The House of Commons Home Affairs Select Committee said its "National Conversation on Immigration" had revealed that British public viewed the target as "damaging" to the national interest.
"The debate about immigration and the net migration target means that students in India are now looking elsewhere, to our competitors," an unnamed university marketing manager was quoted as saying in the report.
Indians are the largest migrant group from outside the European Union (EU) to be based in the UK, according to UK's Office for National Statistics (ONS).
"We are in favour of smooth and legal migration and discourage all kinds ofillegalmigration," said Minister of State for Home Kiren Rijiju, who initialled a new deal on illegal immigrants from India with his British counterpart during a UK visit last week.
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The Indian government has stressed on the ease of mobility for its students and professionals as part of wider India-UK economic ties.
"The continued discrepancy between the target and reality has damaged the public's view of the immigration system because it undermines trust in the state's ability to control migration in the way it intends or to deliver on its plans," the report said.
"Setting a long-term target or aspiration does not solve the challenge of achieving credibility, as people want to see practical steps that can be taken in the short-term," it said.
Net migration to the UK was 230,000 last year, down on the 336,000 figure recorded a year earlier.
"The net migration target isn't working to build confidence and it treats all migration as the same,"said Yvette Cooper, the Labour MP who chairs the Home Affairs Select Committee.
She called for a switch to a Canada-style model that uses evidence to come up with a "framework" of targets and controls for different types of immigration.
The new report also suggested an annual migration report to set out the economic contribution from migration, as well as the impacts, and actions on skills and integration.
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