Official data show that in April and May, foreign direct investment in India slumped by nearly 40 percent, falling from more than $5 billion during the same period last year to $3.2 billion.
Economists say a weakening global and domestic economy is only partly to blame.
N.R. Bhanumurthy with New Delhi's National Institute for Public Finance and Policy, says the slow pace of reforms and policy reversals in recent months have frustrated many foreign investors. He points out that the government has many times promised to push ahead with liberalizing sectors like retail, aviation and insurance, but failed to deliver.
"You do have the intention, but you are not able to do and you are taking one step forward and you are coming two step backwards," noted Bhanumurthy . "There is so much confusion which is affecting the overall foreign investment."
Foreign investors have also been deterred by controversial tax proposals that have left them facing the prospect of paying billions of dollars in taxes they had not anticipated.
However, a recent report by the United Nations Conference on Trade and Development has brought some cheer to Indian policymakers. It says India is the third most attractive destination for global corporations after China and the United States.
Proof that India remains firmly on investors radar came recently when two big foreign companies announced major investments in the country.
Furniture maker IKEA said last month it will invest nearly $2 billion in India to open 25 outlets. Coca Cola, which is already present in India, plans to invest another $3 billion over the coming years.
Devangshu Dutta is head of the consulting firm, Third Eyesight, in New Delhi. Dutta says despite the recent slowdown, India remains attractive because it is a huge market.
"India is, continues to remain, in fact, one of the few large economies which is growing, and that is not something to sneeze at in the current economic scenario around the world," noted Dutta. "Sometimes that fact tends to get swept under the carpet amidst all the gloom and doom. The most important factor which is in India's favor is that it has a young population. That means they are generating income when they become earning members of society and that money has got to get spent somewhere."
The recent U.N. report estimates that foreign direct investment in India can rise by about 20 to 25 percent during the next two years.
Observers say that could happen if India addresses some of the concerns of foreign investors, who are looking for stable policies and more reforms.