‘India can unlock big FDI gains, if…’: Raghuram Rajan shares simple idea to attract foreign investment as firms exit China

India has a significant opportunity to attract foreign investment as multinational firms rethink their global supply chains, according to former Reserve Bank of India (RBI) Governor Raghuram Rajan. Speaking to CNBC-TV18 on May 28, Rajan emphasised that India needs to act quickly to capitalize on this moment. He stated that ensuring stable policies and reforms is crucial.

'It could be India’s moment'

Rajan, currently a Professor of Finance at the University of Chicago Booth School of Business, believes that "it could be India’s moment," highlighting the potential for increased foreign direct investment (FDI) as global firms shift their operations.

He advised against relying too heavily on subsidies, advocating for a consistent, long-term production framework. "If India can put out the red carpet and say, we will have a predictable tax and policy regime… it could result in a significant increase in foreign direct investment," Rajan said.

Need for proactive reforms

Rajan stressed the importance of proactive reforms and strong execution to establish India as a reliable destination for global investors. "India needs to be a lot more proactive than reactive," he noted.

Bilateral deals may fill global trade gap

While acknowledging the absence of a major international trade agreement as "unfortunate," Rajan suggested that bilateral agreements and regulatory transparency could help bridge this gap.

Trump’s message to Apple a negotiation move

Rajan also commented on former US President Donald Trump’s message to Apple, viewing it as a negotiation tactic. "I see Trump’s message to Apple as a negotiation move. Not many CEOs would want to cross the Trump administration," he said.

China’s role in controlling inflation

Regarding global inflation, Rajan pointed out that China's continued ability to keep the cost of goods low could play a role in controlling inflation levels.

More flexibility for rate cuts outside US

Finally, Rajan noted that countries outside the United States, including India, have more flexibility to lower interest rates or inject liquidity to stimulate economic growth.

Growth not enough, private sector must step up

Earlier this year, Rajan pointed out that demand from India’s lower middle class is still weak due to limited job creation, even though consumption at the higher end has improved. He noted that this concern has persisted over time and continues to impact the broader economy.

According to official estimates, India's GDP is expected to grow at 6.4% in FY25, marking the slowest pace in four years. Rajan said India appears to have moved past a phase of economic adjustment and is now growing at a stable rate around 6%. However, he cautioned that this level of growth is not enough for a country like India, which needs to take full advantage of its demographic dividend. He also stressed the need for greater private sector involvement instead of relying mainly on government spending.