Unpacking India’s Growth Story: Why FDI Decline, Manufacturing Struggles, and GDP Myths Matter to You

Sometimes, a simple number can reveal a complex situation. Take India’s net foreign direct investment (FDI) forecast for 2024-25: a mere $353 million. This number is shocking compared to the previous year’s $2.4 billion. It represents only one-seventh of the record-setting FDI from 2020-21, which hit $44 billion. While gross investments fluctuate, the main concern lies with the funds leaving India. In 2024-25, foreign investors took out $52 billion, and Indians invested $29 billion abroad—twice as much as two years prior.

This trend raises important questions. Experts often say India is on track to replace China as a manufacturing powerhouse. Yet, why are funds fleeing the country? The Reserve Bank of India claims this outflow is a sign of a mature market. However, many disagree. They see it differently; it’s a warning signal.

Theoretical frameworks can help us understand this issue. Robert Lucas, an economist, highlighted a paradox where capital is expected to flow into poorer countries with low wages. In theory, investment should be huge in nations like India. But practice shows otherwise; most investment goes to wealthier nations, leaving developing countries struggling.

There’s hope tied to trends like the “China-plus-one” strategy, where companies consider diversifying manufacturing. However, this was anticipated during Donald Trump’s trade policies, suggesting companies would move away from heavy reliance on China. India aimed to capitalize on this with Production Linked Incentives (PLI), targeting a boost from 14% to 25% manufacturing share in GDP.

The narrative surrounding India’s economy as a rising superpower doesn’t align with shrinking investments. India has long struggled to break into global manufacturing. Key factors include low productivity and human capital deficits that hinder economic advancement. Countries like Vietnam have excelled in attracting investments, with robust education systems and high female labor force participation driving their growth.

The historical context is crucial. India’s ratio of manufacturing to GDP has remained stagnant, despite various efforts to boost it. Most of the growth has come from public sectors like administration and finance, not manufacturing. Current statistics suggest a lack of jobs in the manufacturing sector, even after the pandemic.

When companies withdraw money, it signals unease about stability. A notable figure in this scenario is Apple. Starting in 2017, Apple’s suppliers established operations in India, providing jobs primarily for women. Yet, despite the hype about production growth, India must ask if this will attract larger investments or be a short-lived band-aid.

Experts emphasize another vital point: the quality of education and workforce. Economists like Oded Galor argue that education leads to higher productivity. Countries that have prioritized education and female participation, like the East Asian nations, have consistently outpaced India in globalization opportunities. Without these essentials, India is unlikely to benefit fully from global market shifts.

The challenge of job creation is palpable. With only a tiny percentage of its workforce in manufacturing, India faces an uphill battle. Sectors like IT, which once surged, have faced layoffs, indicating a need for re-evaluation.

Some speculate that reporting and government statistics may paint an overly optimistic view of GDP growth. While the country celebrated recent growth, deeper analysis suggests that the real growth might hover around 4.5%. That’s a stark contrast to the touted figures, and it raises questions about the economy’s health.

This leads to a broader issue: is the GDP metric a true reflection of people’s lives? Robert Kennedy once said it fails to measure essential aspects of life—like health and education. That sentiment echoes today. A growing GDP may not translate to improved living standards, especially in a country still grappling with poverty.

Going forward, India must confront these truths. Emphasizing education, empowering women in the workforce, and creating a welcoming investment climate are essential steps. If leaders remain focused on surface-level growth while ignoring structural issues, the dream of becoming a superpower may remain just that—a dream.

It’s clear that addressing foundational problems is critical for real progress. Only then can India hope to shift from being a mere participant in the global market to a leader in it.

Ashoka Mody, a former professor at Princeton, has spent years analyzing economic trends and is the author of several impactful works on global economics.

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