that the relationship with China over non-strategic industries could influence capital inflows, as China remains a major player in driving foreign investment.

Adding to the panel, Aditi Nayar, chief economist at Icra, underscored the importance of broadening private investment across sectors. She noted that although public investment helped revive the economy after the Covid-19 pandemic, private capital growth has been concentrated in areas like data centers, renewable energy, and electric vehicle manufacturing. Nayar recommended fiscal reforms to prioritize capital expenditure over revenue spending within government borrowing limits to better support growth.

Looking ahead to the Union Budget 2027-28, the panelists proposed measures to boost investment and manage fiscal risks. Gudwani called for restoring indexation benefits on debt instruments, while Varma suggested that the government could signal confidence to global investors by reducing its borrowing more than anticipated. Nayar emphasized the need for timely implementation of the Eighth Central Pay Commission's pay revisions to avoid large arrears and ensure consumption growth is supported promptly.

Chakraborty reiterated the need to improve project viability and bankability. He encouraged the finance minister to consider introducing a common framework in the upcoming budget to enhance the attractiveness of investment projects across the country.

This discussion reflects broader challenges faced by emerging economies in balancing foreign capital reliance with domestic reforms amid a complex global economic landscape. India's approach to foreign investment and fiscal management will be critical in shaping its path to achieving the ambitious development goals set for 2047.