'US deal could spur further liberalisation'

To me, the impactful deals are the UK and the European Union. The European Union is the one where I expect the impact to be much greater

India's economic growth is maintaining its momentum, economist and 16th Finance Commission chairman Arvind Panagariya said. In an interview with ET's Deepshikha Sikarwar and Kirtika Suneja, Panagariya, who is also a professor of economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University, outlined several strategies to boost growth, including deeper trade liberalisation, increased privatisation, and reforms in the judiciary and energy sectors. He also emphasised the need to attract more long-term productive investment. Edited excerpts:

Experts have expressed concern over the sudden outflows of foreign capital from India. How do you perceive these outflows?


The first point to note is that, for years, what we have really talked about is gross foreign direct investment. Gross FDI figures have remained robust. There is nothing wrong there; it is growing very well. In fact, for the latest year, 2025-26, it is $93-94 billion. That is very solid growth. The conventional figure that we have always used has continued to perform. This whole issue has come up because net foreign investment has declined. Why has it declined? There are two components: one is investment by our people abroad, and the other is repatriation. What has been happening is that, unlike China, FDI in India comes more in the form of private equity. Private equity has a cycle. Four or five years later, they want to exit. So there is automatically a built-in cycle-when the money comes in and then when it exits. These exits have become concentrated, and that has also caused a spike.

Also read: GVC integration, supply chain resilience, FTAs key to boost exports, high-end manufacturing: Deloitte India

The fact that our people are now investing more abroad is a positive thing. I have no tears to shed if net foreign investment declines on account of our fellows investing abroad. That kind of cross-investing is a great thing, and it increases India's footprint abroad. Foreign investment, to me, is not so much about how much funds I can get. You can always overvalue your exchange rate and run a current account deficit if you want all the flows to come in. But you don't want to do that. It is not about funds; it is about direct foreign investment.

The question we need to ask is: why are we getting so much foreign investment in private equity? Why are we not getting investors directly investing in creating their own companies? That is where we need to look at things like our bilateral investment treaties. ..It reflects a lot less on the Indian economy. It reflects on the Indian economy only to the extent that private equity is the principal form of direct foreign investment into India. That, I think, is something that needs to be closely analysed. Why are we not getting firms investing directly in creating companies-a Foxconn, for example? That is a much more conventional form of investment. Otherwise, the cycle of exits continues.

So, is it mainly domestic factors that are impacting inflows, or do you see geopolitics and geoeconomics playing a role?

No, I don't think so. Why is gross investment growing so strongly? It is growing very solidly. So I don't think that is the main story.

Also read: Bonded warehouses may face 24-hour discrepancy reporting, five-year digital records under proposed customs overhaul

On trade deals, the UK FTA is effective, the European Union FTA is done. In terms of India's overall trade strategy, how do you see this shift in trade deals playing out?

To me, the impactful deals are the UK and the European Union. The European Union is the one where I expect the impact to be much greater.

How significant is a US trade deal for India, not only for tariffs but otherwise as well?

Geopolitically, I think it is a good thing. But right now, geopolitics seems to be going in the opposite direction. I also see it as something that could facilitate our own liberalisation. It is difficult for India to liberalise on its own. But as part of an FTA, we may liberalise a lot more because the other country insists, and access to its market becomes contingent on getting access to our market. That creates a situation in which we can also liberalise our markets. Unilaterally, countries don't easily do that. There was a time when we did it-from 1991 to 2007. There was a very steady liberalisation of tariffs, in addition to import licensing, which was completely dismantled. But after that, we have not really naturally liberalised. So, politically, this is the sense in which a US-India agreement would be very useful.