India must address challenges to unlock its FDI potential: Sanjay Nayar

Says reducing GST on essential goods can stimulate consumption

With concerns about slowing economic growth and declining foreign direct investment (FDI) inflows, SANJAY NAYAR, former head of India for KKR & Co and Citigroup, and now the founder of venture capital fund Sorin Investments and president of Assocham, shares his strategy for putting India back on the path to long-term growth with Surajeet Das Gupta. Edited excerpts:

 

Given concerns about a slowdown in India’s economic growth, what steps should the country take to ensure long-term progress? 

The government has made headway in boosting consumer sentiment and improving access to essential goods and services. These efforts have laid the foundation for stronger economic resilience. At a time when India’s economy stands at a critical juncture, policies that address consumption and FDI challenges can help chart a path towards long-term growth. Since consumption accounts for nearly 60 per cent of India’s gross domestic product (GDP), increasing household spending is essential for sustainable economic expansion. However, inflation, low disposable incomes, and restricted access to credit have hindered domestic consumption in recent years.

 

What steps do you suggest to increase consumption? 

A strategic reduction in the goods and services tax (GST) on essential goods could be a key lever to stimulate consumer demand. While India’s GST regime has streamlined taxation, the current focus on maximising collections may be undermining broader growth objectives. High GST rates, particularly on essential goods, strain household budgets, reducing discretionary spending.

 

A calibrated reduction in GST rates could provide a much-needed boost to demand. Lower taxes on essential items such as food, healthcare, and personal care products would reduce household expenses and improve affordability. This increase in spending power can stimulate demand across sectors, creating a ripple effect that drives production, job creation, and investment.

 

In the long run, demand-driven growth could generate higher indirect tax revenues through increased consumption — benefiting both households and the government.

 

Are there global examples where policy interventions to boost consumption led to long-term growth?

Yes. Countries like Brazil and South Korea have shown the effectiveness of consumption-led policies. In Brazil, targeted social programmes that improved household incomes boosted demand for domestically produced goods, creating a self-sustaining economic cycle. Similarly, South Korea’s alignment of wage growth with productivity supported steady domestic demand, laying the groundwork for sustained growth. India can adopt similar models to unlock its domestic consumption potential.

 

Can pushing exports help counter the economic slowdown? 

India’s reliance on exports, particularly on electronics and engineering goods, highlights the need to strengthen domestic consumption. Merchandise exports currently contribute only 1 per cent to GDP, making the economy vulnerable to global market fluctuations.

 

While free trade agreements offer opportunities to improve export competitiveness, gaps in implementation and coordination hinder their effectiveness. A balanced approach that prioritises both domestic consumption and export growth is key to ensuring economic stability and resilience.

 

FDI growth has slowed. How serious is this issue, based on your experience at KKR?

While consumption is a key growth driver, India must address persistent challenges to fully unlock its FDI potential. Gross FDI inflows fell to $71 billion in 2023-24, the lowest since 2018-19. This decline underscores the need for urgent action to resolve structural, regulatory, and operational hurdles.

 

What hurdles do investors face when considering FDI in India? 

Several factors hinder large-scale investments in India. One critical issue is navigating the complex compliance landscape across municipal, state, and central levels. These overlapping regulations create bottlenecks that undermine the ease of doing business. While India has made progress, further reforms are necessary to streamline approvals, reduce delays, and improve transparency.

 

Another challenge is restrictive policies in certain sectors. For example, foreign investors in private banking face a 15 per cent cap on voting rights, even when their economic stakes are larger. This misalignment discourages investment in high-potential industries.

 

Geopolitical concerns, particularly regarding capital flows from Chinese investors, have also constrained investments in sectors like technology, electronics, and sustainability. While national security remains paramount, policymakers must balance security concerns with the need to attract capital in critical and emerging sectors.

 

What policy and ecosystem changes are needed to attract more FDI? 

Foreign investors typically consider four key factors when investing in India: capital deployment, market hedging against global risks, ease of doing business, and manufacturing opportunities for both domestic and export markets.

 

India has made strides in improving its business environment. However, accelerating reforms to simplify multi-level compliance, enhance tax frameworks, and strengthen single-window clearances is essential. Fostering policies for emerging sectors — such as sustainable technology, alternative materials, and deeptech — can unlock opportunities. These sectors remain underfunded due to high costs and market immaturity but offer a dual promise of economic growth and environmental sustainability.

 

To reverse FDI stagnation, India needs a growth model that strengthens domestic demand while enhancing production and innovation ecosystems. A stronger consumption base and improved ease of doing business will instil investor confidence.