India has experienced a consistent decline in net foreign direct investment inflows as a share of gross domestic product since the pandemic, according to reports from Business Standard. This downward trend stands out in a global trade and investment context where developing economies have fared significantly better than India. The Association of Southeast Asian Nations (Asean) has remained resilient and continued to attract FDI even amid increasing geopolitical fragmentation and trade tensions in the global economy.
According to the United Nations Conference of Trade and Development's Asean Investment Report (2025), Asean has maintained its position as the top FDI recipient among developing regions since 2021, as reported by Business Standard. The manufacturing sector, especially supply chain-intensive industries, has been a major driving force for this success. Vietnam has been among the top recipients in the region with record-level FDI, with the EU emerging as a prominent source alongside East Asian economies and intra-Asean FDI. Among the main sources, apart from East Asian economies and intra-Asean FDI, the EU figures prominently. In the case of Vietnam, the share of the EU has increased since 2019, when the bilateral FTA and Investment Protection Agreement (IPA) were signed with the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) entered into force.
The success of Asean economies can be attributed to their comprehensive approach to trade agreements, according to the analysis. Four Asean economies — Vietnam, Malaysia, Singapore and Brunei — are members of the mega-regional Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP includes cumulation-based rules of origin, which are facilitative of attracting supply-chain intensive investment. At regional level, the Regional Comprehensive Economic Partnership (RCEP), with common and cumulative rules of origin, is complemented by the implementation of the Asean Investment Agreement and Asean Investment Facilitation Framework. Among bilateral initiatives, Vietnam has signed several deep FTAs over the last decade. Apart from over 90 per cent tariff liberalisation, the depth of its FTAs in intellectual property-related provisions and technical standards has set in motion corresponding reforms to align its domestic regulatory framework to international benchmarks. The inclusion of investment liberalisation and investor-protection provisions has, in addition, helped enhance Vietnam's attraction as a production and export base for several large corporations diversifying away from China.
While it is encouraging to note that the fundamental link between trade and investment in modern-day trade led by global value chains (GVCs) is beginning to be recognised by negotiators of India's free-trade agreements, there are significant gaps in current investment protection provisions. An explicit inclusion of investment-related provisions is evident in India's recent FTAs with developed economies of the European Free Trade Association (Efta) and New Zealand. However, in both the FTAs, the respective chapters on investment include provisions only on promotion, cooperation and facilitation. Critical aspects of investor protection and investment dispute settlement mechanism do not find place in these FTAs. The investment target of $100 billion and $20 billion in the FTAs with Efta and New Zealand, respectively, rely on "best endeavour" by the partner countries. Rebalancing mechanisms in the event of failure to achieve the foreign direct investment (FDI) target come into play only after 15 years and, even then, provide for a due process of consultation and consideration of possible reasons for falling short of targets. Effectively, therefore the investment commitment can extend over at least 15 years of the FTAs coming into force.
To boost FDI inflows in this competitive scenario, India needs to improve the depth of its FTAs, as outlined by the expert analysis. The recommendations include accelerating the comprehensive review of tariffs announced in Budget 2025 and moving swiftly towards average most favoured nation tariffs in the manufacturing sector in major Asean economies. Additionally, India needs to negotiate and finalise an Investment Protection Agreement with the EU, with the aim to conclude IPA negotiations at the earliest so that ratification is initiated in parallel with the EU-India FTA. Given that the ratification process of the IPA is a prolonged process done at the level of member states of the bloc, the objective should be to design the investment dispute settlement mechanism and investor-protection provisions in a way that they become the template for India's future negotiations on FTAs and IPAs. A judicious examination of the EU's investment agreements with those of Asian economies like Singapore, Vietnam and Indonesia could be a useful starting point for working on an appropriate combination of investor-protection and state-sovereignty provisions for India. This will be especially useful because India is in the process of negotiating comprehensive trade agreements with developed economies like Canada and Australia.
An announcement on India's intent to participate in the gold-standard CPTPP would be a very positive signal to enhance international investor confidence in the Indian economy and its ability to achieve the highest international regulatory standards, trade and investment policy predictability and transparency, according to the expert analysis reported by Business Standard. The global scenario is becoming increasingly geopolitically motivated and competitive, making it crucial for India's FTAs to include investment chapters and be coupled with parallel IPAs with appropriate investor protection provisions and dispute resolution mechanisms. A combined approach of an FTA with IPA will help India re-establish its position as an attractive destination for FDI. The relatively deeper FTAs with the United Kingdom (UK) and the European Union (EU) do not include an investment chapter or provisions on investment liberalisation and facilitation, and there is as yet no investment agreement/treaty with these countries.
