The manufacturing gap behind India's FDI recovery: Analysis of the Global South investment landscape

Introduction

In 2025, India's foreign direct investment (FDI) inflows recorded US$38.89 billion, an increase of about 44% year-on-year, rising two places globally to 11th. This figure is particularly prominent against the backdrop of a global increase of only 2% in FDI to developing countries. However, beneath the glossy total, greenfield investment commitments in manufacturing plummeted from US$111.14 billion in 2024 to US$74.12 billion, revealing deep-seated difficulties in India's manufacturing transformation. This article examines the quality of India's FDI recovery from the perspective of an emerging market analytical framework and explores the common challenges faced by Global South countries in supply chain relocation.

FDI Total Recovers, but Structural Signals Are Mixed

The improvement in India's FDI was mainly driven by continued capital injections into existing projects, rather than large-scale landing of new capacity. According to UNCTAD data, India's greenfield investment commitments fell 33% in 2025, while globally, total greenfield investment in data centers, semiconductors, and AI infrastructure exceeded US$270 billion, accounting for more than one-fifth of global greenfield project value. Although India secured Alphabet's US$14.5 billion data center project in Andhra Pradesh (the world's largest single greenfield project) and Hynfra's US$4 billion green ammonia project, these mega-projects are insufficient to support a diversified manufacturing ecosystem.

Manufacturing investors pay more attention to long-term operating conditions when choosing locations: land acquisition delays, differences in approval processes across states, tax disputes, slow contract enforcement, and tariff uncertainty. A 2025 report by the OECD pointed out that legal and regulatory barriers remain the main constraint on private infrastructure investment in India. UNCTAD also cited tariff uncertainty and supply chain shifts as reasons for weak new manufacturing commitments.

Global Capital Flows to Technology-Intensive Sectors, India Still in Catch-Up Phase

The structural shift in global FDI in 2025 is not favorable to India. Capital is accelerating toward data centers, semiconductors, and AI infrastructure, where technology, skilled labor, and mature supply chains are concentrated in the United States, Taiwan (China), and South Korea. India's semiconductor program is still in its infancy, and its domestic computing capacity is still under construction, failing to fully capture this wave of technology investment.

The "China+1" strategy is widely anticipated, but multinational companies have compared Vietnam, Mexico, Indonesia, and other countries in actual site selection. India's large domestic market is an advantage, but it is insufficient to offset execution risks. When production costs, trade convenience, logistics depth, and regulatory stability are comprehensively considered, India is often not the first choice.

Net FDI and Capital Outflows: Another PerspectiveThe Reserve Bank of India (RBI)'s net FDI data presents a more cautious picture. In 2025, India's net FDI stood at only $3.34 billion, a slight improvement from $2.83 billion in 2024, but Indian companies' outward direct investment surged 47% to $35.66 billion, and overseas greenfield project commitments rose 41% to $25.29 billion. This means the strong momentum of Indian enterprises' outward investment has almost offset the growth in foreign capital inflows. The internationalization of local companies is not a policy failure, but it shows that the attractiveness of the domestic investment environment is insufficient to retain capital.

Structural Reforms and Remaining Challenges

India has introduced several reforms over the past decade: the Goods and Services Tax (GST) unified indirect taxes, the Insolvency and Bankruptcy Code established a single framework, and the digital public infrastructure (India Stack) expanded identity authentication and payment systems. These measures have reduced some costs, but deeper obstacles remain in land management, judicial efficiency, tax enforcement, and trade policy. Central subsidies (such as the Production Linked Incentive scheme PLI) and the semiconductor plan (₹760 billion) can only partially compensate for uncertainty, but cannot replace a fundamental improvement in the institutional environment.

Lessons for the Global South: From FDI Rankings to Manufacturing Ecosystems

India's case serves as a warning for other emerging markets. A rise in the ranking of total FDI inflows is commendable, but without the mass establishment of new factories, this ranking is merely a numbers game. What truly determines long-term growth capacity is the depth of the manufacturing ecosystem: clusters of small and medium-sized suppliers, a stable policy framework, efficient infrastructure, and a predictable judicial system.

The relocation of global supply chains will not automatically benefit any country. Emerging markets must simultaneously address two major issues: market access and operational certainty. India's FDI recovery in 2025 is a genuine step forward, but the manufacturing gap reminds all parties: to make the Global South a manufacturing hub, deeper institutional changes than subsidies are needed.

Conclusion

India's FDI grew 44% in 2025, but greenfield investment fell 33%, and net inflows were only $3.34 billion. This contrast indicates that India has yet to break through the balance between "market size" and "execution difficulty." For global investors, India remains a destination with high potential but high barriers. Only when obstacles related to land, law, and taxation are systematically dismantled can $38.89 billion translate from progress in rankings into a leap in manufacturing strength.