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We are looking at every aspect of reform: FM Sitharaman on FDI, FPI liberalisation

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  Published in Stocks and Investing on Friday, September 5th 2025 at 9:03 GMT by moneycontrol.com

India’s Finance Minister Signals Comprehensive Push for FDI and FPI Liberalisation

In a speech delivered at a high‑profile policy forum, Finance Minister Nirmala Sitharaman announced a sweeping review of the country’s foreign investment regime. The goal, she said, is to “look at every aspect of reform” in order to attract higher volumes of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), a move that is expected to provide a much‑needed boost to a domestic economy that has been struggling to keep pace with its peers.

Why the Shift Matters

India’s economy has been under pressure from a combination of global slow‑down, rising inflation, and a weakening rupee. While the country’s GDP growth rate remained solid in 2023, the proportion of foreign capital inflow has lagged behind other large emerging markets such as China, Brazil and the United Kingdom. The Finance Ministry has identified the need for a robust inflow of both direct and portfolio capital to shore up the current account, support industrial expansion and maintain the rupee’s stability.

Sitharaman explained that the government’s approach to investment is now “more focused and systematic” than before. Rather than piecemeal adjustments to individual sectors, the ministry plans to adopt a “holistic review” that will assess regulatory bottlenecks, tax incentives and the overall investor experience.

Key Pillars of the Reform Package

1. Sector‑by‑Sector Analysis
   The ministry is conducting a detailed audit of the existing 12–15 sectors that are open to FDI. The review will focus on streamlining approval processes, reducing the time to clear projects and removing ambiguous clauses in sectoral guidelines that currently deter investors.

2. Redefining FPI Thresholds
   One of the most discussed changes is the possibility of lowering the 10 % threshold that triggers additional compliance for FPI flows. The current rules require foreign investors to obtain government clearance if they hold more than 10 % of a domestic company. By easing this threshold, the government hopes to attract a broader pool of portfolio funds.

3. Tax Incentives and Double Tax Avoidance Treaties (DTATs)
   The Ministry is revisiting its tax incentives for foreign investors, with a particular focus on capital gains and withholding tax rates. In addition, it has signalled plans to renegotiate or create new DTATs with key trading partners, including the United States, Japan and the EU, to eliminate double taxation and improve the net return for foreign investors.

4. Simplifying Corporate Governance
   The regulator intends to streamline the company law framework, particularly the Corporate Governance norms that require an audit committee and other internal controls. By offering a more flexible corporate structure, the government aims to attract more venture capital and strategic partnerships.

5. Digitalisation of the FDI Approval Process
   The Finance Ministry will accelerate the rollout of a fully digital FDI clearance portal that reduces paperwork and provides real‑time status updates. Early pilots of the system in sectors such as renewable energy and digital services have already seen positive feedback from the business community.

Expected Impact on the Economy

The Finance Ministry estimates that a 5 % lift in FDI inflows could translate to an additional 1–2 % in GDP growth over the next three years. Similarly, an uptick in FPI flows is expected to improve the current account deficit and help keep the rupee from excessive volatility. The reforms are also anticipated to generate jobs in both the manufacturing and services sectors, as foreign investors bring in new technologies and managerial expertise.

Industry Reactions

The business community has largely welcomed the announcements. “We have been waiting for clearer signals from the government on how to navigate the regulatory maze,” said Rajesh Patel, CEO of an international logistics firm with operations in India. “The Ministry’s commitment to a comprehensive review is a positive sign that we will soon see a more transparent investment environment.”

International Perspective

International investors have taken note of India’s reforms. The World Bank’s Global Competitiveness Report noted that India has the potential to climb higher on the ease‑of‑doing‑business index if it addresses the existing red tape. Meanwhile, analysts from the International Monetary Fund have pointed out that attracting FDI and FPI is critical for maintaining a balanced growth trajectory in a post‑pandemic economy.

What Comes Next?

Sitharaman emphasised that the policy changes will be introduced in a phased manner, with priority given to sectors that have the highest multiplier effect on the economy. A formal “investment policy framework” is expected to be published by the end of the year, accompanied by a timeline for the implementation of each component.

The finance ministry’s initiative to review and overhaul the FDI and FPI landscape comes at a time when India is seeking to reinforce its status as a global investment hub. By simplifying procedures, enhancing transparency and offering competitive incentives, the government hopes to turn the tide in favour of foreign capital, thereby propelling the country toward sustained growth and global economic relevance.