The optimism that has long surrounded India’s economic story is now being clouded by conflicts—whether in the form of tariff wars or tensions spilling over from West Asia. For decades, India enjoyed balance-of-payments surpluses, buoyed by strong remittances, steady foreign capital inflows, and exports. But the tide seems to have turned. Foreign equity portfolio investors have pulled out over Rs 2 lakh crore so far in 2026, even as oil prices threaten to double the current account deficit to 2 per cent of GDP, and the comfort of BoP surplus has given way to the rare discomfort of the third consecutive year of deficit.This may become more than a statistical blip as the US-Iran war continues to defy expectations of an early resolution, warranting a closer look at the changing global environment and the policy roadmap ahead.AdvertisementGlobal capital is no longer the neutral tide it once was, nor is it just about efficiency or returns. It is increasingly a tool of strategic competition, more fragmented and increasingly politicised. We are in a two-speed world: Developed economies are getting bigger dollops of flows, while developing countries are struggling. According to UNCTAD, in 2025, global FDI rose 14 per cent to $1.6 trillion. Flows to developed economies jumped 43 per cent to $728 billion, driven by Europe and financial hubs shaped by industrial policy and geopolitics. In contrast, FDI to developing economies fell 2 per cent to $877 billion.With the global environment steadily deteriorating, capital becoming more discerning, the way forward for policymakers would be a sequenced, time-bound set of tiered actions.Also Read | Three reasons Modi’s patriotic appeal to Indians is not the answer to the Iran war crisisFirst, ensuring stabilisation through bold moves over the next six months. Tax reform could be the big bang stabiliser as opposed to yet another FCNR bond issuance. Capital market signals are worth paying heed to. India could evaluate a shift to a residence-based capital gains tax system, exempting foreign investors from long-term capital gains tax. This would remove a major irritant that currently deters foreign portfolio investors. Long-term capital gains are taxed at 12.5 per cent plus surcharge, short-term at 20 per cent, and indexation has been removed for property and gold. Every rupee taxed while being taken out is a disincentive to re-enter. Exempting non-residents from Indian capital gains tax could provide immediate relief, universal impact and requires no bilateral negotiations. Another measure would be to allow European UCITS funds to access India directly, giving them a passport into the market, though this could take longer to work. Also, cutting withholding tax rates and indexing tax thresholds to inflation would further ease the burden.AdvertisementWhat about FCNR bonds? Under the circumstances, FCNR bonds should remain in the toolkit, but as a fire extinguisher, not the first line of defence. Offering a concessional window to NRIs at a time when US yields are 4-4.5 per cent would mean a much higher cost and would subsidise foreign/NRI capital at the expense of domestic savers. It will also distort capital allocation, favouring banks and NRIs over corporates. Moreover, external buffers remain strong with reserves of $650 billion plus, and manageable debt ratios and healthier balance sheets.Efforts must be made to curb imports of oil and gold in line with the Prime Minister’s appeal. Domestic fuel prices must be raised to allow demand side adjustments, followed by the intent to reform subsidies, especially those of fertilisers.FDI ownership caps could be revisited, including allowing 100 per cent automatic foreign investment into remaining sectors. Note, for India, the FDI story is not one of despair and gross: FDI remains resilient. Today, 90 per cent of sectors are on the automatic route. Even the Press Note 3, which governs investments from land-border countries, has been eased: Ownership below 10 per cent is automatic, and proposals in electronics and polysilicon are fast-tracked within 60 days. Even these (PN3) rules could be refined by lowering the threshold for scrutiny and adopting a screening system similar to America’s Committee on Foreign Investment in the United States (CFIUS). Risks of geopolitical exposure should be managed through careful monitoring. Together, the above changes would make India far more attractive to global capital in the world of 2026.Second, boosting competitiveness. This should focus on measures at the grassroots, alongside which India must front-load infrastructure delivery. Closing infrastructure gaps and delivering on budgeted capex will keep India in good standing and underwrite growth. Labour reform would be a critical measure, with the Centre having notified rules for all four labour codes. States are expected to finalise rules by the second half of 2026, and compliance could be encouraged through incentives. Raising labour force participation to 65 per cent, via a push to labour-intensive sectors as well as agro-processing, would create jobs and strengthen India’s position in global value chains.Judicial reform is yet another grassroots pillar. By introducing AI-enabled case management and fast-track commercial courts, India could aim to resolve disputes within months rather than years. A new version of the national single window system would simplify approvals further. Importantly, judicial improvements would amplify the impact of all other reforms. They are politically less contentious but carry high leverage, much like Poland’s judicial efficiency reforms that unlocked economic dynamism.you may likeThird, for the transformation of the economy over the long-term, India must push decisively for trade liberalisation and integration into global value chains. This may also entail tariff cuts with ASEAN and the EU, alongside extending PLI incentives to labour-intensive sectors. This would make exports more sustainable, but only if the institutional foundations of tier two are in place. Broader policy reforms that target energy security, distribution reforms, and the inclusion of the energy sector, specifically electricity and petroleum products, under GST will also have to be acted upon. Financial deepening would provide resilience against volatile foreign portfolio flows. Working to deepen and energise the corporate bond market could also help build domestic pools of capital.India stands at a cusp, and the policy imperative is clear. Big bang reforms can draw capital, but structural reforms will ensure it stays and even grows the pie. The world is watching whether India can match ambition with execution.The writer is group chief economist, L&T. Views personal