Why India’s fiscal health matters for Asean businesses

AS INDIA prepares to host this year’s Brics summit – themed around the ideas of resilience and cooperation – the country finds itself at the centre of an increasingly fragmented global economy.

Companies are restructuring supply chains, governments are reassessing strategic partnerships, and investors are searching for resilient growth markets.

For businesses in Asean, these developments present significant opportunities. India offers one of the world’s largest consumer markets and has become an important destination for trade and investment.

India’s appeal extends well beyond its domestic market. As companies diversify beyond China, manufacturers are expanding production of electronics, pharmaceuticals and renewable energy in India. 

The country’s digital public infrastructure, engineering talent and improving logistics have also strengthened its attractiveness. 

Yet, the same geopolitical uncertainties encouraging companies to look at India are also prompting them to allocate investment in several other Asian markets, rather than to rely on any single destination.

Fiscal policy and foreign investment

In the last two years, India’s external financing environment has become more challenging.

Although gross foreign direct investment (FDI) has remained relatively strong, higher profit repatriation and rising overseas investment by Indian firms have reduced net FDI, and portfolio flows have become more volatile.

At the same time, global investors have increasingly favoured economies leading in artificial intelligence, advanced semiconductors and digital infrastructure.

For investors, market size alone is no longer enough. Investment decisions depend as much on policy predictability, infrastructure quality, innovation ecosystems and institutional credibility.

India’s greatest long-term challenge may therefore not come from the external environment at all. It lies in strengthening the domestic foundations that sustain productivity, investor confidence and sustained growth.

Fiscal institutions are central to that. They determine whether governments can mobilise resources to build the artificial intelligence ecosystem, advanced computing capacity, research ecosystems and a skilled workforce that attracts long-term global investment.

In the emerging AI economy, fiscal policy is becoming an important instrument of competitiveness; macroeconomic stability alone is not enough – and India’s fiscal health needs a recheck.

Weaknesses in fiscal management 

This is not a story of imminent crisis, but of vulnerabilities that become visible only gradually. Weak public financial management, opaque liabilities and spending that does too little to raise productivity can quietly accumulate, limiting future policy choices.

India’s general government debt is around 80 per cent of gross domestic product. More important than the headline figure is that borrowing has increasingly moved outside the budget into public enterprises and state-guaranteed entities, leaving significant liabilities beyond the core fiscal accounts.

Recent strains in global bond markets offer a broader lesson. Investors focus not only on debt levels, but also on hidden liabilities and contingent obligations. Transparency regarding off-budget borrowing is becoming almost as important as transparency regarding debt itself.

Public financial management is another weakness. Reported capital expenditure can overstate productive investment because financial transactions are often reported alongside asset creation. 

Fiscal reporting remains fragmented across levels of government, while India still lacks a comprehensive consolidated public-sector balance sheet. 

Without a complete picture of public enterprises, guarantees and contingent liabilities, governments risk underestimating fiscal vulnerabilities while investors may overestimate them.

The composition of public spending also matters. General government interest payments are at around 6 per cent of gross domestic product – roughly three times public health spending. The question is therefore not simply how much the government spends, but whether spending strengthens productivity, skills and innovation.

Energy provides a good illustration. Fuel-price interventions and borrowing by state-owned electricity distribution companies often shift costs outside the budget before they eventually return through higher public debt or government support. Such practices reduce fiscal transparency and weaken investor confidence.

The response is not simply lower deficits. It is stronger fiscal architecture – better reporting of off-budget liabilities, consolidated public sector accounts, stronger fiscal risk disclosure and a greater focus on directing scarce public resources towards productivity-enhancing investments in AI infrastructure, skills, digital frameworks, research and innovation.

Why Asean businesses should care

For businesses in Asean, these reforms matter. Companies establishing regional headquarters, manufacturing platforms or technology partnerships evaluate policy stability, fiscal credibility and the quality of infrastructure alongside growth prospects. 

For many investors, the key question is no longer whether India will grow, but whether it can build the institutional and technological foundations needed to sustain that expansion in the coming decade.

India’s opportunity is therefore larger than at any point in recent decades. The challenge is to convert geopolitical relevance into lasting investment leadership. 

In a more fragmented global economy, the countries that succeed will be those that combine strategic opportunity with credible institutions.

For India, stronger fiscal institutions are becoming not simply a matter of sound public finance, but a foundation for long-term competitiveness and sustained investor confidence.

The writer is a distinguished fellow at the Centre for Social and Economic Progress and former Asia-Pacific director at the International Monetary Fund