European corporations, facing rapidly shrinking profit margins in China, are urgently seeking new, lucrative global markets to deploy their capital. India stands out as the most logical successor, yet a sharp decline in its foreign direct investment (FDI) highlights a pressing issue: New Delhi must dismantle strict trade barriers and guarantee investor protections if it hopes to capture the manufacturing wealth migrating out of Beijing.

For the past two decades, China was the undisputed default for foreign investment. Today, however, companies have stopped seeing returns. Both foreign and domestic firms are trapped in what the Chinese officially term “involution”—an economically destructive cycle characterized by price wars, over-competition, and vast overcapacity. In a landscape where producing more does not equate to earning more, European corporate boards have concluded that their funds must be redirected.

On paper, India is the perfect alternative. It provides exactly what Europe requires and what China now lacks: a rapidly expanding consumer market, surging household demand, and an underdeveloped manufacturing sector ripe for ground-up construction rather than saturated competition. The European Union is already India’s largest genuine foreign investor, and current returns on European investments in India actually surpass those in the mature UK and US markets, which traditionally absorb the majority of EU capital.

Despite these advantages, India ranks only eighth globally as a destination for European firms, and industrial manufacturing investments have barely shifted. The bottleneck stems entirely from India’s own policies. According to the country’s own data, total FDI inflows plummeted from a peak of $64 billion in 2020 to $27.5 billion in 2024. This contraction occurred exactly when capital began to exit China and should have theoretically surged into Indian markets.

Over the last decade, India has actively made itself a more difficult place to do business. Between 2016 and 2024, New Delhi unilaterally terminated bilateral investment treaties with 77 countries. This included 22 EU member states, notably the Netherlands, which has long served as a primary gateway for European funds. India’s 2015 Model BIT stripped away standard investor safeguards, leading to a measurable 30% drop in investment from countries whose treaties were allowed to lapse. Any capital arriving since is largely unprotected, leaving commercial disputes to languish for years in domestic courts.

Additional barriers further compound the problem. India’s average applied tariff is roughly 17%, compared to under 10% in Vietnam, creating a massive deterrent for manufacturers reliant on imported components. Technical rules that function as non-tariff barriers, known as Quality Control Orders, are steadily accumulating. Furthermore, India is currently the sole holdout blocking the WTO’s investment-facilitation agreement.

Looking closely at European relations, the free trade agreement signed in January omitted the two most critical factors for manufacturing investments: access to public procurement and enforceable investor protections. Instead, the Investment Protection Agreement (IPA) was sidelined into an unfinished, separate negotiating track, and procurement was entirely excluded. The recent EU-EFTA deal serves as a cautionary tale in this regard—a $100 billion investment pledge that provides a headline number, but zero underlying legal protection.

The primary constraint is Indian reluctance, not European appetite. To resolve this, Brussels must apply diplomatic pressure on two fronts. First, it must pragmatically finalize the IPA. While Brussels favors its Investment Court System, the framework has struggled to gain traction—even the 2016 CETA remains only partially in force among EU members. A practical compromise that guarantees legal certainty is far more valuable than a perfect text that is never ratified. Second, Europe must demand access to Indian public procurement, a vital sector the recent FTA deliberately kept closed.

Europe holds significant untapped leverage through its own industrial policy. The Industrial Accelerator Act, designed to rebuild European strategic capacity and reduce dependency on China, will increasingly channel public funding and procurement toward domestic suppliers and members of the WTO Government Procurement Agreement. Because India is not a party to that agreement, it will find international doors quietly closing just as it attempts to position itself as Europe’s prime manufacturing partner.

New Delhi needs to understand this dynamic clearly. India desires European technology, supply-chain integration, and factories; Europe requires reciprocal market access and legal certainty. The Industrial Accelerator Act presents a tangible ultimatum: if India accommodates Europe on procurement and investor protections, it will secure a prominent role in the supply chains Europe is rerouting from China. If it refuses, that investment will simply pivot to Vietnam and eastern Europe.

While a treaty will not single-handedly fix domestic hurdles like India’s patchwork labour codes or its notorious land-acquisition delays, it would eliminate the crippling risk premium that currently makes Indian manufacturing appear uncompetitive. With profitability driving European capital out of China, India is the natural destination. Whether that capital actually arrives now depends entirely on New Delhi yielding on protections, and on Brussels firmly utilizing its leverage to ensure it does.