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India is the unlikeliest and, until recently, a very reluctant member of the Quad: the quasi-geopolitical alliance with the U.S., Australia, and Japan. As a lower-middle-income nation, it is outweighed in GDP terms by its heftier, more developed counterparts. India’s increased enthusiasm for the Quad, demonstrated by Prime Minister Modi’s participation in the Quad summit hosted at the White House, reflects the nation’s growing anxiety about China, the giant neighbor with whom it has sparred on its Himalayan border and by whom it has been surpassed in almost every economic measure.

Just as New Delhi turned toward the Quad as a hedge to deal with an assertive China, long- and short-term foreign investors seem to be warming to the idea of India as a hedge against their China exposure. That shift in sentiment is a product of geopolitics and fraught U.S.-China trade tensions, as well as the rising cost of doing business in China and Beijing’s recent regulatory crackdown against vast swaths of the tech industry.

Modi is having the kind of year for which the Latin phrase annus horribilis was invented. The country is emerging from a deadly second wave of the pandemic, with over 34 million infections and almost 460,000 fatalities since the pandemic’s start. Economic growth will recover from the dismal 7.3% contraction of 2020, but the momentum behind reform has been lost. Modi’s promise to deliver “minimum government, maximum governance” looks increasingly elusive. Domestic business sentiment has yet to regain pre-lockdown levels, and lack of access to credit has stalled investment.

Modi, early in his tenure, took pride in the slogan that India was the “fastest-growing economy” in the G20. Those heady years of high growth are long past.

But India’s economic sluggishness has not dampened the enthusiasm of foreign investors, portfolio investors, and private equity funds, who continue to pour vast sums into the country’s public and private markets. A recent survey of 1,200 business leaders by consulting firm Deloitte showed that India attracted record foreign direct investment (FDI) during the pandemic totaling an estimated $81 billion in 2020-21. Portfolio investor appetite for Indian stocks remains keen, with the benchmark Sensex Index amongst the top performers in emerging markets this year. Private equity and venture funds have also found rich pickings in private companies and startups. Hotel chain Oyo, partly owned by SoftBank, and payments platform Paytm, backed by Ant Group and Berkshire Hathaway among others, are preparing to raise billions through IPOs this month.

What explains the apparent disconnect between India’s economic malaise and the enthusiasm of foreign investors? In a word, China.

India is uniquely positioned to benefit from foreign investors fleeing China. India’s huge population, growing middle class, and rapid urbanization are compelling for investors eager to diversify.

But history suggests that only the hardiest of investors will succeed in navigating India’s complex web of rules and regulations. Unlike investor-friendly Vietnam, a magnet for foreign investors seeking to move out of China, India presents a significantly greater challenge.

Perhaps recognizing that this could be India’s moment, policymakers have belatedly made economic restoration a priority. India recently scrapped the hugely unpopular 2012 law that retrospectively levied capital gains tax on foreign companies for the indirect transfer of their Indian assets. Policymakers also recognize that the country’s transition to a fully developed economy depends on its ability to increase the share of manufacturing in its GDP, currently skewed in favor of services.

The blossoming romance of foreign investors toward India will have to be reciprocated by the national government and provincial authorities. Until that happens, it will be Vietnam and other Southeast Asian countries that will absorb much of the new FDI inflows.

The Modi government is not giving up on its drive to reform the economy. “When India grows, the world grows,” Modi told the United Nations General Assembly in September. “When India reforms, the world transforms.”

These bold words need to be matched by action. As part of its push, the government recently pledged to “monetize” state-owned enterprises by offering long-term leases to the private sector. There is progress on the privatization front as well, with the Tata Group securing the winning bid to wrest control over the national carrier Air India: an ironic development, given that Air India was taken from Tata when it was nationalized in the 1950s.

For longtime observers, India today bears a striking resemblance to the slumbering India of the 1980s before 1991’s economic reforms. India was then described as a shackled tiger waiting to be unleashed; investors likely believe something similar today in their bullish rush into the country. India certainly has the potential to roar again, relative to peers like Brazil and South Africa.

The question is whether Modi will open that cage.

Vasuki Shastry is an Associate Asia Fellow at Chatham House. A former journalist, he had a long career at the International Monetary Fund, Standard Chartered Bank, and Singapore’s central bank. He is the author of Has Asia Lost It? Dynamic Past, Turbulent Future.