Editor-in-Chief Atul Singh and senior finance professional Sam Tully discuss the sharp withdrawal of foreign capital from India and what it reveals about the country’s economic trajectory. They explore whether recent market weakness reflects temporary geopolitical turbulence or deeper structural problems involving investment, manufacturing, bureaucracy and policy. While Singh fears India risks repeating past crises without major reforms, Tully argues that the country retains important economic strengths despite mounting challenges.

Foreign investors lose confidence

The conversation opens with a striking statistic: Foreign portfolio investors have withdrawn roughly $45 billion from Indian markets over the past two years, including about $18.5 billion in 2025 and another $20 billion by early June 2026. Foreign ownership of Indian equities has fallen to its lowest level in over a decade, raising concerns that international investors are reassessing India’s prospects.

Tully attributes the trend to both external and domestic factors. Geopolitical instability around the Strait of Hormuz has threatened energy and fertilizer supplies that are critical to South Asia, creating inflationary pressures across the region. Simultaneously, India’s traditionally high market valuations have become harder to justify because corporate earnings have disappointed while competing markets such as China, Taiwan and South Korea have benefited from the global boom in AI-related hardware.

As Tully explains, “India’s expensive. It doesn’t have the exposure to the AI hardware that we see in Korea, Taiwan and China.” As a result, investors increasingly see better opportunities elsewhere.

Growth slows as structural weaknesses emerge

Singh says that India’s problems extend well beyond short-term market sentiment. He points to sluggish private-sector capital expenditure, weak innovation and declining international competitiveness. Indian technology companies have excelled in services but invested relatively little in proprietary products, leaving the country absent from many of today’s fastest-growing industries.

Tully agrees that private investment has lagged despite strong corporate balance sheets. Rather than a shortage of capital, he points to structural obstacles including land acquisition, labor regulations and complex approval processes that discourage businesses from expanding manufacturing.

The speakers also revisit earlier policy decisions such as demonetization and the rollout of the Goods and Services Tax. Singh contends these measures damaged small and medium-sized businesses, reducing employment and weakening domestic demand. Tully adopts a more measured view, acknowledging that consumption has slowed while emphasizing that India’s large domestic consumer market remains one of its greatest long-term advantages.

They also note that India failed to capitalize fully on the “China plus one” opportunity. Although initiatives such as Make in India encouraged manufacturing, production has not expanded at the pace seen elsewhere in Asia, leaving India with relatively little exposure to sectors such as semiconductors and AI hardware.

Demographic pressures meet bureaucratic barriers

The discussion then turns to India’s labor market. Around 90% of employment remains in the informal sector, only about 80–90 million people are registered taxpayers and roughly ten million new workers enter the labor force every year.

Singh argues that without stronger job creation, India’s demographic dividend risks becoming a liability rather than an advantage. He observes that many talented Indians continue to pursue education and careers overseas, suggesting both capital and skilled labor increasingly “vote with their feet.”

Tully acknowledges these concerns but highlights encouraging developments within India’s startup ecosystem. Entrepreneurs are applying new technologies to agriculture, education and other sectors, creating innovative businesses that continue attracting venture capital despite broader economic uncertainty.

The speakers devote considerable attention to India’s bureaucracy. Drawing on his own experience in government, Singh criticizes the Indian Administrative Service for retaining a centralized, interventionist mindset that he believes discourages entrepreneurship and efficient policymaking. Tully is more sympathetic toward institutions such as the Reserve Bank of India, though both agree that structural reforms remain necessary to improve the business environment.

The rupee, domestic investors and reform

The weakening rupee becomes another focal point of the discussion. Singh states that continued currency depreciation erodes investor returns while making India less attractive for foreign capital. Unlike export-driven economies that may benefit from weaker currencies, India’s domestic-oriented economy gains relatively little from this adjustment.

Tully agrees the rupee’s decline deserves attention but believes the broader economy remains more resilient than it was before the 1991 balance-of-payments crisis. Domestic investors have increasingly offset foreign selling, helping stabilize markets even as overseas funds reduce their exposure.

Nevertheless, Singh warns that systematic investment plans have left many middle-class investors supporting valuations while experienced foreign investors exit. He raises the possibility of a sharp correction if confidence deteriorates further.

Tully remains cautious but less pessimistic. “I don’t have quite that strong a sense of foreboding,” he says. He considers India’s underlying fundamentals reasonably robust despite the recent setbacks.

Waiting for reform

India stands at an important crossroads. External shocks — from Middle Eastern instability to US tariffs — have compounded domestic weaknesses, yet many of the country’s challenges originate within its own institutions and regulatory framework.

Singh and Tully believe another wave of structural reforms is needed to strengthen manufacturing, encourage investment and improve ease of doing business. They differ on urgency, however. Singh says history shows that meaningful reform often follows severe crises. Tully hopes corrective measures can arrive before conditions deteriorate that far.

Tully concludes, “We must not underplay the extent of the success and transformation that you have seen in India,” even as the country confronts difficult choices about sustaining growth in an increasingly competitive global economy.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.