The Lift Line
“Restrictions on capital carry costs that emerge slowly, as investments not made and firms not built.” (Niharika Yadav, research lead at XKDR Forum, in The Indian Express, 6 November 2026)
Why This Editorial Matters for Your Exam
In the news: In a signed column published on 6 November 2026, Niharika Yadav, research lead at XKDR Forum, argues in The Indian Express that the RBI’s draft Foreign Investment Rules, released in July 2026, cannot do the job without an overhaul of the Foreign Exchange Management Act (FEMA). The argument is the author’s. The draft is still a draft.
For related reading, see Surjit S Bhalla’s column on the 2016 Model BIT and net FDI, The Hindu on calibrating inbound investment and our piece on China+1 and the States, which covers Press Note 3.
UPSC relevance:
- GS Paper 3: Indian economy; investment models; foreign direct investment; the capital account.
- GS Paper 2: regulation and how rules get made: consultation, cost-benefit analysis and review.
- Prelims: the NDI Rules, 2019 and the draft that would replace them; gross versus net FDI in RBI data; Section 6 of FEMA; Press Note 3.
- Essay and Interview: does a state’s default stance towards capital matter as much as its rules?
The Crux in 60 Words
The RBI’s draft Foreign Investment Rules, not yet final, tidy up how foreign money enters India. Niharika Yadav argues that this is not enough: the real constraint is FEMA itself, which the column reads as a default of restriction. Its remedy is a first-principles overhaul of the statute. The RBI’s own data give a more mixed picture of net FDI.
Reworking the rules cannot help much while the statute beneath them starts from restriction: India needs a first-principles overhaul of FEMA.
- On the author’s reading of Section 6, capital account transactions stay prohibited unless specifically permitted, so the draft rules only list exceptions.
- Even in open sectors, the author writes, the state regulates the instrument, the recipient’s legal form and the price, as with certified valuations for unlisted share transfers.
- Restrictions should be temporary and tied to stated objectives, and security screening should bring together departments with competing mandates, not rest with DPIIT alone, the author argues.
The RBI’s own table shows gross inflows in 2025-26 above their 2020-21 level, with net FDI squeezed mainly by repatriation and outward investment, and a recovery in 2025-26 that the author does not mention. The author also concedes that global conditions once masked these problems, so the statute is not shown to be the whole cause.
The author wants three tests for every control: neutrality as to the vehicle, neutrality as to the investor, and a link to an identified market failure, with consultation, cost-benefit analysis and review. Our analysis: finish the rules first, and argue the statute on data that separate inflows, exits and outward investment.
Background and Context
The draft, and where it stands
The RBI’s press release of 21 July 2026 says it “has today placed on its website draft Foreign Exchange Management (Foreign Investment) Rules, 2026 for comments / feedback from all stakeholders”, with comments invited by 31 August 2026.
The draft has a stated origin. The Union Budget 2026-27 “announced a comprehensive review of the NDI Rules to create a more contemporary, user-friendly framework for foreign investments”, and “a committee was constituted by the Central Government to undertake a comprehensive review”. The RBI prepared the draft on that committee’s recommendations.
The RBI lists what the draft is meant to do, including a “Simplified and principle-based framework”, “Clear demarcation of procedural FEMA provisions from policy and sector-specific requirements” and “principle-based, investee-neutral and investor-neutral provisions”.
The status matters for an answer. The release says: “The Rules will be finalized after wider public consultations.” No notification of final rules could be found as of 7 November 2026, so write of rules that would replace the NDI Rules, never of rules in force.
What the RBI’s net FDI series shows
The column opens with a number: net FDI “has gone down from $40 billion in FY2021 to effectively zero in FY2025”. The RBI’s Handbook of Statistics (Table 143, posted in July 2026) reads differently at both ends and adds a year the column leaves out:
| Year (US$ million) | Gross inflows | Repatriation and disinvestment | Direct Investment to India | FDI by India | Net FDI |
|---|---|---|---|---|---|
| 2020-21 | 81,973 | 27,046 | 54,927 | 10,972 | 43,955 |
| 2021-22 | 84,835 | 28,605 | 56,231 | 17,644 | 38,587 |
| 2022-23 | 71,355 | 29,349 | 42,006 | 14,020 | 27,986 |
| 2023-24 | 71,302 | 44,472 | 26,830 | 16,678 | 10,152 |
| 2024-25 | 80,615 | 51,486 | 29,130 | 28,171 | 959 |
| 2025-26 (provisional) | 94,836 | 54,044 | 40,791 | 33,844 | 6,947 |
So the RBI has about $44 billion where the column has $40 billion, and under $1 billion where the column has “effectively zero”. For 2025-26, about $6.9 billion, the table marks the data provisional. The steep fall the column describes is real. Net FDI staying near zero is not what the RBI’s latest year shows.
The Analysis
The column’s argument
1. The draft is fine as far as it goes. The author calls it “a mixed bag”, crediting “shorter sections, an investee-centred framework and harmonised definitions”, but treats these as “operational revisions”. In the author’s words: “The binding constraint is India’s suspicious approach towards foreign capital”.
2. The statute starts from no. The column’s reading: “Under Section 6 of FEMA, capital account transactions remain prohibited unless specifically permitted by the RBI or the government”. So everything above it, the draft included, “essentially serves as a schedule of exceptions to a default state of restriction”. That is the author’s characterisation of the law, and the column’s central claim. Since October 2019, section 6(2A) has let the Central Government, in consultation with the RBI, prescribe which classes of capital account transactions not involving debt instruments are permissible; section 6(2) gives the RBI that power for debt instruments.
3. India stands apart, the author says. Foreign capital, the column writes, is “prohibited in sectors such as real estate business, and capped in others such as digital media, broadcasting, multi-brand retail and pensions”. It calls this “an outlier among significant economies, alongside China”, and adds: “No OECD country maintains general capital and exchange controls, and even emerging economies such as Chile and Mexico have avoided transaction-by-transaction regulation of the capital account.” These comparisons are the author’s.
4. Controls reach private deals. The state prescribes, the column says, the instrument, the recipient’s legal form and the price. Its example: “transfers of unlisted shares between residents and non-residents require certified valuations before transaction, with the draft FI Rules further narrowing the latitude”. The column does not quote the draft clause, so treat this as the author’s description. Its answer: “If the concern is tax evasion, it should be addressed after the transaction, not through ex-ante controls.”
5. The design already exists, the author says, in reports by “Tarapore, Percy Mistry, U K Sinha, and the FSLRC”. The column draws three principles:
- Restraint. A restriction should be “imposed temporarily, based on publicly stated objectives, and used as an emergency measure for managing macroeconomic risk”. Security goals call for screening that brings together departments with competing mandates. The author’s example is Press Note 3, which “should not have been issued by DPIIT alone, whose mandate is to promote investment” (DPIIT is the Department for Promotion of Industry and Internal Trade). The column names the US’s CFIUS and the UK’s Investment Security Unit as models.
- Process. Rulemaking should involve “public consultation, cost-benefit analysis and review”. The column attributes to the FSLRC the view that “restrictions should operate principally at the point of entry”, followed by “national treatment comparable to domestic investors”.
- Three tests. “Neutrality as to the vehicle through which money enters, neutrality as to who is investing, and a discipline tying each restriction to an identified market failure.”
The conclusion: “tactical adjustments such as the draft FI Rules are unlikely to alter the status quo”.
Where the column is strong, and where it stops
- Strong: it separates levels. A rule, a statute and the stance behind them are different things, and the point that a better schedule of exceptions is still a schedule of exceptions is easy to carry into an answer. Its three tests are a ready way to judge any control.
- It stops at FY2025. The opening line ends there, but the RBI’s table goes one year further, to the 2025-26 recovery.
- It does not show the link from law to number. Our reading of the RBI table: gross inflows in 2025-26 ($94.8 billion) stood above 2020-21 ($82.0 billion), while repatriation and disinvestment about doubled (from $27.0 billion to $54.0 billion) and FDI by India about tripled (from $11.0 billion to $33.8 billion). So the fall in net FDI is not mainly a fall in gross inflows. The table does not say why money left or why Indian entities invested more abroad; a Section 6 explanation would have to show that, and the column does not try.
- It concedes another cause. The column says these difficulties “were papered over in earlier years” by global interest in India and low interest rates worldwide. If global conditions could hide the problem, they may also explain part of what changed, and the column does not size them.
- The distance from the draft may be narrower on neutrality. The author’s first two tests sit close to the RBI’s own “investee-neutral and investor-neutral” wording. The real test is what the final text does, which is one more reason not to treat the draft as settled.
- On Press Note 3, the column writes in the present tense and does not go into the note’s later history. For its terms and what has followed since 2020, see our 15 October piece.
Way forward
- Finish the rules, and publish the reasoning. The final text should show how comments were treated, in the spirit of the consultation and review the column asks for. (Our analysis.)
- Run each existing restriction through the three tests. A control that cannot name its market failure or its objective has to justify itself. (The author’s test; applying it restriction by restriction is our suggestion.)
- Settle the statute question on separated data. Argue FEMA’s design with gross inflows, exits and outward investment kept apart, not on the net figure alone. (Our analysis.)
Data and Institutions Vault
Prelims-grade facts:
The draft (RBI press release, 21 July 2026):
- Name: draft Foreign Exchange Management (Foreign Investment) Rules, 2026
- Would supersede, per the draft’s enacting clause: Foreign Exchange Management (Non-Debt Instruments) Rules, 2019
- Would be made by: the Central Government, under section 46 of FEMA, per the same clause
- The draft’s FDI: “foreign investment of ten per cent or more in the equity of a company or an LLP”
- The draft’s foreign portfolio investment: “foreign investment of less than ten per cent in the equity of a company or an LLP”
- Origin: review announced in the Union Budget 2026-27; committee constituted by the Central Government
- Comments invited by 31 August 2026
- RBI’s wording: “principle-based, investee-neutral and investor-neutral provisions”
Net FDI (RBI Handbook of Statistics, Table 143, posted 31 July 2026):
- 2020-21: US$ 43,955 million
- 2024-25: US$ 959 million (gross inflows 80,615; repatriation and disinvestment 51,486; FDI by India 28,171)
- 2025-26: US$ 6,947 million (provisional)
- RBI’s data note: FDI data from 1995-96 include “acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999”
⚠️ Watch the trap:
- The 2026 rules are a draft: not notified, not in force
- “$40 billion” and “effectively zero” are the column’s figures; the RBI’s are above
- Net FDI is not gross inflows: a small net figure can sit beside large gross inflows
- The prohibition reading of Section 6 and the sector and OECD comparisons are the author’s
- Figures for one year can differ by source and vintage: the 2 October column gave net FDI for 2025-26 as $7.65 billion, the writer’s own figure; the RBI Handbook’s provisional figure is above
The Debate
| The case for overhauling FEMA | The case for caution |
|---|---|
| A statute read as a default of restriction signals distrust, however clean the rules on top (the author) | The RBI’s table shows gross inflows in 2025-26 above 2020-21; the fall in net FDI runs mainly through exits and outward investment |
| Ex-ante price and instrument controls add friction to private deals (the author) | The column accepts that some curbs have a place: temporary ones for macroeconomic risk and screening for national security |
| Other economies avoid transaction-by-transaction regulation (the author’s comparison) | The column gives no source for the comparison in its text, and a full-scale statutory rewrite is a larger step than the evidence in the column supports |
| Costs are invisible: “investments not made and firms not built” | Invisible costs are hard to measure, so a claim about them is hard to test either way |
Balanced verdict: the column’s distinction between rules and statute, and its three tests, are worth carrying into an answer; its opening numbers are not, and should be replaced by the RBI’s series. Whether the statute is the binding constraint remains the author’s argument, not an established finding.
How to Think About This
- Ask what level a reform works at. A procedure, a rule, a statute and an administrative stance can each be changed separately. Name the one you are judging.
- Break a net figure into its parts. Before blaming a policy for a fall in a net number, ask which component moved.
- Test the control, not the slogan. “Open” and “closed” are poor categories. Ask what objective a restriction serves, whether it lapses, and who weighed its cost.
Diagram-in-Words
Section 6 read as prohibition unless permitted → rules become a schedule of exceptions → the state regulates instrument, form and price, in the author’s account → friction and a signal of suspicion → the author’s remedy: a first-principles overhaul of FEMA → check against the data: gross, exits and outward FDI
Read it left to right: the first five steps are the column’s chain of argument; the last is the test the RBI’s table sets for it.
It is argued that rewriting India's foreign investment rules will not improve the investment climate unless the Foreign Exchange Management Act, 1999 itself is reformed. Critically examine this view with reference to the trend in net FDI and the RBI's draft rules of 2026. (250 words)
India’s foreign investment framework is being rewritten: on 21 July 2026 the RBI placed draft Foreign Exchange Management (Foreign Investment) Rules, 2026 for comment, which would replace the Non-Debt Instruments Rules, 2019 once finalised. The real question is whether a rewrite of rules can change the investment climate, or whether the Foreign Exchange Management Act, 1999 must itself change.
RBI data frame the concern: net FDI fell from about $44 billion in 2020-21 to under $1 billion in 2024-25, and recovered to about $6.9 billion in 2025-26 (provisional). Reformers argue that rules cannot fix this because Section 6 of FEMA, on their reading, leaves capital account transactions prohibited unless permitted, so rules merely list exceptions.
They object to ex-ante controls on private deals, such as certified valuations for unlisted shares, and to nationality-based curbs such as Press Note 3 issued without cross-departmental screening. They cite expert reports such as Tarapore, Percy Mistry, U K Sinha and the FSLRC. The same RBI data complicate this diagnosis: gross inflows were higher in 2025-26 ($94.8 billion) than in 2020-21 ($82.0 billion), while repatriation about doubled and outward FDI about tripled, so the fall in net FDI is not mainly a fall in gross inflows.
The draft itself promises principle-based, investee-neutral and investor-neutral provisions, and even reformers accept temporary curbs for macroeconomic risk and screening for national security.
A balanced reform would finish the rules and then test each restriction against a stated objective: neutrality as to vehicle and investor, a link to an identified market failure, public consultation and cost-benefit review, and time limits on emergency curbs. Whether FEMA needs an overhaul should be judged on evidence that separates gross inflows, exits and outward investment.
Interview Angle
"If gross FDI inflows are strong but net FDI is small, is that a failure of policy, or can it also reflect investors exiting and Indian firms investing abroad? What would you want to know before answering?"
Takeaway Box
- The status: the 2026 rules are a draft that would replace the NDI Rules, 2019; do not write them as law.
- The argument: the column says the constraint is FEMA itself, not the rules, and offers three tests for any control.
- The data: use the RBI’s net FDI series, not the column’s rounded figures, and split net into gross inflows, exits and outward FDI.
- Watch: whether and when the Central Government (Ministry of Finance, Department of Economic Affairs) notifies the final rules.
Sources:
- The Indian Express, column by Niharika Yadav, “To attract foreign capital, reforms must be deeper, not cosmetic”, 6 November 2026
- RBI press release, Rationalisation of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019: Draft Rules for Comments, 21 July 2026
- RBI, Handbook of Statistics on the Indian Economy, Table 143: Foreign Investment Inflows, 31 July 2026
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