Kirsty is a counsel at law firm Dentons in Edinburgh and Namita is a partner in New Delhi

By all counts, India is becoming an increasingly attractive target for international expansion. Preliminary data suggests greenfield foreign direct investment (FDI) project numbers in 2024 hit record highs, according to fDi Markets.

India’s big FDI wins last year include its first semiconductor plant, backed by Taiwan’s PSMC (Powerchip Semiconductor Manufacturing Corporation) and VinFast’s $2bn pledge to build an electric vehicle plant in the country. Companies worldwide are realising that India is a crucial place to invest and grow. 

This momentum is often attributed to the country’s economic and demographic strengths. The world’s most populous nation is also the world’s fastest-growing large economy, with the IMF projecting it will expand a further 6.5% in 2025. Economists expect it to overtake Germany and Japan by 2030 to become the world’s third-largest economy, behind only China and the US. Its low operating costs and highly educated English-speaking workforce also boost its FDI appeal.

But India’s FDI prospects are also buoyed by pro-business policymaking rolled out by Narendra Modi’s government. Over the past decade, core government objectives have included encouraging FDI, internationalising the business community, and satisfying consumer demand for foreign goods and services. This commitment to creating an investor-friendly climate is a key factor in positioning India as a critical player in the global economy.

Legal bids

The poster child for India’s overtures to the international business community is Gujarat International Finance Tec-City (Gift City). This global financial and IT services hub — the first of its kind in India — in Gandhinagar, Gujarat, opened its doors a decade ago and has attracted the likes of HSBC, Oracle and Google. Its incentives include exemptions from various Indian laws, the ability to transact in foreign currencies and a simplified tax regime which — for qualifying companies — includes a 100% tax exemption on business profits for 10 years. 

Outside of Gift City, there has also been a loosening of FDI restrictions in sensitive and strategic sectors such as defence manufacturing, space-technology, telecommunications and public-owned areas like railways, real estate and agriculture. 

These come on top of wider operational improvements to speed up bureaucratic processes. For example, the digitisation push via the Digital India initiative has streamlined processes ranging from company registration to legal compliance filings. 

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Tax and start-ups

In its 2024 budget, the government unveiled reforms to remove disincentives for FDI in India. The corporate tax rate for foreign companies will be lowered from 40% to 35% starting this year, and it abolishes the ‘equalisation levy’ — an additional 2% charge on the revenues of digital service providers operating without a physical presence in India.

Production-linked incentives in sectors like electronics, pharmaceuticals, and semiconductors have further incentivised foreign investment. Last year, the government slashed tariffs on products ranging from electronic components to inputs for lithium-ion batteries, hoping to boost investors’ confidence that they can import raw materials without incurring additional costs. 

The latest budget also abolished the ‘angel tax’ which was levied on investors whose stakes in a start-up exceeded its fair market value. It’s one change aiming to lure back Indian-owned start-ups that would otherwise establish themselves overseas. The ongoing simplification and digitisation of the listing regime is another effort to help local start-ups.

A patchwork picture

While India is evidently open for business, its advantages come with potential pitfalls that must be considered before committing to opening up shop in the country. Its scale and diversity make the market very different to the comparatively homogeneous business environment of the UK and many other advanced, Western countries. 

India consists of 28 states and eight union territories. It has 22 official languages, hundreds of unofficial ‘mother tongue’ languages, and thousands of local dialects. The legal system consists of common law, and national and state statutory laws, plus so-called ‘personal laws’ that govern specific religious communities. 

It’s also crucial to understand dispute resolution and governing law clauses in contracts, to mitigate the risk of commercial disputes that drag international businesses into the Indian court system.

Despite these complexities, with guidance and forward-planning, international firms have much to gain by betting on India. The regulatory trajectory for FDI paints an encouraging picture to allow businesses to capitalise on India’s dynamic market potential for years to come.

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