FDI on the Frontline: India’s Economic Growth Amid Geopolitical Storms

Authors
Ms Janani VS, BSc Economics (Hons.)
Dr Salineeta Chaudhuri, Department of Economics
Ms.Nipunika Shahid, Department of Media Studies
CHRIST University. Delhi NCR Campus

India has reached a significant milestone in its economic journey, crossing the $1 trillion mark in cumulative Foreign Direct Investment (FDI) inflows since April 2000, a testament to the country’s growing global appeal. This achievement has been further underscored by a 13.6% surge in FDI in FY 2024-25. As per monthly RBI bulletin (May 2025), gross FDI reached 81.04 billion dollars in 2024-25, which was just 71.28 bn dollars in 2023-24. It signals sustained investor confidence in the Indian economy.
At the heart of this momentum lies a dynamic combination of structural reforms, a burgeoning services sector, a youthful workforce, and a policy environment increasingly geared toward ease of doing business. In 2023–24, India recorded a robust real GDP growth rate of 8.2%, reinforcing its position as one of the fastest-growing major economies in the world. For FY 2024-25 a 6.4% GDP growth is expected. Even at this rate India will remain the fastest.
However, this promising growth narrative unfolds against a backdrop of mounting geopolitical challenges including persistent India-Pakistan tensions, cross-border terrorism, and regional instability, all of which pose potential risks to long-term economic stability and foreign investor sentiment.
In the past few years, FDI has played a pivotal role in shaping India’s development landscape. Capital inflows have helped modernize infrastructure, create jobs, enhance productivity, and technology spillovers. From sectors such as telecommunications and renewable energy to digital services and retail, foreign investors have placed their bets on India’s long-term promise. According to data from the Department for Promotion of Industry and Internal Trade (DPIIT), the top sectors receiving FDI include services (16%), computer software and hardware (15%), trading (7%) and telecom (6%).
The success of initiatives such as ‘Make in India,’ ‘Digital India,’ and the Production-Linked Incentive (PLI) Scheme has made the Indian economy more attractive, especially as global companies seek alternatives to China under the “China Plus One” strategy. India’s GIFT City, a newly developed financial hub, has further positioned the country as a global financial destination.
Admitting this positive trajectory, India continues to face persistent geopolitical tensions in South Asia, particularly due to the complex dynamics with neighbouring countries like Pakistan, China, and, at times, Bangladesh. These challenges are often marked by strategic maneuvers, border disputes, and diplomatic strains that threaten regional stability. India has long grappled with the menace of cross-border terrorism, primarily emanating from Pakistan, which has repeatedly been accused of harbouring and supporting extremist groups. The unresolved Kashmir conflict, fueled by Pakistan’s continued attempts to internationalize and assert territorial claims, remains a significant flashpoint. These ongoing hostilities not only strain diplomatic ties but also have broader implications for investor confidence, regional cooperation, and internal security, all of which are crucial to sustaining India’s economic momentum.

Since independence, India has fought several wars, each of which had an economic cost

The 1962 war with China led to a sharp rise in defence spending, with military expenditure increasing from around 2% to nearly 4% of GDP by 1964, drawing resources away from critical development programs. The Indo-Pak wars of 1965 and 1971 also strained the young, foreign aid-dependent economy struggling with food shortages. Following the 1971 war, inflation soared to over 9%, while fiscal deficits widened due to higher military costs and refugee influx from East Pakistan (now Bangladesh).
Later, the Kargil conflict in 1999 occurred when India had just begun opening its economy to the world. Defence budgets rose by nearly 20% that year, and there was a brief slowdown in foreign investment inflows due to security concerns. Despite the conflict, India’s economy showed resilience, real GDP rose by 8.85% to $770 billion, and per capita income touched $743. However, after the 2001 Parliament Attack, India’s economic growth slowed to 4.82%, and real GDP stood at $839 billion, reflecting growing investor caution amid geopolitical uncertainty. The Pulwama terror attack in 2019 further disrupted economic momentum, GDP growth dropped sharply to 3.87%, with real GDP at $2.68 trillion, nearly halving from the previous year’s pace.
Coming to the current situation, the Pahalgam attack on 22nd April 2025, followed by the retaliatory Operation Sindoor launched in the early hours of May 7, may have cast a shadow over India’s otherwise optimistic economic trajectory. Operation Sindoor, though it cost around $1.8 billion, had only a small and short-term effect on India’s financial markets. The Nifty and Sensex dropped briefly but bounced back quickly, showing that investors have faith in India’s strong economy and steady flow of capital.
However, foreign direct investment (FDI), especially in areas like manufacturing, technology, and infrastructure, usually prefers a peaceful and stable environment. Incidents like the Pahalgam attack and India’s military response can make foreign companies more cautious. Even though India has large foreign exchange reserves ($688 bn as on 25th April) and solid economic policies to support growth in the short term, repeated tensions in the region might lead investors to think twice about committing money for the long term. If such conflicts continue, it could greatly influence the volume of foreign investment India receives. As global firms seek reliable destinations under the “China Plus One” strategy, maintaining diplomatic stability becomes just as critical as economic reforms in ensuring that India remains a top choice for FDI.
Senior journalist S.K. Singh notes, “This concern is evident in the net FDI figures, which dropped sharply to just $353 million in 2024-25, down from $10.12 billion in the previous year. A key factor behind this decline is the significant increase in repatriation of funds by foreign investors. At the same time, outward FDI by Indian companies rose to $29.20 billion in 2024-25, compared to $16.68 billion in 2023-24, a trend that has also contributed to the drop in net FDI.”

Stability: The New Currency of Confidence

In the eyes of global investors, growth matters but predictability is priceless. India’s sound economic fundamentals, robust foreign exchange reserves, and reform-friendly policies have built a sturdy base. Yet, numbers alone don’t seal investment deals. What foreign investors value most in an increasingly volatile world is political and regional stability.
Commenting on the importance of policy predictability, Mr. Singh says, “In the initial wave of the China Plus One strategy, countries like Vietnam and Mexico emerged as the primary beneficiaries. Except for the mobile phone sector, India attracted relatively little significant FDI. Now, with a second opportunity on the horizon, India must act decisively – because if we miss this chance, there may not be another. It is encouraging, however, to see growing investment in emerging sectors such as new technology.”
He adds, “In addition to regional conflicts, the so-called ‘Trump tariffs’ have introduced a new wave of uncertainty, which could negatively impact India’s exports. Although the U.S. Court of International Trade in Manhattan has declared the Liberation Day reciprocal tariffs illegal, the situation remains unclear, as the Trump administration has announced plans to appeal the ruling to the U.S. Supreme Court.”
Events like the Pahalgam attack and subsequent military action may not crash markets overnight, but they do plant seeds of doubt. Multinational corporations making billion-dollar bets in sectors like infrastructure, manufacturing, or advanced tech weigh economic metrics and the risk of sudden disruptions.
India is currently riding high on the momentum of the “China Plus One” strategy, a shift that has directed attention and capital toward emerging economies seeking to offer scale without the unpredictability of Beijing. But this advantage is fragile. If border tensions and terror threats persist, India risks becoming a high-reward but high-risk alternative, not the stable investment haven many global firms seek.
In this new global order, stability isn’t a luxury, it’s leverage. The next leap in India’s FDI journey may not be driven solely by reforms or incentives, but by how securely the country can insulate growth from the fog of geopolitical uncertainty.

The Road Ahead

To truly cement its place as a global investment hub, India must walk a delicate line balancing assertive defence postures with diplomatic prudence. In today’s interconnected world, geopolitics and economics are no longer separate domains. Every border flare-up, every diplomatic breakdown, carries the potential to sway investor confidence and shape economic outcomes.
India has rightfully earned its place on the global investment map, backed by policy reforms, a robust GDP trajectory, and a resilient democratic framework. As it rises as a soft power with growing strategic partnerships and diplomatic goodwill with major global economies, the challenge lies not just in sustaining this momentum but in protecting it.
Peace must remain a cornerstone of India’s growth narrative. However, this commitment to diplomacy must not be mistaken for passivity. India has made it clear that any threat to its sovereignty or to the safety of its citizens – be it through cross-border terrorism or attacks like those witnessed in the past – will be met with a decisive and proportionate response, as seen in its pretence like Operation Megdoot, Operation Rakshak, Operation Ganga, Operation Pawan and the most recent Operation Sindoor.
In essence, India’s future lies in projecting strength with responsibility: fostering global cooperation and economic development, while ensuring national security and strategic autonomy remain non-negotiable.