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India’s economic growth story is deeply intertwined with its ability to attract investments, both domestic and foreign. However, recent trends indicate a worrying decline in domestic private investment, which directly impacts Foreign Direct Investment (FDI). This blog critically examines the interplay between sluggish demand, domestic and foreign investments, and the reforms needed to revitalize India’s economy.

The Current Scenario: A Decline in Domestic and Foreign Investment

Domestic private investment has been stagnating, and this has a cascading effect on FDI. Foreign investors often rely on local market demand as a key determinant of investment decisions. If domestic entrepreneurs are not investing, it signals a lack of confidence in market growth. This creates a vicious cycle where weak demand discourages both local and foreign investment.

For instance, farmers and small business owners who previously ventured into new businesses now refrain from reinvesting. Instead, they are choosing to withdraw capital from ventures that no longer yield attractive returns. This withdrawal not only reduces economic activity but also fosters a “trading mentality” among foreign investors. Instead of committing to long-term investments, they bring in money for short-term gains and withdraw once profits are realized.

Data and Insights: The Link Between Investment and Growth

India’s GDP growth has shown fluctuations over the years and while there has been improvement in absolute terms, the growth remains inadequate. The lack of consistent domestic investment further discourages foreign investors, creating a self-reinforcing cycle of reduced economic activity.

The Regulatory Challenge: Too Many Rules, Too Little Ease

Despite India’s improvement on the World Bank’s Ease of Doing Business Index—from 142 in 2014 to 63 in 2023—significant hurdles remain. According to TeamLease Regtech, businesses in India face:

1,563 acts and rules

69,233 compliances

6,618 annual filings


While not every company is subject to all these regulations, the cumulative burden is substantial. This regulatory complexity discourages entrepreneurs and deters investors seeking simpler and more predictable environments.

The Reform Agenda: What Needs to Change?

India must address its sluggish investment climate with bold and decisive reforms. The government has made strides, such as privatizing Air India—a long-awaited and symbolic move. However, progress has stalled since then. Key areas for reform include:

1. Privatization of Public Sector Enterprises: The privatization policy announced in May 2020 under the COVID-19 package showed initial promise but has since lost momentum. Selling public sector banks like IDBI could send a strong signal to investors about the government’s intent to reduce inefficiencies and foster competition.


2. Simplifying Regulations: Streamlining the vast array of rules and compliances will significantly improve ease of doing business. This includes reducing the number of mandatory filings and harmonizing regulations across states.


3. Reviving Demand: Policies aimed at boosting consumer demand, such as increased rural spending, tax cuts, or targeted subsidies, can encourage both domestic and foreign investments. Without robust demand, no amount of policy reform can sustain long-term investment.


4. Speaking the ‘P’ Word—Privatization: Beyond IDBI, the government must accelerate privatization in other sectors, showing investors its commitment to a market-driven economy.

The Critical Role of Demand in Driving Investment

At its core, investment—whether domestic or foreign—is driven by the potential for returns. Entrepreneurs and investors, irrespective of their origin, prioritize profitability over nationality. Therefore, the distinction between domestic and foreign investment becomes moot when demand is weak.

For instance, foreign investors look at local market conditions, and a lack of domestic investment signals a broader economic malaise. Addressing demand through targeted fiscal and monetary measures is crucial for revitalizing investment across the board.

The Road Ahead

India’s journey toward becoming an attractive investment destination is far from over. While progress has been made, there is still much to be done. The government must rekindle its reform agenda with a renewed focus on privatization, demand generation, and regulatory simplification. By addressing these challenges, India can restore confidence among domestic entrepreneurs and foreign investors alike, setting the stage for sustainable economic growth.

India’s success story lies in its ability to adapt, reform, and deliver on its promises. The time for bold action is now. Will the government seize this opportunity, or will the sluggish investment climate persist? Only time will tell.