The US Department of State has flagged corruption risks, regulatory uncertainty and unequal treatment of foreign investors as continuing barriers to foreign direct investment (FDI) in India, even as New Delhi has taken steps to open up its investment regime.
The US Department of State’s report titled 2026 India Investment Climate Statement, published in September, said India welcomes FDI, but US investors operate in an environment that balances openness with what it described as “economic nationalism”.
US direct investment stock in India stood at $58.54 billion in 2024, down 3.37 per cent from 2023, according to US Bureau of Economic Analysis data cited in the report. At the same time, the report noted improvements in India’s business climate, including the liberalisation of foreign investment rules, greater use of digital governance, tax streamlining and labour law reforms.
India allows 100 per cent FDI through the automatic route in most sectors. However, foreign investors, including wholly owned Indian subsidiaries of foreign companies, still need government approval in sectors such as multi-brand retail, private banking, pharmaceuticals, defence, print and digital media, and satellites. These requirements do not apply to Indian companies, the report noted.
It also pointed to restrictions that can affect foreign companies in specific sectors. In defence, for instance, domestic content requirements can prevent wholly owned subsidiaries of foreign companies from bidding for several government procurements. In e-commerce, foreign investors cannot operate an inventory-based business-to-consumer model, while domestic investors can.
FDI-FPI rules seen as restrictive
Under the current framework, an investor that enters a company through the FDI route before its initial public offering cannot acquire additional shares through the FPI route during or after the IPO until its pre-IPO FDI holdings are fully divested. The report said this can prevent separate funds belonging to the same investment group from participating in an IPO if one affiliated fund has made a pre-IPO FDI investment.
The US State Department said the restriction is particularly burdensome for large investment groups managing multiple independent funds. It argued that the existing 10 per cent FPI cap already limits foreign investors from building strategic stakes in listed Indian companies, making the additional restriction unnecessary.
The report also flagged unresolved tax and Permanent Account Number issues for US mutual funds structured as business trusts, saying these can complicate fund reorganisations in India.
Import hurdles
The report also raised concerns over India’s Import Management System (IMS), particularly for foreign firms seeking to bring in specialised used equipment.
The system, introduced in 2023 and extended through 2025 with graduated import caps, poses challenges for imports of high-end servers, semiconductors and advanced testing equipment used in technology production, the report said. It described authorisation requirements and a lack of transparent guidelines as sources of regulatory uncertainty.
On exports, the report said India controls sensitive products through the SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) list.
Higher tax burden for foreign banks
The report also highlighted a differential tax burden on foreign banks. The effective tax rate paid by foreign banks was 38.22 per cent, 4.63 percentage points higher than that paid by domestic banks, according to the report.
The report said the higher effective tax burden could affect the attractiveness of India to foreign lenders, including decisions on capital allocation, pricing and the scale of their local operations.
Corruption remains a concern
The report said US businesses report both actual corruption and the anticipation of potential corruption, particularly within regulatory systems, as barriers to FDI. It also acknowledged India’s anti-corruption framework, which includes the Companies Act, the Prevention of Corruption Act, the Prevention of Money Laundering Act and the Lokpal and Lokayuktas Act.
The report said India’s Prevention of Corruption Act criminalises public servants accepting undue advantage in exchange for improper performance of official duties. It also noted that the Central Bureau of Investigation registered 502 new cases under the Act during the most recent reporting period, with 529 cases under active investigation.
Regulatory uncertainty
The US State Department also flagged inconsistent application of regulations, bureaucratic delays and judicial backlogs. Some US companies, it said, had complained about last-minute postponements in implementation of rules after they had already incurred compliance costs.
Some US investors had also complained of heavy-handed enforcement, including extended detention of senior executives for questioning at some Enforcement Directorate offices.
The report, however, also highlighted several measures aimed at making India more attractive to foreign capital, such as the National Single Window System, changes to the FDI screening framework, a 60-day review timeline for certain government-route investments in specified manufacturing sectors, and continued efforts to revise India’s bilateral investment treaty framework.
