India faces a tougher environment for attracting capital as uncertainty over US trade relations, crude oil prices and the absence of a strong India angle in global AI investment trends weigh on near-term investor sentiment, according to the Finance Ministry’s Monthly Economic Review.
New Delhi, Oct 1 — India, along with other developing economies, faces a difficult challenge in attracting capital flows as global trade, geopolitical and financial conditions remain uncertain, according to the Finance Ministry’s Monthly Economic Review for September.
The report said high-frequency indicators for July and August 2026 suggest some moderation in economic activity after India recorded 7.8% GDP growth in the April-June quarter.
It noted that global conditions have again become less favourable, with crude oil prices rising in September and the Indian currency facing short-term pressure.
The report said India cannot rely only on its strong post-Covid growth performance and will need to sustain growth quarter after quarter to maintain investor confidence.
The Finance Ministry also stressed the need to make the economy “more competition-friendly rather than business-friendly”, arguing that a competitive economy is more likely to become innovative, successful and manufacturing-led.
Among the major challenges highlighted were unsettled trade relations with the United States, tariff pressures, uncertainty over crude oil prices and supply, and the limited role of India in the current wave of global AI-related capital investment.
The report also pointed to growing competition from developed economies seeking investment to rebuild manufacturing capacity amid the increasing strategic use of global supply chains.
Despite these challenges, the review said net foreign direct investment inflows are expected to perform better in the current financial year than in the previous one.
The domestic economy’s resilience was described as an important strength in an otherwise difficult global environment. The report said investor interest in India remains present but cautious.
It also highlighted the need to strengthen near-term job creation through better employment access, demand-linked skilling and improved job-matching mechanisms.
The review warned that geopolitical polarisation and supply-chain weaponisation are intensifying, with supply shocks beginning to emerge in sectors including energy, metals, electronics, food and semiconductors.
It also flagged upside inflation risks arising from climate, geopolitical and monetary pressures, noting that supply-driven inflation could weigh on economic growth.
The report added that rising interest rates in developed economies could put upward pressure on domestic bond yields and slow cross-border capital flows.
It said sustained, high-quality and timely decision-making, along with better governance and stronger state capacity, would be important for improving India’s competitiveness and reassuring investors.
