The Quiet Shift in India’s Development Philosophy

For much of India’s post-liberalisation journey, economic development was viewed primarily as a financing challenge.

Like many developing economies, India possessed ambitious investment needs but relatively limited domestic savings. Building roads, ports, factories, power plants and industrial infrastructure required financial resources that domestic savings alone could not fully provide. Foreign Direct Investment (FDI), therefore, became an essential source of external capital, supplementing domestic savings and enabling higher levels of investment and economic growth.

Within this framework, success appeared straightforward. Larger inflows of foreign investment were interpreted as signs of growing investor confidence and stronger economic prospects. Governments competed to attract multinational corporations, liberalised investment regulations and improved the ease of doing business. The underlying assumption was simple: more capital would naturally translate into faster development.

This way of thinking shaped India’s external sector strategy for decades.

Recent Economic Surveys, however, suggest that India’s development philosophy has quietly undergone a profound transformation.

Earlier surveys largely viewed the external sector through the lens of resilience—building foreign exchange reserves, financing the Balance of Payments, and cushioning the economy against global shocks. The latest institutional thinking moves beyond this defensive approach. The external sector is now increasingly viewed as a long-term instrument for building productive capability, economic complexity and global competitiveness. Rather than merely financing growth, it has become a means of transforming the structure of the economy itself.

As India’s economy has matured, the central question has also changed.

The objective is no longer simply:

How much foreign capital enters the country?

Instead, policymakers increasingly ask:

What capabilities does that capital help India build?

Capital Builds Factories. Capability Builds Nations.

Financial capital remains indispensable for economic development.

It finances infrastructure, expands industrial capacity and enables firms to invest in new technologies. Without adequate investment, industrialisation becomes difficult and economic growth slows.

Yet history also demonstrates that financial capital alone does not explain why some countries become advanced industrial economies while others remain trapped in middle-income status.

Many countries have attracted substantial foreign investment over several decades without fundamentally transforming the sophistication of their economies. Others have received comparable levels of investment yet steadily progressed from simple manufacturing into precision engineering, advanced machinery, electronics and other knowledge-intensive industries.

The difference lies not in the amount of capital they received.

It lies in the productive capabilities they accumulated.

These capabilities extend far beyond physical infrastructure. They include engineering expertise, manufacturing experience, supplier ecosystems, technical standards, research capability, managerial practices and the institutional knowledge required to continuously improve industrial performance.

Unlike financial capital, productive capability cannot simply be purchased.

It develops gradually through years of production, experimentation, technological adaptation and continuous learning.

Factories can be built within months.

Industrial capability often takes decades.

This distinction fundamentally changes how economic development is understood.

Growth is no longer viewed merely as the accumulation of financial capital.

It is increasingly understood as the accumulation of productive knowledge.

Why Capability Matters

Consider two countries that each attract ten billion dollars of foreign investment.

The first country establishes factories that primarily assemble imported components. Most sophisticated inputs continue to be produced abroad, domestic firms remain confined to relatively simple activities and technological learning remains limited.

The second country receives the same amount of investment but gradually develops domestic supplier networks, trains engineers, adopts advanced manufacturing processes and enables local firms to participate in increasingly sophisticated stages of production. Over time, domestic firms begin supplying components, improving product quality and developing specialised expertise of their own.

Both countries attracted identical amounts of capital.

Yet twenty years later, they would likely occupy very different positions within the global economy.

The first would continue competing primarily on lower labour costs.

The second would increasingly compete through technology, manufacturing capability and industrial expertise.

The difference is not the capital itself.

It is the knowledge embedded within the production process.

This insight has fundamentally changed how economists evaluate long-term prosperity.

Instead of asking how much an economy produces, increasing attention is being paid to what an economy is capable of producing.

The products a country successfully manufactures reveal the productive knowledge accumulated across its firms, workers and institutions.

An economy capable of producing semiconductor equipment, aircraft components or precision machinery possesses capabilities that are fundamentally different from one exporting products that many countries can manufacture with relative ease.

Development therefore becomes a process of continuously expanding the range and sophistication of what an economy can successfully produce.

Economic Complexity: The New Measure of Development

This idea is captured by the concept of Economic Complexity.

Economic Complexity measures the productive know-how embedded within an economy by examining not only how much it exports, but also how sophisticated and difficult those products are to produce. Economies capable of producing a wide range of specialised, knowledge-intensive products possess deeper productive capabilities than those whose exports remain concentrated in relatively simple or widely produced goods.

Recent Economic Surveys identify this as India’s next major development challenge.

India has achieved remarkable success in expanding trade. Total exports reached a record USD 825.3 billion in FY25, while services exports have emerged as an important source of resilience for the external sector. These achievements reflect the growing scale of India’s engagement with the global economy.

However, scale alone is no longer considered sufficient.

The Economic Survey argues that India’s long-term competitiveness will increasingly depend on improving the sophistication of its export basket rather than merely increasing its size. Although India possesses considerable “Complexity Outlook”—the potential to diversify into more advanced industries—its current export basket remains concentrated in relatively low- and medium-complexity products such as refined petroleum and rice. India currently ranks 44th on the Economic Complexity Index, highlighting the gap between its industrial potential and its present manufacturing capabilities.

This distinction fundamentally changes the development challenge facing the country.

The objective is no longer simply to export more.

It is to export better.

Instead of relying primarily on products that many countries can produce, India must gradually expand into advanced machinery, precision engineering, electronics, specialised manufacturing and other knowledge-intensive sectors where productive capability—not low costs—determines competitiveness.

Economic development, therefore, is increasingly viewed not as a race to accumulate larger quantities of investment, but as a long-term process of accumulating productive knowledge.

Once this becomes the objective, the role of Foreign Direct Investment also begins to look very different.

Rather than serving primarily as a source of financial capital, foreign investment increasingly becomes a mechanism through which countries acquire technology, production systems, supplier ecosystems and industrial know-how that would otherwise take decades to develop independently.

That shift marks a profound change in India’s understanding of economic development.

It also explains why India’s thinking on Foreign Direct Investment has quietly evolved—from treating it primarily as a source of finance to viewing it as a catalyst for building productive capability.

Why India’s Thinking on FDI Changed

If economic development is ultimately about building productive capability, then the purpose of Foreign Direct Investment must also be viewed differently.

For much of the post-liberalisation period, FDI was valued primarily because it supplemented domestic savings. India was a capital-scarce economy with investment requirements that exceeded the resources available domestically. Foreign investment helped bridge this savings-investment gap, financed industrial expansion and supported faster economic growth. In this framework, FDI was essentially a gap-filler.

Recent Economic Surveys reveal a significant shift in this institutional reasoning.

The objective is no longer simply to attract financial capital.

It is to attract productive knowledge.

Rather than treating FDI merely as a source of finance, recent Surveys increasingly describe it as a vehicle for Knowledge Internalisation—the process through which domestic firms absorb technologies, production systems, managerial practices and industrial capabilities from globally competitive enterprises. This marks the transition from viewing FDI as a financing instrument to viewing it as a strategic tool for industrial transformation.

The question policymakers increasingly ask is therefore no longer:

How much foreign investment entered the country?

Instead, it has become:

What capabilities did that investment leave behind?

This seemingly simple change represents one of the most important shifts in India’s development philosophy.

Knowledge Internalisation: The Real Value of Foreign Investment

Money finances factories.

Knowledge builds industries.

This distinction lies at the heart of the government’s evolving understanding of Foreign Direct Investment.

When a globally competitive manufacturer establishes operations in a country, it rarely brings capital alone. It also brings decades of accumulated production experience, engineering expertise, quality standards, supplier relationships, managerial systems and technological know-how.

Domestic firms that become part of this ecosystem gradually learn to operate at international standards.

Workers acquire specialised technical skills.

Engineers gain exposure to advanced production techniques.

Universities adapt their training to the needs of emerging industries.

Local suppliers improve product quality and manufacturing precision.

The result is that productive capability spreads far beyond the original investment.

This process is what recent Economic Surveys increasingly describe as knowledge internalisation—the gradual absorption of productive know-how into the domestic economy.

Unlike financial capital, this knowledge cannot be withdrawn once a factory has been established.

It remains embedded within workers, firms, institutions and supplier ecosystems, continuing to generate productivity gains long after the initial investment has taken place.

That is why the quality of investment increasingly matters more than its quantity.

Why Governments Compete for GVC Anchors

This changing logic also explains why governments around the world actively compete to attract companies such as Apple, Foxconn, Samsung and advanced semiconductor manufacturers.

At first glance, these companies appear attractive because they bring billions of dollars in investment and create employment opportunities.

In reality, their greatest contribution often lies elsewhere.

Modern manufacturing operates through Global Value Chains (GVCs), where production is fragmented across multiple countries and coordinated through highly specialised supplier networks. Lead firms establish technical standards, production processes and quality benchmarks that thousands of suppliers must satisfy.

When a GVC Anchor establishes operations in India, it does not simply construct another factory.

It creates an ecosystem.

Domestic suppliers upgrade their production processes.

Component manufacturers improve quality standards.

Logistics networks become more efficient.

Testing laboratories emerge.

Research partnerships expand.

Skill requirements evolve.

Over time, an entire manufacturing ecosystem becomes more sophisticated.

The Economic Survey therefore argues that attracting GVC Anchors is far more valuable than simply attracting financial investment because these firms bring the productive know-how required to move India into higher-value manufacturing.

This represents the core of India’s changing FDI strategy.

The objective is no longer merely to attract capital.

It is to embed India within globally competitive production networks.

China Plus One: A Window That Will Not Remain Open Forever

The transformation of global supply chains has created an opportunity that few countries receive more than once.

As geopolitical tensions, technological rivalry and concerns over supply chain resilience have encouraged multinational firms to diversify production beyond China, many have adopted a China Plus One strategy. Rather than concentrating manufacturing in a single country, firms are increasingly establishing additional production bases across trusted partners and emerging manufacturing hubs.

For India, this is not simply an opportunity to receive more investment.

It is an opportunity to accelerate capability acquisition.

Each globally competitive manufacturer that relocates part of its production brings with it technical standards, supplier ecosystems, production discipline and specialised knowledge that would otherwise require years of domestic learning.

This explains why recent Economic Surveys repeatedly emphasise attracting GVC Anchors as a strategic priority.

The objective is not merely to increase FDI statistics.

It is to use this unique geopolitical moment to move India into higher-complexity manufacturing before global supply chains stabilise once again.

As one of the Survey’s observations suggests, the current window for attracting such investment will not remain open indefinitely.

The State Produces Governance. Firms Produce Goods.

Perhaps the most profound institutional insight emerging from recent Economic Surveys is that governments cannot manufacture competitiveness directly.

Their role is different.

The state’s responsibility is to produce governance.

That means creating efficient logistics, reducing regulatory uncertainty, simplifying compliance, improving infrastructure, ensuring policy stability and building an environment in which productive firms can thrive.

The private sector, in turn, produces goods, develops technology, improves quality and competes in global markets.

Competitiveness therefore emerges not from subsidies alone but from the interaction between efficient governance and productive enterprise.

This also explains why recent policy reforms increasingly focus on reducing logistics costs, improving ease of doing business, rationalising tariffs and aligning regulatory systems.

These are not merely administrative reforms.

They are instruments for building internationally competitive manufacturing ecosystems.

In this view, the state does not replace markets.

It creates the conditions under which markets can generate productive capability.

Measuring Foreign Investment Differently

Once capability becomes the objective, the way foreign investment is evaluated must also change.

Traditionally, discussions on FDI focused largely on headline investment figures.

Higher inflows were viewed as success.

Lower inflows generated concern.

Those indicators remain important.

However, they no longer tell the entire story.

A more meaningful evaluation increasingly asks:

Has the investment strengthened domestic supplier ecosystems?
Has it transferred productive knowledge and technical expertise?
Has it enabled Indian firms to move into higher-value manufacturing?
Has it integrated domestic producers into Global Value Chains?
Has it increased the sophistication of India’s export basket?

These questions recognise that the true value of foreign investment cannot be measured simply by the capital it brings.

Its lasting contribution lies in the productive capabilities it leaves behind.

A billion dollars invested in an isolated assembly plant may generate output.

A billion dollars invested in a manufacturing ecosystem can transform an entire industry.

The quality of investment therefore becomes as important as its quantity.

From Capital Accumulation to Capability Accumulation

Viewed together, these developments reveal a broader transformation in India’s understanding of economic development.

The central challenge facing India is no longer merely attracting larger quantities of foreign capital.

It is steadily increasing the productive knowledge embedded within the economy.

That requires stronger supplier ecosystems.

Higher technological capability.

Continuous industrial learning.

And deeper participation in globally competitive manufacturing networks.

Foreign Direct Investment remains central to this process.

But its significance no longer rests solely on the financial resources it provides.

Its greatest contribution lies in accelerating capability accumulation.

This marks the transition from capital accumulation to capability accumulation.

It also explains why recent Economic Surveys increasingly describe FDI not simply as an investment policy, but as an industrial strategy.

Conclusion

India’s approach to Foreign Direct Investment has quietly undergone one of the most significant institutional transformations since economic liberalisation.

For decades, foreign investment was primarily viewed as a means of financing development. A capital-scarce economy required foreign savings to support investment, industrialisation and economic growth.

Today, that philosophy has evolved.

Foreign investment is increasingly valued because it brings productive knowledge.

It connects domestic firms to Global Value Chains.

It transfers technology, technical standards and managerial capability.

It strengthens supplier ecosystems.

Most importantly, it helps India move toward a more complex, knowledge-intensive economy capable of producing increasingly sophisticated goods.

The objective of development is therefore no longer merely to accumulate more capital.

It is to accumulate more capability.

Because countries do not become prosperous simply by attracting investment.

They become prosperous by transforming investment into productive knowledge, productive knowledge into industrial capability, and industrial capability into long-term economic competitiveness.

That is the deeper significance of India’s changing approach to Foreign Direct Investment.

It reflects a broader evolution in the country’s development philosophy—from financing growth to building capability.