India Is Overhauling Its Factors of Production. It Must Now Rebuild Its Factors of Trust.

India has spent forty years rebuilding its factors of production. The next decade of growth turns on something it has neglected for just as long, the trust between the State and the people who invest, build, and employ. 

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Economists teach that growth rests on the factors of production, namely land, labour, capital and enterprise. They rarely name the input that decides whether those factors are ever committed at scale. That input is trust, and the Indian state has underinvested in it for decades.

Trust is what converts a nation’s savings into long-term capital. A founder commits a decade to a venture only when the rules that govern it will not be rewritten midway or turned into grounds for prosecution. Jobs follow firms that choose to expand, and firms expand only when they can plan against a predictable playing field. India must create work for the millions who join its workforce every year, and that depends on private investment climbing, with the World Bank urging the country to lift its investment rate from about 33.5% of GDP toward 40% by 2035. Patient capital, the kind that builds factories and funds research over many years, prices in reliability before it prices in returns.

Foreign capital is the most mobile of all, and the most sensitive to whether a State keeps its word. It has been voting. Even as gross FDI rose about 14% to USD 81 billion in 2024-25, net FDI collapsed to roughly USD 0.4 billion, a fall of around 96% from USD 10.1 billion a year earlier, because repatriation by foreign investors reached USD 51.5 billion, the highest in a decade, and now accounts for roughly 63% of gross inflows. 

The Reserve Bank reads this as the mark of a mature market where investors enter and exit smoothly. We read it differently. When foreign earners increasingly choose to take money out rather than reinvest, and the manufacturing share of FDI falls, the signal is about more than just maturity.
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A New Attitude Is Essential For the Rise to Viksit Bharat 2047 

All of this runs against a hard deadline. The World Bank’s World Development Report 2024 found that since 1990 only 34 economies have escaped the middle-income trap, while 108 remain stuck, and that growth tends to stall near 10% of US per capita income, about USD 8,000. India, a lower-middle-income economy since 2007 with per capita income near USD 2,813, is targeting a USD 10 trillion economy on the way to a developed India by 2047. No country has made that climb while its State remained an unreliable counterparty.

The cost of low trust is not abstract, and it is already on the national balance sheet. The Finance Minister told the Rajya Sabha in March 2025 that about Rs 11.8 trillion, close to USD 125 billion, sits locked in direct tax litigation alone. By our own approximations, the total across all tax disputes is nearer to Rs 30 lakh crore, around USD 320 billion, with roughly Rs 15 lakh crore stuck in the courts, and 80% of it has accumulated in just the last five years. The State is itself the source of roughly half the 5.6 crore cases clogging Indian courts. The State has paid out only about 15% of its flagship production incentive outlay, Rs 28,748 crore against a Rs 1.97 lakh crore commitment to PLI, five years after launch.

Rebuilding trust is therefore the reform beneath all other reforms. A concerted focus here can be organised into six factors and three promises. One idea runs through all of them. Safe harbour protects two parties at once, the investor who commits resources and the honest official who must exercise judgment without fear, and India has so far protected neither.

Capital Builds Only on Ground That is Stable

A firm cannot obey a rulebook it cannot read. Legibility is the first factor of trust, and India must fix this at scale. Businesses navigate 1,536 Acts and more than 69,000 compliances across central, state and local authorities, with 843 laws still carrying criminal provisions, against more than 9,000 regulatory changes a year, by TeamLease RegTech’s count. A single manufacturer needs up to 77 approvals merely to begin operations and can face 59 separate inspectors. 

For foreign capital, the entry maze is harsher still. India asks the world's largest institutional investors to courier notarised and apostilled paper into a market it has spent a decade digitising. Before a global fund can buy its first Indian security, its constitutional documents must be notarised in the home jurisdiction, apostilled by a competent authority under the Hague Convention, and moved physically through consular and courier chains. Registration that should take hours or days stretches toward a month, The angel tax on startup fundraising ran for years before being abolished only in 2024. 

The repair is within reach, because India has already built the template in digital public infrastructure. A compliance layer on that stack, with PAN 2.0 as a single common business identifier feeding a National Open Compliance Grid, plus clear and time-bound approval windows for foreign capital, would let an honest firm know its full obligations and meet them.

Capital also will not build on ground the State can move beneath it. Durability is the factor India breached most famously. The retrospective tax saga ended with a USD 1.2 billion award against India in the Cairn case for violating fair and equitable treatment before the government repealed the amendment in 2021. The living version of the problem is the tax code’s own instability. Long-term capital gains on equity moved from exempt before 2018, to 10%, then to 12.5% in 2024, while short-term gains rose from 15% to 20% and indexation was withdrawn, and the 2024 removal of indexation was partly reversed for property within the same budget. A State that cannot hold its own rule for a month cannot expect a manufacturer to commit a plant for decades. 

Constantly shifting taxation is itself a deterrent to foreign investment, compounded by India having let its older bilateral investment treaties lapse after the arbitration losses and only now drafting a new Model treaty, announced in early 2025, which left investors thin on recourse in the years between. The instrument is straightforward, namely statutory safe harbor clauses written into every PLI scheme, national mission, and investment incentive programme, non-retrospectivity as the default in tax law, and a capital gains regime that is set once and grandfathered, not revisited each budget.

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Enforcement Without Limits Makes Every Firm Defensive

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A jail clause attached to a late filing taxes enterprise itself. Proportionality asks that punishment fit the lapse, and that criminal law be reserved for genuine harm. The Observer Research Foundation found that 37.8% of business compliance clauses carried the possibility of imprisonment, which is why firms have long hired lawyers where they should have hired fund managers. 

The State has begun to move, from 183 provisions decriminalised across 42 Acts under the Jan Vishwas Act of 2023 to 784 provisions across 79 Acts in 2026, and by its own account it has removed more than 40,000 compliances and decriminalised over 3,400 provisions in the wider ease-of-doing-business drive. This is real progress and it should be acknowledged. 

It is also a floor rather than a ceiling, and parts of the new income tax law move the wrong way, with provisions allowing tax authorities arbitrary access to a taxpayer’s digital devices and accounts. The direction of travel must be one way only, towards protections for law abiding citizens, civil penalties over prosecution, and a hard statutory limit on enforcement’s new digital reach.

An official without constraints will be feared by everyone, and fear is no climate for investment. Restraint is where the sharpest insight sits, because safe harbour must cut both ways. The State keeps litigating cases it has already lost because an officer who settles a dispute risks an audit objection or a vigilance inquiry, so appealing is safer than accepting a court order. 

We have called the wider pattern “tax terrorism” in our prior writing, and its engine is structural. With collection targets set for tax officials pushing them to coerce businesses, backed by more enforcement power handed to the authorities than at almost any point in the last thirty-five years, this can only be perceived as revenue extraction mechanisms and not as citizen-aligned fair practices.

Even worse, the honest official is as trapped as the honest taxpayer. Protect that official’s good-faith judgment by statute, replace personal discretion with bright-line rules and faceless processes, and the same reform disarms harassment and pointless litigation together.

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A State That Breaks Its Own Word Cannot Demand Trust

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The largest defaulter in the economy cannot credibly demand discipline from everyone else. Reciprocity asks that the State pay, refund, and disburse on time. 

The production incentive record is the headline case, with only about 15% of the committed outlay disbursed by December 2025 and 14 of 58 specialty steel projects having withdrawn. Beneath it sits a quieter breach, where government bodies and public sector firms make up around 40% of those who delay payments to MSMEs, with over Rs 22,000 crore stuck in pending dispute cases and around Rs 84,500 crore in dues reported by companies in a single half-year. The remedy is to hold the State to the same standard it sets for others, with statutory payment timelines that carry interest, refunds that are automatic rather than discretionary, and the government bound by the very 45-day rule it imposes on private buyers.

Justice the economy cannot use in time is no remedy at all. Recourse asks that a dispute with the State resolve quickly and fairly, and that a citizen be able to win. Today’s tax disputes run about 15 years on average, as per the National Institute of Public Finance and Policy’s estimate, and the count of such disputes has doubled since the 2014 promise to end tax terrorism. 

The mechanism to fix this already exists on paper and has simply never been enforced, since the National Litigation Policy, written in 2010 and revised in 2015, has remained a paper exercise with no committee to filter frivolous appeals. Give it teeth through empowered committees in every ministry, time-bound tribunals, and a firm rule that the State withdraws any appeal it has already lost twice. That last step is also what shields the officer who chooses not to appeal, which returns us to restraint.

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The Factors of Trust Will Accelerate Viksit Bharat

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India has spent a decade competing for capital, labour, and supply chains, and it has competed well. It will not win the coming decade until it competes on reliability, because the marginal dollar of global capital now moves to wherever the rules are clearest and the State is most predictable. 

Every factor of trust above can be legislated and enforced. None requires new money. Each asks the harder thing, which is for the State to lead by example. 

The factors of production will take India to the edge of high-income status. Only the factors of trust will carry it across. The question is no longer whether India can attract investment and enterprise. It is whether its own State will stop being the reason both hesitate.

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