Fiscal and investment credibility, not headline numbers, will drive India's economic growth
Written by Deepanshu Mohan & Ankur Singh
Two critical trends have occurred with little discussion or critical reflection. One is the recent data showing inward FDI (Foreign Direct Investment) capital flows reducing, as against the rise observed in outward FDI (capital moving out of the country), which indicates weakening investor confidence and/or low growth in capacity utilisation of existing (or already invested) private capital in key sectors.
According to the RBI, India performs well in terms of greenfield FDI (new projects) investments announced during 2024–25, following the US, UK, and France, as the fourth destination most preferred by investors. But what's important is to distinguish 'gross flows' of investment from 'net flows'. As reported and explained, 'Gross flows account only for the FDI that flows into the country. It doesn't take into account the funds that flow out due to foreign companies repatriating funds to their head offices overseas, or foreign investors selling off investments in Indian companies, or Indian companies investing in ventures overseas. Net flows, after accounting for the outward movement of funds, collapsed to just around $400 million in 2024–25, down from over $10 billion the year before.'
This is worrying and signals a structural shift in India's FDI-led investment ecosystem. Beyond this trend, Moody's cut the United States' sovereign credit rating on May 16 from AAA to Aa1. The downgrade wasn't in reaction to a crash, a pandemic, or a war. This was also not a sudden moment of fiscal slippage. It was something slower and far more dangerous: the normalisation of fiscal recklessness at the heart of the global monetary order.
The timing of this also matters. Unlike the S&P downgrade in 2011, which followed the debt-ceiling standoff, or Fitch's move in 2023 amid post-COVID distortions, Moody's decision came in a year of relative economic calm, at least on the surface. Inflation is easing, unemployment is low, and global markets are more stable than they've been in years. That's what makes the downgrade quietly radical.
Under Trump's presidency, the US has doubled down on a mix of tax cuts, tariff wars, and populist spending — all without credible offsets. The so-called One Big Beautiful Bill, heavy on headline-friendly promises like tax exemptions on tips and overtime pay, masks an extraordinary fiscal burden. Independent estimates peg its ten-year cost at over $5 trillion. That's on top of a debt-to-GDP ratio already exceeding 120 per cent.
That shift matters for every other country trying to navigate a world built on dollar stability. It matters most for emerging markets like India, which borrow trust before they borrow money. If even the US can lose its fiscal halo, no country is immune from scrutiny.
In India, elections have long served as budget announcements. Whether in the corridors of the Centre or on the campaign trail in the states, fiscal responsibility is often the first casualty of political ambition. Loan waivers, free electricity, subsidised gas cylinders, unemployment stipends, direct cash transfers — the list of election-time giveaways has grown longer with each cycle. In recent years, nearly every state election — from Haryana to Jharkhand, Delhi to Maharashtra — has witnessed a scramble among parties to outdo each other in promises of material entitlements: free rides, free water, free laptops.
India's general government gross debt stands close to 80 per cent of GDP. Its combined fiscal deficit continues to hover above prudential norms. Yet our politicians treat the budget as an open-ended ledger for electoral engineering, diverting scarce public funds toward short-term voter appeasement rather than long-term nation-building.
This erosion becomes all the more dangerous in the context of a shifting global climate — one in which financial markets may no longer be willing to turn a blind eye to fiscal indiscipline, however well-wrapped in democratic legitimacy it may be.
Moody's downgrade of the United States marks a turning point. When the world's largest economy, issuer of the global reserve currency and anchor of financial markets, sees its sovereign creditworthiness questioned, it signals a recalibration in how markets view risk. This is not a one-off judgement. It is part of a broader repricing of fiscal credibility — one that should worry emerging economies more than most.
With the US downgrade, the club of AAA-rated sovereigns has grown even more exclusive. Germany and Canada, which were long considered models of stability, too are now grappling with their own budget imbalances, prompting speculation that they, too, may soon fall off the list.
For India, the implications of this are twofold and urgent. First, it is a reminder that the global financial order no longer offers blanket indulgence to profligacy. Its capital markets remain vulnerable to swings in foreign sentiment, and its monetary policy is constrained by external balances. In such a landscape, credibility must be consistently earned.
Second, India's vulnerabilities are institutional. Beneath the headline numbers, what is often ignored is inconsistent tax enforcement, erratic regulatory actions, and delays in judicial and insolvency mechanisms. These are not peripheral issues; they shape how investors price long-term risk.
On FDI, behind the headline numbers shared earlier — often denominated in billions of dollars — India has been affected as well. As a share of GDP, net FDI into India peaked at 2.65 per cent in 2009. According to a recent study, other preferred destinations for FDI, such as China or Vietnam, have also seen net FDI as a share of GDP fall in recent years.
I have argued earlier that India needs productivism — to borrow from Dani Rodrik's reasoning — and must prioritise the dissemination of productive economic opportunities and investment capital across all sectors and segments of the workforce. This will help utilise effective capital mobility for job creation as well. All this requires a critical shift from fiscal management as a crisis-response to fiscal credibility as the default posture. Markets don't send warnings like this twice.
Deepanshu Mohan is Professor of Economics and Dean, IDEAS, Office of InterDisciplinary Studies, Director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities. Ankur Singh works at CNES
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
23 minutes ago
- Time of India
Bamboo Farming Holds Promise to Uplift Vidarbha's Farmers: Experts
Nagpur: Senior scientist and agroforestry expert Vijay Illorkar on Friday said bamboo farming has immense potential to transform the agricultural landscape of Vidarbha, offering farmers a sustainable and profitable alternative. He was speaking at the first bamboo harvest at the Agroforestry Research Farm of Dr Punjabrao Deshmukh Krishi Vidyapeeth (PDKV). Illorkar, who has been leading the study on bamboo since 2010, said that the university has submitted 15 key research-based recommendations to the state govt over the years, which have been implemented through various policies. Despite being a traditional resource, bamboo cultivation demands specialised skills. The tools used are still traditional, but training is necessary, as general labourers often cannot operate them effectively," he said. Illorkar emphasised the need to match bamboo varieties with available labour capacities, and also stressed the importance of fumigation and post-harvest handling. Adding to the discussion, bamboo entrepreneur Ashish Kaswa, who out of his 27 cultivation sites, collaborated with the PDKV and harvested the plant at the facility, said, "The plant has the natural ability to absorb toxic elements such as arsenic from water and convert them into harmless salts," he said. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like 2025 Top Trending Local Enterprise Accounting Software [Click Here] Accounting ERP Click Here Undo Kaswa said that this could come in handy for Vidarbha, where many districts have high alkaline water. Additionally, bamboo retains 70–80% moisture in its early stages, requiring proper awareness to avoid premature harvesting. Despite its ecological and economic value, challenges in training labour, high harvesting costs, and misinformation have hindered widespread adoption. "Bamboo, unlike other crops, requires specific knowledge and labour training, which most daily-wage farm workers lack," said Kaswa adding that current harvesting costs of Rs2,000 per tonne need to be brought down to Rs 1,200 to make the venture viable. Historically, bamboo's use in India was curbed by the 1927 Forest Control Act imposed by the British, who restricted its cultivation and trade. "The Britishers labelled it 'poor man's timber' and psychologically distanced even the affluent Indians from its use," said Kaswa, adding that bamboo played a vital role in Indian culture, from surgical procedures to cremation. However, in 2017, bamboo was finally removed from the Forest Act by the Central govt.
Time of India
an hour ago
- Time of India
When Dr Radhakrishnan gave away degrees under tent at IIT-Kanpur
Lucknow: When RBI governor, Sanjay Malhotra, returns to his alma mater, IIT-Kanpur, on June 23 to address the premier institute's 58th convocation at its sprawling auditorium, the event will mark the institute's memorable journey from its humble beginnings. Tired of too many ads? go ad free now The institute's first convocation was held under a tent in 1965 and addressed by the then President of India, . The event saw 66 members of the institute's first graduating class conferred the BTech degrees. Dr PK Kelkar, founder director of IIT-K, presided over the function and gave a report on the growth and prospects of the institute. Among the many speeches on the occasion, Kelkar's was the most memorable. IIT-K has come a long way since its inception in 1959. From its humble beginnings in a borrowed room at Harcourt Butler Technological Institute, it has grown to become a premier institution, now situated on a sprawling 420-hectare campus located on the Grand Trunk Road, around 15km west of Kanpur city. Land for the institute was gifted by the govt of Uttar Pradesh in 1960 and, by March 1963, it had shifted to its current location. Today, IIT-Kanpur is renowned for its academic excellence, research, and innovation. A visit to the campus back then would have revealed a serene landscape featuring standing crops, acacia woods, a picturesque line of stately mango trees, flocks of peafowl roaming freely, and a quintessential Indian countryside scene. This idyllic setting made a perfect blend of natural beauty and rustic charm. The campus is designed with a focus on environmental freedom, featuring halls of residence, faculty and staff houses, and community buildings. Tired of too many ads? go ad free now All these are strategically arranged around the central academic area to facilitate flexibility in movement and easy communication. The institute's inaugural batch, the Class of 65, produced some illustrious technocrats and business honchos in the country like Abhay Bhushan, a computer scientist who has been a major contributor to the development of the internet TCP/IP architecture and is the author of the File Transfer Protocol, Suresh Pandey (former director, Bokaro Steel Plant), and Vinay Kumar Modi (Director of Modi Industries Limited). The batch members recall how they departed from the campus in May 1965 and were waiting to hear when the convocation would be held. Finally, they received invitations by India Post. By then many batchmates had left for studies abroad and some of the ones in India could not attend because of work or personal issues. A few of them, though, did make it to Kanpur to receive their degrees. IIT-K made arrangements for them to be picked up at the railway station and they were lodged at the Visitors' Hostel. Abhay Bhushan, chairman of Asquare Inc and part of IIT-K's 1965 batch, reminisces: "The convocation was planned for the afternoon, from 3pm to 5.30pm. We, the graduating students, were asked to arrive by 1.30pm to collect our gowns and caps and to get instructions on walking in the procession. In all, 67 BTech and 5 PhD degrees were awarded." "During the convocation, several speeches were given. Of note was Dr Kelkar's speech where he recalled what we, as the pioneer batch, had been through and how we were better educated to handle whatever our profession and life may have to offer. He said that the faith that they have shown in the future of the institute has been a real source of inspiration," Bhushan said. The Class of 1965 gifted IIT-K Rs 2.5 crore during its Diamond Jubilee Reunion celebrations in March. The batch pledged this amount towards creating a "Pioneering Research and Innovation Award" at the institute. Talking to TOI, the institute's present director, Professor Manindra Agrawal, said: "This year, we are celebrating the 58th convocation. Over the years, the institute has come a long way in contributing to the nation's technology and innovation landscape, as well as shaping bright minds. As an alumnus myself, every convocation here is nostalgic."
Time of India
an hour ago
- Time of India
ICICI sought to acquire HDFC, reveals chairman Deepak Parekh
Former HDFC chairman Deepak Parekh and ICICI Bank chief Chanda Kochhar MUMBAI: Former HDFC chairman Deepak Parekh, in a candid disclosure, said that then ICICI Bank chief Chanda Kochhar had proposed a merger between the two lenders - well before HDFC's eventual reverse merger with its banking subsidiary. During an interaction with Kochhar on her channel, Parekh said: "I remember you talking to me once. I remember it very clearly. It's never been talked about in public, but I'm willing to share it now. You said that ICICI started HDFC. 'Why don't you come back home?' That was your offer." Parekh said he declined the offer, saying "it won't be fair" or "proper with our name and the bank and all". Parekh said the eventual merger with HDFC Bank, completed in July 2023, was driven mainly by regulatory pressure. RBI had classified NBFCs like HDFC, then holding assets over Rs 5 lakh crore, as systemically important, breaching the Rs 50,000-crore threshold. "RBI supported us and they pushed us into it to some extent and they helped us," he said. However, he added that there were "no concessions, no relief, no time, nothing". Describing the day the merger concluded, Parekh called it "a sad day and a happy day". He said, "It's good for the institution. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like 180k traders turn to IC Markets for optimum CFD trading conditions IC Markets Sign Up Undo It's good for the country to have large banks. Look at how large Chinese banks are. We have to be bigger, larger in India." Parekh believes that Indian banks must grow through acquisitions to become stronger in future. On broader economic concerns, Parekh cited persistent uncertainty in supply chains, trade policy, and export conditions as top CEO concerns. Calling insurance the "least understood product", Parekh criticised "mis-selling by banks" driven by high upfront commissions. Stay informed with the latest business news, updates on bank holidays and public holidays . AI Masterclass for Students. Upskill Young Ones Today!– Join Now
