Fiscal and investment credibility, not headline numbers, will drive India's economic growth

Indian Express

12-06-2025

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