India's Foreign Direct Investment Landscape in Trump 2.0 Era During Trump's first term, India lost its Generalized System of Preferences (GSP) status, which had previously enabled tariff-free exports of certain goods to the U.S. Without GSP, sectors like pharmaceuticals, textiles, and engineering—key components of India's export portfolio—could face challenges if new tariffs or restrictions are imposed.
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As discussions emerge around the second term for Donald Trump, questions arise about the future of Foreign Direct Investment (FDI) in India. Trump's first administration was marked by aggressive measures to drive investments back to the U.S., which resulted in regulatory shifts that affected FDI patterns worldwide, including in India. With similar policies potentially in the cards for Trump 2.0, the outlook for India's FDI inflows presents both challenges and unique opportunities.
During the Trump administration's first term, significant regulatory changes were implemented to encourage U.S. companies to reinvest domestically, a policy shift that showed up in FDI figures worldwide. India was no exception, with FDI inflows of only $11 billion recorded during this period, as per a SBI report. If Trump 2.0 pursues a similar approach, multinational corporations (MNCs) may once again focus on bolstering U.S. operations rather than expanding abroad. This shift could redirect potential FDI away from India, especially in sectors more directly impacted by U.S.-driven investment redirection.
Opportunities Amid Uncertainty
Despite the potential headwinds, India's robust growth outlook and expanding consumer market continue to make it an attractive FDI destination, especially in sectors less vulnerable to global trade tensions. Recent trends reflect India's pivot away from dependence on traditional FDI sources, with investments increasingly directed toward emerging industries, including renewable energy, digital services, non-conventional energy, sea transport, medical and surgical appliances.
In fact, these 12 rising sectors now account for nearly half of India's FDI inflows, a substantial increase from a 2021 share of just 18.7 per cent. By diversifying the industries that attract FDI, India has strengthened its position, making it less susceptible to potential policy shifts from any single country, including the U.S. This diversification may allow India to remain a compelling FDI destination for sectors aligned with its economic priorities and government initiatives.
A key factor influencing India's FDI and export environment under Trump 2.0 would be the approach to the U.S.-India trade relations. During Trump's first term, India lost its Generalized System of Preferences (GSP) status, which had previously enabled tariff-free exports of certain goods to the U.S. Without GSP, sectors like pharmaceuticals, textiles, and engineering—key components of India's export portfolio—could face challenges if new tariffs or restrictions are imposed.
At the same time, Trump 1.0 fostered strategic U.S.-India cooperation through initiatives like the Indo-U.S. 2+2 Dialogue, underscoring the strong diplomatic ties between the nations. If these strategic ties continue under a second Trump administration, India could benefit from diplomatic avenues for dialogue on trade issues, though protectionist stances may still pose risks.
Growth Despite Tariffs
The report also highlighted that, despite tariffs imposed during Trump's first term—including 25 per cent on steel, 10 per cent on aluminium, and approximately 30 per cent on washing machines—India's exports to the U.S. proved resilient. For instance, exports of iron and steel products rose by 44.7 per cent from FY20 to FY21, even amid these tariff barriers. India has maintained a trade surplus with the U.S. in merchandise, indicating that Indian products remain competitive despite additional costs.
As India prepares for the possibility of a Trump 2.0 administration, it faces both potential challenges and reinforcing opportunities in the FDI landscape. U.S. policies may shift focus away from international expansion, but India's strategic diversification across emerging sectors, positions it as an attractive destination for global investors.
While challenges could arise in export-heavy sectors affected by trade policy, India's ability to adapt and expand its export base in recent years demonstrates resilience that may help it navigate these shifts.
