Business-Friendly or Competition-Friendly? What India Must Fix to Attract Capital

A US report and India's Finance Ministry share one lesson: fair rules for everyone matter more than favours.

Two documents arrived within days of each other, from very different places, and they said something strikingly similar. One came from the United States government, in the form of its annual investment climate report on India. The other came from India's own Finance Ministry, in a review of the economy. The first listed hurdles that foreign investors face. The second urged India to be competition-friendly and not only business-friendly.

The phrase sounds like a slogan. In fact, it contains a sharp idea, and one that can help explain why India's economy is growing fast but its private investment and foreign capital are not growing as fast as many expected.

A difference that matters

At first, "business-friendly" and "competition-friendly" sound like the same thing. They are not.

A business-friendly policy tries to help firms. It may mean tax breaks, subsidies, quick approvals, protection from imports or easy access to land and credit. These can be useful. But they usually help particular firms or sectors, often the ones that are large, well-connected or already established.

A competition-friendly policy tries to help markets work. It means that rules are clear, that the same rules apply to everyone, that new firms can enter and compete, that no one is shielded from rivals by special favours, and that consumers have real choices. It protects the process, not any single player.

The two can conflict. A policy that protects an existing champion from competition is business-friendly for that champion, but not competition-friendly for the economy. Over time, that can lead to higher prices, less innovation and weaker investment from those outside the circle.

The Finance Ministry's message, in short, is that India's growth will be stronger if it is built on open, fair competition and not on the comfort of a few.

The state of the economy

The context is mostly positive. The Finance Ministry expects growth of about 7.3% in the second quarter of this fiscal year. Net GST collections in September rose 18.1% to ₹1.77 trillion, and gross collections rose 14.7% to ₹2.04 trillion. The manufacturing index reached 55.1, a seven-month high. Foreign exchange reserves are close to $800 billion.

But there are warning signs. New private investment announcements slowed in the second quarter. Rural demand is under strain from the weak monsoon. The rupee has weakened by more than 6% this year. Oil is near $100. The stock market has fallen to a 2026 low. And the ministry itself says that US trade uncertainty, high crude prices and limited participation in global AI developments are weighing on capital.

So the question is: what can India do, beyond waiting for global conditions to improve?

What the US report says

The annual investment climate statement from the US State Department is not a neutral document. It reflects the concerns of American companies and the interests of the US government. It should be read with that in mind. But it also lists specific problems, many of which Indian businesses and economists have raised too.

According to the report, the stock of US foreign direct investment in India was $58.54 billion in 2024, down 3.37% from the year before. India allows up to 100% foreign ownership in most sectors through the automatic route, which means no prior government approval. But in several areas, including multi-brand retail, private banking, defence, media and some others, approvals or limits apply. Foreign-owned e-commerce firms are barred from running an inventory-based model. There are limits on foreign investors holding stakes in the same company in different ways, and caps on how much a single portfolio investor can own.

The report also points to tax and legal concerns. It says foreign banks face an effective tax rate of 38.22%, which is 4.63 percentage points higher than for domestic banks. It notes that corruption remains a concern, citing hundreds of new cases opened by the Central Bureau of Investigation. It also records complaints about the use of enforcement agencies against businesspeople.

On the positive side, the report acknowledges steps such as the National Single Window for approvals, a 60-day review timeline in some areas and work on revising investment treaties.

Separating fair complaints from foreign interests

A careful reader should sort the report's points into two groups.

Some points reflect real problems that affect Indian firms as much as foreign ones. Unclear rules, long approvals, unpredictable enforcement and inconsistent taxation make it hard for any business to plan.

Other points reflect what foreign firms want, and India may reasonably say no. A country has the right to protect small retailers, to limit foreign control in sensitive areas like defence and media, or to prefer domestic production. Not every restriction is a mistake. The test is whether the restriction serves a clear public aim and is applied evenly.

This is where the Finance Ministry's idea helps. A restriction that protects small shopkeepers because of a considered social choice is one thing. A restriction that protects a few large incumbents from competition is another.

Where competition policy shows up in daily life

It helps to imagine how this plays out.

A young entrepreneur wants to start a logistics company. If licences are clear, approvals are quick and the rules are the same for her as for a large rival, she can compete. If approvals depend on connections, or if large players get special treatment, she may decide not to start.

A foreign manufacturer is deciding where to build a plant. It will compare India with other countries. It will look at wages and market size, but also at how predictable the rules are, how fast disputes are settled, and whether the tax system treats it fairly. If it sees an uneven field, it may choose another country.

A consumer buys a phone, a bank loan or an airline ticket. If there are many competing sellers, prices stay lower and quality improves. If a few firms dominate, prices can drift up.

In each case, the key factor is competition, not special favours.

Capital goes where rules are predictable and rivals are fair, not where favours are easy.

The trade deal in the background

All this is playing out while India and the United States work on a trade agreement. Commerce Minister Piyush Goyal met US Trade Representative Jamieson Greer on the sidelines of the G20 trade ministers' meeting, as talks continue on an interim deal. A framework for such a deal was announced earlier this year.

Trade talks usually focus on tariffs, but investment rules matter just as much. The US investment report lists the kinds of issues that may come up. For India, the challenge is to decide which changes serve its own interests and which it would resist. A fair deal need not mean giving in to every demand. It should, however, make the rules clearer for all participants.

The case for a competition-first approach

There are several reasons to think this approach would work for India.

• It rewards efficiency. When firms must compete, the better ones grow and the weaker ones improve or exit.

• It helps consumers. More competition tends to bring lower prices and better service.

• It supports small firms. A level field helps start-ups and small businesses, which create many jobs.

• It attracts long-term capital. Investors prefer stable, clear rules to short-term incentives that can change.

• It reduces corruption risk. Fewer special favours mean fewer chances for improper deals.

The challenges

Moving in this direction is not simple. Governments face pressure from established firms that benefit from the current system. Some sectors need protection for social reasons, such as small farmers and shopkeepers. Strategic industries may need support. And competition rules require strong, independent regulators, which take time and trust to build.

There is also a risk of confusing the two ideas. A government may sincerely believe it is helping the economy by backing national champions, and in some cases it may be right. The test is whether that support is open, time-limited and judged by results, or open-ended and tied to a few names.

What a practical agenda could look like

The Finance Ministry's remark gives a direction. Turning it into action could involve several steps.

1. Simplify and stabilise rules. Fewer changes, clearer notifications and long enough notice for businesses to adapt.

2. Apply tax rules evenly. Review gaps such as the higher effective tax on foreign banks, and explain the reasons for any difference.

3. Strengthen regulators. Ensure that competition and sector regulators are independent, well-staffed and fast.

4. Speed up dispute resolution. Faster courts and arbitration give investors confidence that contracts will be honoured.

5. Make enforcement predictable. Investigations should follow clear procedures and timelines, and avoid the appearance of selective action.

6. Be open about trade-offs. When India limits foreign ownership or protects a sector, say why, and review the rule regularly.

7. Use the single window fully. Make approvals truly one-stop, with clear timelines and tracking.

None of these needs a new law at the start. Many can be done through better administration.

A balanced reading

The Indian government deserves credit for some of the progress described. Reforms such as the single window, better infrastructure and a strong digital payments system have made doing business easier in many ways. India's growth is among the fastest in the world, and its markets are huge.

But growth rates alone do not guarantee investment. Capital is mobile, and it compares places. A country that wants a large share needs to show not only that its market is big, but that its rules are fair.

The takeaway

The phrase "competition-friendly, not just business-friendly" is easy to say and hard to practise. It asks governments to resist the pull of favouring the known and the powerful, and to invest in rules and institutions that benefit everyone, including firms that do not yet exist.

If India takes this advice seriously, it can turn a good growth story into a more durable one. If it does not, it may find that the capital it wants goes to places that offer a fairer field. The two reports, one from outside and one from inside, are pointing in the same direction. The next step is up to India.