Why India’s Investment Climate Is Losing Its Shine?: Reassessing India’s FDI Landscape

The Indian growth story has long been an attractive prospect for foreign capital. However, in recent years, the high value exits of global investors have raised pressing concerns about the sustainability of India’s investment climate.

Illustration by The Geostrata

A mix of internal and external factors has negatively affected investor confidence, despite the country’s solid macroeconomic fundamentals. Chief among the concerns of the investment community are valuation pressures, regulatory uncertainty, infrastructure constraints, and geopolitical shifts. At times, these challenges have overshadowed India’s vast market potential, prompting marquee investors to explore other markets that are cheaper, more stable, or both.

VALUATION PRESSURE AND GLOBAL REALLOCATION

Indian stock valuations have always been priced at a premium to the rest of the emerging markets, which makes them susceptible during times of crunch in global liquidity.

By mid-2025, the Nifty 50 had a trailing P/E just under 24x, which was a significantly higher level than its 21.9x historical average.

Comparatively, Chinese equities were being bought at 10x P/E following Beijing's pump-priming efforts, causing Foreign Institutional Investors (FIIs) to drift towards them to exploit greater returns in the short term. At the same time, high U.S. Treasury yields, above 4.6 per cent on the 10-year note, have provided a low-risk asset, which has occasioned portfolio movement away from Indian equity towards U.S. bonds and equity.

This change has been caused by geopolitical uncertainties. The dollar was also boosted due to expectations of changes in U.S. policy in regard to cuts in corporate taxes and tariffs under the upcoming presidential elections in 2024, further making emerging economies of Asia and other parts less appealing. In the hunt for money and security, funds have shifted towards markets that are believed to have a better risk-return trade-off, leaving India momentarily on the bench.

REGULATORY UNCERTAINTIES AND EASE OF DOING BUSINESS

Although there are reforms that have geared toward liberalisation of FDI policy, there is a claim by the enterprises that regulatory flip-flops and red tape are significant obstacles. India has a vast network of central and state regulations, which tend to result in long delays of approvals.

Business laws in the country have more than 26,000 punishments by imprisonment, and this rules out businesses which are used to open systems of laws that multinational companies are used to.

These were constant changes, like the wholesome change of the Mines and Minerals Development and Regulation Act of 2015, compelling investors to grapple with continuously changing mine-auction regulations, leading to uncertainty in projects.

Unclear land titles, extended public hearings, and active opposition by locals can hold up projects, which end up taking years. Uncertainty with regard to greenfield project timelines on land acquisition is the major greenfield project deterrent, with a PwC India study registering this. Even after getting central government clearances, execution often proves poor at the state level, which leads to a decline in trust of investors.

INFRASTRUCTURE, OPERATIONAL AND GEOPOLITICAL HEADWINDS

An inadequate logistical system increases expenses and lags. Transport costs of freight in India are higher than in most other countries in the globe by road and rail to domestic transport, which capitalises on the profit margins of heavy industries.

Power reliability is also good but not in all areas, and thus investors are forced to incur the cost of captive power plants. This fact means that even infrastructure deficits can be critical in locating facilities in sectors where the supply chain is based on just-in-time methods of production, including electronics manufacturing.

Currency risk and macroeconomic volatility are things more and more global investors are sensitive about. The falling Indian rupee, driven by continuous FII selling, slowly eats into returns on repatriation, with additional forces encouraging exits. Also, geopolitical tension in the regions, such as conflict in West Asia and the war between Russia and Ukraine, has made investors averse to risk and thus caused them to move out of the emerging markets.

THE POSCO CASE: AMBITIONS AND EXIT

POSCO displays a case of the warning over how a sizable promise can go sour in the environment of India, with its multifaceted investment climate.

In June 2005, POSCO India Private Limited entered a MoU with the Odisha government to establish a 12 billion dollar integrated steel plant in Jagatsinghpur district to provide 12 MPTA capacity.

It would include captive mines and port development infrastructure and was by far the largest FDI commitment by any company in India. It was expected to bring other development in the region, 18,000 direct jobs, and add a year to Odisha with 12,100 crores to its GDP.

But the twin was affected by land acquisition struggles, community objection, and delays in regulation, and remained so for more than ten years. There were also local demonstrations organised by the POSCO Pratirodh Sangram Samiti against land being sold cheaply, forced displacement, and the effect on the environment.

Although it was cleared at first, the project remained hanging due to the intervention of the Odisha High Court and Supreme Court in issues of land-use change and the diversion of forests. Simultaneously, in 2015, the amendment of the mineral laws stipulated competitive bidding of iron-ore blocks, depriving POSCO of its idea of having captive mines at discounted charges.

Dealing with increasing costs, logistical challenges, and constant resistance, POSCO ceased operations in 2015, only to later temporarily shelve the plan once more in 2016, before giving up once and for all in March 2017 and basically putting the proposed project into retirement after a dozen years without laying a single brick. Among the reasons listed by stakeholders as contributing to withdrawal, there was failure to reach local consensus, long-term court struggles, and unpredictability of the policy.

The project stagnated for over a decade due to delays caused by long community protests and a series of stays by the courts on diversion of the land. At the same time, a 2015 regulatory restructuring that required competitive bidding of iron-ore mines effectively removed access to captive ore blocks at favourable rates expected by POSCO, further hurting the prospects of the plant.

To worsen the situation, POSCO went ahead to undertake more than one mega-project at a time (back in Odisha, Karnataka, and a joint venture in Bokaro), which strained the company in its financial resources, capacity, and abilities, causing it to then focus back on Odisha, but the project in Odisha did not take off either.

Over the years, the high projection of costs was caused by the need to maintain land without corresponding development and increases in inflation, which would lead to delayed penalties and cost overruns along the way, making the initial financial model unviable.

The case of POSCO retreat highlights that most of the policy changes that have been done by India are ambitious yet insufficient in implementation in terms of land entitlements, environmental approvals, and community consultations. Until some systemic changes and improvements protect big foreign investments by predicating predictability, transparency, and smoother dispute resolution, major foreign investments are likely to face continued delays and eventual exits.

CONCLUSION

The burden of India is not inadequate demand of its market but the willingness to see its regulatory and operational climate integrated in a manner that fits investor views on predictability, promptness, and cost-effectiveness at an international level.

The valuation premiums are subject to global liquidity swings, though the long-term setbacks in land policy, infrastructure, and regulatory transparency are at the risk of putting underlying investor confidence in danger. To keep and attract the sort of investments it needs to make its next step of growth, it is important that harmful structural problems such as land acquisition frameworks, streamlining approvals, boosting infrastructure creation, etc., are dealt with effectively.

Failure to do so risks repeating the POSCO scenario on a wider scale, as international businesses, facing lower hurdles and higher returns elsewhere, continue to reallocate capital away from India’s promising yet procedurally complex landscape.

---

BY POSHIKA MUKKU

COVERING PRIME MINISTER'S OFFICE

TEAM GEOSTRATA

info@thegeostrata.com