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India, like other developing nations, faces a stiff challenge in attracting capital flows as near-term uncertainties over US trade relations, crude price spikes, and the lack of an India angle in global AI developments weigh on its investment attractiveness, a Finance Ministry report said on Thursday.
Stating that high-frequency indicators for July-August 2026 suggest some moderation in the pace of economic activity following the strong 7.8 per cent GDP growth in the first quarter (April-June), the Monthly Economic Review said global conditions have turned unfavourable again, with an oil price spike in September and short-term pressure on the Indian currency remaining.
“Geopolitical and geoeconomic uncertainty means that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers,” said the Monthly Economic Review for September.
The report highlighted the need to make the Indian economy “more competition-friendly rather than business-friendly”, saying only a competitive economy will become a successful, innovative, and manufacturing economy.
The ‘unsettled’ trade relations with the United States, AI continuing to drive capital investment and capital flows across borders, and developed countries racing to secure investments to finance their renewed manufacturing aspirations amidst increasing weaponisation of global supply chains have posed challenges for developing countries.
“India, as do other developing nations, faces a stiff challenge to attract capital flows. Indications are, however, that foreign direct investment inflows, on a net basis, should do better this financial year than the last,” it said.
The resilience displayed by the domestic economy in this challenging global environment is acting as a “big strength” in an otherwise difficult global situation, it added.
“Over time, investors will come to appreciate the resilience and the sustenance of high growth in India in the post-Covid years. For now, investor interest in India is not low but cautious.
“Near-term uncertainties pertaining to the state of the trade relationship with the United States, tariff pressures, uncertainty with respect to crude oil prices and supply and the absence of an India angle to the AI-related global developments cast a shadow on India as an attractive investment destination,” the report said.
Over time, as these challenges dissipate, India’s intrinsic growth potential will earn the attention it deserves from investors, it noted.
The report further said the divergence between current pessimistic sentiment and positive future expectations highlights the need to strengthen near-term job creation by improving access to employment opportunities, demand-linked skilling and improving job matching mechanisms.
It cautioned that geopolitical polarisation “may be worsening amidst apparent bonhomie” and supply-chain weaponisation is intensifying, and global supply shocks in diverse sectors such as energy, metals, electronics, food and semiconductors are beginning to emerge.
India’s economic outlook faces some upside inflation risks driven by compounding climate, geopolitical, and monetary headwinds. Inflation arising from supply shocks will restrain economic growth.
It said interest rates in the developed world are rising sharply and will spill over into domestic bond yields as well, and cross-border capital flows will slow as higher interest rates will persuade many investors to stay invested in domestic markets amidst pervasive and rising global uncertainty.
“Sustained high quality, consistent and reasonably swift decision-making will reassure investors. More importantly, India must work on ensuring that the economy is more competition-friendly rather than business-friendly. Only a competitive economy will become a successful, innovative, and manufacturing economy. Improved governance and enhanced state capacity at all levels of the government hold the key to a competitive Indian economy,” the report said.
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