India faces a stiff challenge to attract capital flows as the global investment landscape is being reshaped by the artificial intelligence boom, renewed manufacturing ambitions in developed economies and the increasing weaponisation of global supply chains, according to the India Monthly Economic Review report released by the Finance Ministry.
Countries are increasingly striving to safeguard their supply chains, intensifying the competition for global capital.
As a result, India, similar to other developing nations, encounters significant challenges in drawing capital inflows, the report stated.
The report suggests that net foreign direct investment (FDI) inflows are expected to surpass last year's performance in the current financial year.
However, Indian assets, including the currency, continue to face short-term pressure, the report stated.
It also highlighted that the development in AI is fueling cross-border capital investment and flows, while developed nations are competing to attract investments to support their revitalized manufacturing goals.
The report stated that festive demand and increased input costs might contribute to short-term price pressures. However, proactive government measures on the supply side and market interventions could mitigate upward risks and alleviate temporary price fluctuations.
Retail inflation increased to 4.82% in August, with food inflation reaching 5.95%. Wholesale inflation climbed to 9.92%, partly due to rising fuel and power costs.
India's external sector demonstrated resilience, bolstered by services exports, remittances, foreign exchange reserves, and capital inflows, according to the report.
As of September 18, foreign exchange reserves amounted to $765.9 billion, offering approximately 11.1 months of import coverage.
The report indicated that geopolitical and geoeconomic instability prevents India from depending solely on its post-Covid growth achievements.
India must not become complacent about its post-Covid growth due to ongoing geopolitical and geoeconomic uncertainties, the report stated. It emphasized that sustained growth needs to be achieved every quarter, presenting a significant challenge for policymakers.