Multinationals no longer choose where to invest on cost alone. As trade restrictions and geopolitical tensions reshape supply chains, the legal and regulatory framework of a host country has become part of the risk calculation, and India's framework both strengthens and complicates its case.
For most of the last three decades, the question a multinational asked before investing abroad was where it could make things most cheaply. Today, the question is increasingly where it can keep making them if relations between two major economies break down. This shift, commonly described as geopolitical hedging, involves spreading production, suppliers and capital across several jurisdictions so that no single conflict, sanction or tariff can disrupt the entire business. India has been one of the most frequently named beneficiaries of this trend. However, it would be wrong to assume that geopolitics alone will bring investment to India. Whether a multinational actually chooses India over Vietnam, Indonesia, Malaysia or Thailand depends to a large extent upon legal and regulatory factors, i.e., the rules on who may invest and how, the incentives on offer, the certainty of the regime and the protection available if things go wrong. This article examines those factors and the risks businesses should weigh before choosing India as part of a hedging strategy.
Hedging In Practice
Geopolitical hedging operates at two levels. Governments hedge by keeping relations open with competing blocs, and India's long-standing policy of strategic autonomy allows it to attract capital from the United States, Europe, the Gulf and East Asia at the same time. Companies hedge by adding production capacity outside their main base, a strategy commonly described as "China plus one", rather than leaving that base altogether. Empirical research on geopolitical risk has consistently found that rising risk deters foreign investment, particularly in emerging economies, but also that effective governance and stable legal protection in the host country reduce that effect. Hence, for a country like India, the quality of its legal framework is as much a part of its attraction as its market size or labour costs.
What The Numbers Show
The figures present a mixed picture. According to UNCTAD's World Investment Report 2026, FDI inflows into India rose by 44 per cent in 2025 to about USD 39 billion, at a time when global FDI grew by only 6 per cent. Much of this was driven by information and communication technology, including hyperscale data centres, and by services. However, the value of announced greenfield projects in India fell from more than USD 111 billion in 2024 to about USD 74 billion in 2025, and greenfield manufacturing announcements fell from about USD 65 billion to USD 27 billion. UNCTAD attributed the weakness in new manufacturing commitments partly to tariff uncertainty and supply chain realignment. Thus, the same forces that make India attractive as a hedge can also make investors hesitate before committing to it.
The Legal And Regulatory Factors
FDI rules. Most sectors in India are open to foreign investment under the automatic route, which requires no prior government approval, while sensitive sectors require approval and a small number, such as lottery, gambling and real estate business, remain closed. For hedging investors, the most significant rule is the one governing investment from countries that share a land border with India. Since April 2020, any such investment, including where the beneficial owner is situated in such a country, has required government approval. This has mattered greatly for supply chain diversification, as many multinationals moving production to India depend on Chinese component suppliers which would need to follow them. On 10 March 2026, the Union Cabinet approved amendments which now allow non-controlling beneficial ownership of up to 10 per cent through the automatic route and set a 60-day timeline for processing proposals. Larger or controlling investments from these countries still require approval.
Market-entry structures. The choice of vehicle also affects how well a hedge works. A wholly owned subsidiary gives a multinational the separation and flexibility needed for manufacturing and long-term operations, whereas a branch or liaison office keeps the Indian presence within the parent and limits what it may do. Since hedging by its nature assumes that conditions may change, a structure that can be scaled up or restructured as circumstances shift is usually the safer choice, which in most cases points towards a subsidiary.
Incentives and trade agreements. India's Production Linked Incentive schemes, which cover 14 sectors with an announced outlay of about ₹1.97 lakh crore, reward incremental production in India and have been an important part of the case for locating manufacturing here. India has also widened its network of trade agreements. The India–EFTA Trade and Economic Partnership Agreement entered into force on 1 October 2025, with the parties setting an objective of USD 100 billion of investment in India over fifteen years, and the India–UK Comprehensive Economic and Trade Agreement entered into force on 15 July 2026. Negotiations on a free trade agreement with the European Union were also concluded in January 2026. With the United States, a framework to reduce tariffs on Indian goods was announced in February 2026 after a period of steep tariffs in 2025, and investors should check the current position before relying on any particular rate.
Regulatory certainty. For a hedging investor, certainty matters more than generosity, as the whole purpose of hedging is to reduce exposure to sudden change. India has taken visible steps in this direction. The Taxation Laws (Amendment) Act, 2021 withdrew the retrospective tax on indirect transfers which had damaged investor confidence for nearly a decade, and in April 2026 Parliament passed the Jan Vishwas (Amendment of Provisions) Bill, 2026, which amends 784 provisions across 79 central laws and decriminalises 717 of them. The Income-tax Act, 2025 also came into force on 1 April 2026. However, investment treaty protection remains limited. India terminated around 75 bilateral investment treaties in 2016 and 2017, and its Model BIT requires investors to pursue local remedies for five years before turning to international arbitration. New treaties with the UAE, Uzbekistan and Kyrgyzstan are now in force, and the government confirmed in February 2026 that it is working on a revised, more investor-friendly model. Even so, the agreements with EFTA and the UK do not give investors a direct right to bring arbitration claims against India.
India And Competing Asian Jurisdictions
India's main competitors for hedging capital are in South-East Asia, i.e., Vietnam, Indonesia, Malaysia and Thailand, with Singapore as a regional hub. Each offers something India does not. Vietnam has a long head start in electronics assembly and is deeply integrated into existing Asian supply chains, while Malaysia has an established semiconductor base. However, two recent legal developments have narrowed some of their advantages. First, Vietnam, Indonesia, Malaysia, Singapore and Thailand have all introduced the OECD's global minimum tax, which limits the value of tax holidays for large multinational groups and makes headline incentives less decisive than they once were. Second, trade measures increasingly target transshipment. When the United States announced its trade arrangement with Vietnam in July 2025, it set a 20 per cent tariff on Vietnamese goods and a 40 per cent tariff on goods transshipped through Vietnam. A hedge that relies on routing Chinese inputs through a third country with little local value addition is therefore exposed to rules of origin scrutiny wherever it is located.
India's advantage, in contrast, lies in the size of its domestic market. A plant in India can serve Indian demand as well as exports, which reduces dependence on any single export market and its tariffs. Its disadvantages are equally well known, i.e., land acquisition, multiple layers of central and state approvals, and the time taken to enforce contracts.
Risks Businesses Should Assess
In our view, a multinational considering India as part of a hedging strategy should assess the following:
- Ownership and supply-chain exposure. Whether any shareholder, beneficial owner or key supplier is from a country sharing a land border with India, as this determines whether government approval is needed and how long the investment may take.
- Sector-specific conditions. Sectoral caps, licensing requirements and conditions attached to FDI, which may differ significantly from the general automatic route.
- Incentive conditions. The production, investment and timeline thresholds attached to PLI and state incentives, as missing them can lead to the loss of benefits.
- Trade exposure. The tariff position in the intended export markets, and whether the products will satisfy the rules of origin under the relevant trade agreements.
- Dispute resolution. Whether the investor's home country has an investment treaty in force with India and, if not, how the investment and its contracts should be structured to provide for arbitration.
- State-level regulation. Land, labour and environmental approvals at the state level, which often determine timelines more than central policy does.
Conclusion
Geopolitical hedging has made foreign investment more selective rather than simply redirecting it. Multinationals are not leaving their existing bases so much as adding capacity elsewhere, and they are choosing those locations by asking which legal system will still protect their investment when relations between major powers deteriorate. India is well placed in this respect, as its policy of strategic autonomy allows it to receive capital from every major bloc, and its recent reforms show a clear intention to improve certainty. However, the fall in greenfield manufacturing announcements in 2025 shows that intention alone is not enough. Hence, if India is to turn its position into sustained investment, it needs to finish what it has started, i.e., honour its approval timelines, offer investors credible treaty protection under the revised Model BIT, and reduce the overlap between central and state approvals. For businesses, the lesson is that India should be assessed as a long-term legal environment and not merely as a geopolitical alternative to somewhere else.
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