The signing of the EU-India Free Trade Agreement (FTA) in January 2026 represents a significant milestone in bilateral economic relations, for both sides. However, it fails to address a more critical challenge: India’s persistent struggle to attract manufacturing foreign direct investment (FDI). This paper argues that India requires more manufacturing FDI not only for financial resources, but as the principal means of knowledge transfer and boosting employment creation. This paper documents India’s substantial underperformance in attracting FDI compared to China and ASEAN countries. China’s manufacturing FDI ecosystem has yielded high returns for foreign investors and technological spillovers for domestic firms. In contrast, India has primarily attracted capital to the services sector, where investment has flowed largely into captive, foreign-owned offshore units with limited backward linkages to independent domestic firms, or into private equity and venture capital funds that typically acquire existing assets, thereby weakening the typical knowledge-transfer channels. The European Union, already India’s largest investor and the world’s leading source of outward FDI, possesses both the strategic interest and the financial means to help bridge this gap, especially as European firms re-evaluate their exposure to China, and because India offers a vast and rapidly growing consumer market. Despite this, EU FDI into Indian manufacturing remains significantly lower than what India’s growth rate and investment returns would suggest. A lack of credible investor protection could be partially responsible for this, and the FTA, as it stands, lacks investment-protection provisions which could play a vital role in meaningfully redirecting European manufacturing capital towards India.

Source : Bruegel