India's economic growth is stimulated by a gradual easing of foreign investment restrictions. Inward foreign direct investment (FDI) into India in 2007 was US$32.4 billion (US$17 billion in 2006), and has been an annual average of US$2 billion since 1990. In 2007 Ford Motor Company announced it would spend US$500 million on expanding car manufacturing facilities in India.

Another driver of the Indian economy is its burgeoning services sector. Many international companies are realising the benefits of business process outsourcing to India. India captures approximately 12% of global business processing outsourcing engagements, amounting to annual revenue to India of US$34 billion. More than 400,000 people work in Indian call centres. Foreign entrepreneurs likewise benefit from the country's large pool of young, educated, fluent English speakers to provide services for companies around the world. India's labour availability is one of its major competitive advantages.

Many foreign investors choosing India company formation require access to India's thriving domestic consumer market. The Indian economy is primarily a services-based economy, including business process outsourcing for western firms, software development, tourism and financial services. While the services sector accounts for 61% of total economic output, the sector employs a mere 28% of the work force. However, the manufacturing, pharmaceuticals and biotechnology sectors are booming in India thanks to India’s low cost labour base.

However, India’s economic growth is vulnerable to i) heavy state control of many industry sectors, for example transport sectors ii) pressure on infrastructure and land because of the country’s high population iii) excessive rules, regulations and paperwork when dealing with public and private sector organisations and iv) corruption among government officials and civil servants.

In addition, India is poorly ranked the world's 85th least corrupt country in the 2008 Corruption Perceptions Index by Transparency International, a global measure of corruption amongst public officials and politicians.

Furthermore, India's economy is restricted. The Heritage Foundation's 2008 Index of Economic Freedom ranks India as only the world's 115th-freest economy. For example, Indian companies are also subject to foreign exchange controls.

With the exception of Special Economic Zones (SEZs), the Indian government does not provide tax or other financial incentives to attract foreign investment or encourage India company formation. Outside the SEZs, the majority of foreign investment relates to the business process outsourcing and IT and software development sectors, both of which are open to 100% foreign investment.