Overseas securities investment institutions have sold a cumulative $29.5 billion worth of Indian equities so far this year, compared to nearly $19 billion for the entirety of last year.
Experts note that while India's economic growth remains resilient, it is being persistently hampered by multiple headwinds including weakening domestic demand, low market investment confidence, rising energy costs, and increasingly cautious global capital investment.
Data from the Center for Strategic and International Studies (CSIS) shows that the Modi government has implemented only 2 out of 30 major reforms over the past two years.
Narendra Modi, who has held the prime minister's office for 12 years, continues to enjoy high popularity domestically. However, this world's fastest-growing major economy is now losing favor with global investors.
Several experts point out that India's outward-facing trade stance, which appears resistant to the development of the artificial intelligence industry, combined with the prolonged Middle East conflict exerting downward pressure on its economy, is driving an unprecedented large-scale exodus of overseas capital from the Indian market.
Alexandra Hermann-Prasad, Chief Economist at Oxford Economics, stated: "A few years ago, investors unanimously viewed India as a one-way upward growth bet, but that logic no longer holds." She added that although India's growth rate remains impressive from a global perspective, multiple adverse factors are creating an impact, including soft domestic demand, subdued investment sentiment, rising energy costs, and increasingly selective international capital.
Foreign direct investment into India totaled $90 billion over the 12 months ending January 2026, representing 13% year-on-year growth. However, a significant increase in profit repatriation by foreign firms, coupled with overseas expansion by Indian domestic companies, has pushed the net foreign direct investment figure down to near historic lows.
Amid persistently high international oil prices, capital outflows have significantly pressured the Indian rupee. With over 85% of India's crude oil reliant on imports, the combination of a depreciating currency and expensive oil has plunged the country's economy into a severe predicament.
The cost pressures stemming from the Middle East crisis will ultimately be passed on to end consumers. Rising domestic inflation and slowing economic growth will further diminish India's appeal to global capital. Last Friday, the Reserve Bank of India raised its inflation forecast for the fiscal year ending March 2027 to 5.1%, while lowering its economic growth forecast to 6.6% from a previous estimate of 6.9%.
Outlook for Reform Progress
To curb capital outflows, the Indian government announced several policies last Friday, including an exemption from capital gains tax for foreign investments in the Indian bond market. Experts say that while such relief measures are timely, India still needs to advance deep-seated, significant reforms to re-attract global capital.
Stephen Davies, Founder and CEO of Javelin Wealth Management, stated on CNBC's 'India Deep Dive' program on Tuesday: "Short-term policies can only improve market sentiment; they cannot alter economic fundamentals. We expect the government to introduce more policies conducive to market-oriented development."
A reform progress assessment report by the strategic think tank CSIS tracks the implementation of 30 core reforms across Modi's three terms. The data shows that in the nearly two years since entering the third term, the government has completed only 2 major reforms, a pace of progress far slower than during the first and second terms.
Richard Ross, Chair in Indian and Emerging Asian Economics and Senior Adviser at CSIS, told CNBC: "There has been no substantive improvement in land acquisition processes or the judicial handling of economic disputes." He added that labor regulations have seen only minor optimizations, and the lack of stable, affordable water and electricity supply remains a core obstacle to achieving India's industrialization goals.
Rising Criticism from Various Quarters
The Modi government's current economic governance measures are facing growing external skepticism. While some experts call for accelerating the implementation of reforms, others point out that India is already lagging in the global AI race.
Sujit Bhaira, an Indian economist and former member of the Prime Minister's Economic Advisory Council, stated last month that Modi's party should use the economic pressure from the Middle East crisis as an opportunity to drive structural reforms. However, to date, the government has not announced any major corresponding initiatives.
Global brokerage Bernstein, in a letter to the Modi government this April, warned that AI technology advancements would impact high-paying jobs in India's information technology sector, thereby dragging down domestic consumption. The report also raised a risk alert: unlike China and the US, India has not developed any indigenous general-purpose large language models, and the country may long remain a mere consumer market for the AI industry.
Venugopal Garre, Head of India Research and Managing Director at Bernstein, told CNBC last week that India has missed the window for AI development. The country can only indirectly participate in the AI supply chain through the data center segment, which cannot compensate for the loss of high-end jobs in the IT industry.
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