BFSI Insight Summit 2026: Economists divided over reliance on foreign funds | BS Events

As the finance minister keenly watches the debate over taxation of foreign portfolio investors (FPIs) in equities, economists remain divided on how much India should rely on foreign capital to fund its growth ambitions.

 

At a panel discussion with Tamal Bandyopadhyay at the Business Standard BFSI Insight Summit in Mumbai on Monday, Aastha Gudwani, India chief economist at Barclays, said India could not achieve its goal of becoming a developed economy by 2047 without foreign financial inflows. Sonal Varma, managing director and chief economist for India and Asia ex-Japan at Nomura, and Samiran Chakraborty, managing director and India chief economist at Citibank, however, argued that India must reduce its dependence on foreign capital amid persistent geopolitical tensions and global financial volatility.

  

“India’s journey from here to the Viksit Bharat goal that we have for 2047 cannot happen without participation of foreign financial capital,” Gudwani said, adding that foreign capital also helped stabilise the currency, an important ingredient for financial stability.

 

According to Gudwani, a tax change may not be a reform in the grand scheme of things, but if it was suitable, considering it could remove the marginal hurdle for an FPI to undertake an investment position in India at a time when valuations were not very attractive, nor India was the front runner in the artificial intelligence (AI) hardware story, and currency stability lacked predictability.

 

“I would therefore be looking at some tax exemptions for FPIs in equity markets, and, of course, more currency stability, which is an overarching responsibility of policymakers,” she said.

 

Nomura’s Varma, however, said foreign investment was not the best source of capital in a world characterised by heightened uncertainty and volatility.

 

“One thing that has become very clear over the last 2-3 years is that we live in a world of increased volatility and uncertainty and geopolitical tensions are here to stay,” Varma said. “So you don’t want to have an economic model where your growth rates, your financial needs are continuously at risk of the mood of foreign capital. So I think from a more macro perspective, the reform that we need is to reduce the dependence on foreign capital.”

 

The scale of India’s investment needs, however, means that foreign inflows will remain important. Citing a Citibank study, Chakraborty said India’s investment requirement was projected to rise from $1.5 trillion currently to $3.2 trillion over the next decade. Of the $3.2 trillion requirement, about $600 billion would need to come from foreign sources, implying an annual requirement of roughly $60 billion in foreign capital over the next 10 years.

 

“If you look at last 15 years average, we have got $80 billion (foreign capital) a year. So, compared to that, the $60 billion number is nothing, especially when the economy is growing. But if you look at last two years, we have barely had any capital account surplus. So, almost no inflow on capital account on net basis,” Chakraborty added.

 

Varma explained that there were three major shifts underway globally — AI driving capital, geopolitical disruptions leading to constant supply chain shocks, higher inflation and interest rates, and Foreign Direct Investment (FDI) decisions increasingly being influenced by geopolitical alignment rather than manufacturing costs or ease of doing business.

 

Developed economies that were traditionally sources of capital were now attracting more of it, making it harder for emerging economies such as India to finance their investment needs while managing external-sector pressures, she said.

 

Chakraborty also argued that the debate focused too heavily on the supply of capital and not enough on whether India was creating projects that investors and lenders were willing to fund.

 

“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. How are we making our projects bankable? How are we making our projects investable?” Chakraborty said. “I think that the demand side of the problem is less discussed, and we should emphasise that part as well.”

 

The question, therefore, is what should be India’s strategy on the current account, capital account and domestic reforms to sustain its investment and growth needs despite the adverse global backdrop.

 

“From a medium-term perspective, I think having gross FDI inflows, or for that matter net FDI inflows which happens to be the most patient part of our capital account, is something that we need to strive for,” Gudwani recommended. “Index inclusion, making it simpler to be a part of global indices, making securities more liquid, better tradable, is something that we can immediately look at to improve the foreign portfolio investments,” she added.

 

Additionally, India should also strive to attract capital in labour-intensive low-tech industries, Varma said. “If we want to attract some of the capital in these labour-intensive low-tech industries, our relationship with China on non-strategic sectors is something we’ll need to look at, because China is driving a lot of the inflows,” she added.

 

At the same time, Icra Chief Economist Aditi Nayar raised the need for private investment to become broad-based in India. Public investment was the primary tool of the government to revive the economy after the Covid-19 pandemic, to induce a multiplier effect in private sector.

 

However, private investment has picked up in limited sectors, particularly data centres and those related to renewable energy and electric vehicle manufacturing, Nayar said. I think one side reform, which is also needed is expenditure management and rationalisation so that within the borrowing that you’re (government) allowed to do, more of it can actually go towards capital spending, and less of it towards revenue expenditure,” she added.

 

Ahead of the Union Budget for 2027-28 (FY28), the economists also outlined measures that can support investment, manage fiscal risks and boost growth. Gudwani called for the restoration of indexation benefits for debt instruments, while Varma said the government could send a positive signal to global investors by reducing its borrowing more than expected.

 

“There’s a lot of focus on fiscal risk globally right now, and if we can surprise by cutting borrowing more than what is expected, I think that would be a positive signal in an otherwise very nervous global investor environment we are in,” Varma said.

 

Nayar called for the upcoming pay revision by the Eighth Central Pay Commission to be implemented without a large build-up of arrears, allowing the economy to absorb the additional burden while supporting growth. This would help ensure the boost to consumption and growth comes next year itself, rather than leaving the government to absorb a larger arrear bill in a single year, she said.

 

Chakraborty, meanwhile, reiterated the need to focus on the demand side of investment by making projects more viable and attractive to lenders and investors. He said the finance minister could use the Budget to propose a common framework for improving the viability, bankability and investability of projects across the country.