India is the world’s fastest-growing major economy. It has nearly $700 billion in foreign exchange reserves, a stable banking system and one of the strongest growth outlooks among large nations.
Yet foreign investors have been . Foreign portfolio investors withdrew a net $16.5 billion in FY26, while net foreign direct investment (FDI) stood at just $7.7 billion, far below the levels seen a few years ago.
So why isn’t more global capital coming into India? Economists say part of the answer lies in how global investing has changed.
While India spent much of the past decade fixing structural weaknesses and improving the ease of doing business, global investors have increasingly moved towards artificial intelligence (AI), semiconductors and advanced manufacturing — sectors that have become the biggest magnets for capital.
The biggest investment boom in the world today is no longer centred on economic growth alone. Increasingly, foreign capital is flowing towards artificial intelligence, semiconductors and the infrastructure needed to power both.
The biggest winners of this shift are not necessarily the fastest-growing economies. They are the countries and companies sitting at the centre of the AI revolution.
The United States has become the epicentre of the AI boom. Taiwan sits at the . South Korea has emerged as a major beneficiary of soaring demand for memory chips used in AI systems.
“Global capital pursues returns, not growth,” said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
It is a simple observation, but one that helps explain what investors are doing today.
Countries often assume strong GDP growth automatically attracts investment. Investors, however, are not buying economic report cards. They are buying future profits.
According to Vijayakumar, South Korea’s KOSPI has and nearly 200% over the past year. Meanwhile, Taiwan’s benchmark index has gained roughly 58% this year and around 100% over the last twelve months.
Much of that rally has been concentrated in a handful of companies linked to the AI supply chain.
“This is a rare explosive narrow trade,” Vijayakumar said, pointing to Samsung, SK Hynix and Taiwan Semiconductor Manufacturing Company (TSMC).
Investors are not necessarily betting on South Korea or Taiwan as economies. They are betting on chips, data centres and artificial intelligence.
This shift is not merely visible in stock markets. It is showing up in capital flows.
According to data from the Reserve Bank of India (RBI), foreign portfolio investors pulled out a net $16.5 billion during FY26. The central bank’s annual report also acknowledged that overall capital flows fell short of financing India’s current account deficit during the year.
To be clear, this does not mean investors are abandoning India. Gross foreign direct investment reached a record $94.5 billion in FY26, indicating continued confidence in India’s long-term prospects.
But another number tells a more nuanced story. Net FDI — the money that remains after foreign companies repatriate profits and Indian firms invest overseas — stood at just $7.7 billion. While that marked a recovery from the previous year, it remained far below the nearly $28 billion India attracted in FY23.
The gap matters because it suggests that while fresh money continues to enter India, larger sums are also leaving than they were a few years ago.
Foreign firms repatriated $53.6 billion during FY26, while Indian companies invested $33.3 billion overseas.
This is proof that India continues to attract investment. The question is whether it is attracting enough of the world’s capital at a time when policymakers routinely describe the country as one of the most compelling investment destinations on the planet.
For years, foreign investors had a long list of complaints about India.
The tax system was fragmented. Banks were burdened with bad loans. Regulations were often seen as cumbersome. Bureaucratic bottlenecks regularly featured in investor presentations.
India spent much of the last decade addressing exactly those issues.
The . The Insolvency and Bankruptcy Code (IBC) strengthened credit discipline. Digital public infrastructure transformed everything from payments to welfare delivery. Governments repeatedly highlighted efforts to improve the ease of doing business and reduce compliance burdens.
These reforms were important.
They made India easier to invest in, strengthened confidence in the economy and helped improve the country’s long-term growth prospects.
But while India was fixing the foundations of its economy, global investors were increasingly looking elsewhere for the next big opportunity.
The biggest fortunes of the past few years were not made from tax reform or regulatory simplification. They were made from artificial intelligence.
As investors searched for exposure to AI, they naturally gravitated towards the countries and companies building the technologies that power it.
That meant semiconductor manufacturers, chip designers, cloud-computing giants and data-centre operators.
Many of those ecosystems were already concentrated outside India.
According to Manoranjan Sharma, Chief Economist at Infomerics Ratings, that may be one of the biggest reasons .
“India lacked the first-mover advantage in semiconductors and AI computing as strategic national capabilities. Consequently, the first wave of global investments flowed to the USA, Taiwan, South Korea, Vietnam and parts of the Gulf,” Sharma said.
That first-mover advantage matters because capital tends to cluster around existing ecosystems.
Once chipmakers, suppliers, research institutions and specialised talent begin concentrating in one geography, more investment usually follows.
By the time artificial intelligence emerged as the defining investment theme of this decade, much of that ecosystem had already been built elsewhere.
India’s challenge is not that it lacks talent. The country produces engineers at scale and has built one of the world’s largest technology workforces.
The challenge is that much of India’s startup success has been concentrated in software services, consumer internet businesses and digital platforms rather than semiconductor manufacturing, advanced hardware or frontier technologies.
India spends roughly 0.7% of GDP on research and development, significantly below many of the countries currently benefiting from the AI and semiconductor boom.
Deep-tech venture capital remains limited compared with major innovation hubs.
As global investors began searching for exposure to artificial intelligence, many of the obvious destinations were therefore outside India.
When foreign investors pull money out of markets, regulation often becomes the first target of criticism. Investors complain about compliance requirements, approval timelines and bureaucratic hurdles.
But both economists interviewed for this story caution against treating regulation as the primary explanation.
“Regulatory complexity is not the important factor influencing FPI flows. It is primarily earnings growth,” Vijayakumar said.
In his view, recent foreign portfolio outflows have been influenced by a combination of factors, including the global AI trade, energy-price shocks and rupee depreciation.
Sharma broadly agrees.
According to him, India’s regulatory framework today is significantly more transparent and rules-based than it was a decade ago. While compliance requirements under FEMA, FDI regulations and anti-money laundering norms remain demanding, investors now enjoy greater clarity on sectoral policies and ownership limits than in the past.
In other words, India may have become easier to invest in even as global capital became more interested in something else.
That does not mean India has missed the opportunity entirely.
Recent semiconductor incentive schemes, AI missions and efforts to develop advanced manufacturing capabilities are .
The government has also sought to position India as an alternative manufacturing hub as companies diversify supply chains beyond China.
Electronics exports have grown sharply in recent years. Global companies continue to expand operations in India. Large investments have been announced in semiconductors, data centres and digital infrastructure.
The challenge, however, is that innovation ecosystems take years to build.
Semiconductor supply chains, research clusters and deep-tech ecosystems are not created overnight.
Countries currently benefiting from the AI boom spent decades building the capabilities that investors are rewarding today.
India is now trying to accelerate that process.
It would be wrong to conclude that foreign investors are giving up on India.
Record gross FDI inflows suggest the opposite. Few major economies can match India’s combination of growth, demographics and market size.
Yet growth alone no longer guarantees a disproportionate share of global capital.
For much of the last decade, India’s biggest selling point was its scale. The country’s market size, demographics and consumption story became central to its pitch to global investors.
Those strengths remain intact. What has changed is the nature of global investing.
The world’s most valuable companies are increasingly built around algorithms, chips, cloud infrastructure and computing power. Investors are chasing technologies expected to shape the future rather than simply economies expected to grow the fastest.
India has largely won the argument on growth. The bigger challenge now is whether it can win the argument on innovation.
Because the next wave of global capital may not be looking for the fastest-growing economy. It may be looking for the next technological breakthrough.