Foreign Direct Investment (FDI)

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Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) works as an important catalyst for Indian economic growth, constituting a substantial non-debt financial reservoir for the Nation's development. International entities strategically invest and capitalize on unique Indian investment incentives, such as tax incentives and competitive labour costs. It ensures not only the acquisition of technological advancement but also develops potential job opportunities and provides different advantages. The rapid investments in India are a direct outcome of the government's proactive policy framework, a dynamic business environment, enhancing global competitiveness, and a huge economic influence. The Indian government has implemented a wide range of policies and necessary initiatives to enhance the volume of foreign direct investment (FDI) in India. The liberalisation of policies, especially in retail, defence, insurance and single-brand trading, has been a key strategy of the government. The implementation of Goods and Service Tax (GST) in the country has enhanced transparency, while the Special Economic Zones (SEZs) and GIFT City have provided the best space with tax incentives. During FY21-22, Indian Foreign Direct Investment (FDI inflow) reached a record level of approx. US$84.84 billion. Prominent receivers of FDI are mainly computer software and hardware, service stations, trading, etc. According to the World Investment Report FY22, India ranked 8th among the global recipients of Foreign direct investment (FDI) till 2022. With the help of significant transactions in technology and health sectors, Multinational companies (MNCs) have engaged in strategic collaborations with top-level domestic business groups, fuelling an increase in cross-border M7A of 83% to US$27 billion in 2020. As per the World Investment Report 2023, India emerges as the FDI powerhouse and holds ranked 3rd in foreign investment during FY21-22. The volume of foreign direct investment (FDI) inflow during the last ten, ranging from April 2014-Dec-2023, was recorded to be US$647.96 billion. The FDI inflow has come from more than 170 different countries that have invested across 33UTs and States and 63 sectors in Indian Territory.

Foreign Direct Investment (FDI) Market Size in India

Foreign Direct Investment (FDI) inflow in India has rapidly increased 20 times from the year 2000-01 to 2023-24. As per the Department of Promotion of Industry and Internal Trade (DPIIT), the cumulative FDI inflow in India was recorded at US$ 971.52 billion between 2000 and 2023. This is due to the Indian government's efforts to enhance the ease of doing business and FDI norms. The total FDI inflow in India was recorded from April 2023 to December 2023 was approx. US$51.50 billion and FDI equity inflow during the same period recorded with approx. US$32.04 billion.

From April 2000-December 2023, the Indian service industry gained record levels of FDI equity inflow of approx. 16.21% (US$108.04 billion), also followed by the computer software and hardware industry with 14.75% (US$ 98.32 billion) and the automobile sector with 5.35% (US%35.65 billion).

Maharashtra was one of the state who received highest FDI since 2000 to 2023, with an approx. US$ 66.08 billion at 29.99%, duly followed by Karnataka (US$48.12 billion) at 21.84%, Gujarat (US$ 37.73 billion) 17.12%, Delhi (US$ 28.99 billion) 13.16%, and Tamil Nadu (US$ 10.26 billion) 4.66%.

During 2022, India received 811 industrial Investment Proposals recorded volume approx. US$42.78 billion (INR 352,697 crore). The total amount of Industrial Investment proposals for 2022 increased to US$298 billion (INR 23.6 lakh crore) as compared to US$ 169.5 billion (INR 13.8 lakh crore) during previous year. In FY22-23, FDI inflow of US$71.35 billion reported. During FY23-24, (up-to December 2023), FDI worth US$ 51.50 billion reported.

Understanding Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is categorized as the cross-border investment under which a potential investor or resident of one country establishes a lasting interest in and significantly influences the enterprise of another country's economy. Having ownership of more than 10 % voting rights in the enterprise of another country's economy showcases the relationship. FDI is a crucial channel for sharing the transfer of innovative technology between countries, enhancing international trade through easy access to foreign markets, and being a true vehicle to boost economic development. In a broader sense, foreign direct investment (FDI) refers to an ownership stake in any foreign company or project duly made by an investor, company, or government from another country. Usually, FDI refers to a business decision to acquire a substantial stake in a foreign business or buy a business to expand operations to a new region. This term is not used to describe a stock investment within a company alone. FDI is an important element in international economic integration because it facilitates a stable and long-lasting between different country's economies. It is evident that FDI investors take control positions among domestic firms or joint ventures and are actively engaged in their management. Reports state that top recipients of Foreign Direct Investment (FDI) over the past few years have been named to the US and China.

How Does Foreign Direct Investment (FDI) Work?

Companies or governments generally consider foreign direct investment (FDI) to target firms or potential projects in an open economy that offers a skilled workforce and growth prospects for investors. FDI frequently goes beyond mere capital investment and may include different management, technology, and equipment provisions. An important feature of foreign direct investment is that it facilitates effective control over foreign business or at least substantial influence over its decision-making. Foreign investments can be in two forms- organic and inorganic. Organic investments include investing funds to accelerate the growth of established businesses, whereas inorganic investments include the acquisition of businesses within the target country. It is evident that foreign direct investments (FDI) in areas such as India and other parts of South Asia play a very important role in providing assistance to struggling businesses. However, the Indian government has implemented different innovative initiatives to attract huge investments across various sectors, including defined production, telecommunications, state-owned oil refineries, and information technology sectors.

FDI, also known as non-debt financial resource, has substantial potential to boost India's economic growth. The rise and emergence of globalization and internationalization have paved the way for the expansion of FDI. Stephen Hymer, one of the renowned Canadian Economist also known as the 'Father of International Business', stated that foreign investments may continue to grow due to different reasons, including

  • FDI enable control over the different companies or entities located outside (foreign territory).
  • FDI tends to break down or eliminate monopolistic practices within specific business sectors.

Moreover, given the existence of market imperfections, such FDI investments act as a buffer against sudden and unpredictable declines in business activity.

Types of Foreign Direct Investment

Foreign direct investment (FDI) may be categorised as horizontal, vertical, conglomerate and Platform FDI. The FDI types are described below-

Horizontal FDI (Foreign Direct Investment)

The most common type of FDI (Foreign Direct Investment) is commonly known as Horizontal FDI, which substantially revolves around investing funds within a foreign company which belongs to the same industry and is duly owned and operated by the FDI investor. In a broader sense, a company usually invests in another company that is located in the jurisdiction of another Nation, and both companies are working together to develop a similar kind of product and services. Take an example- a Span-based company, namely ZARA, may prefer to invest in or purchase the Indian company FAB India, which is also working towards developing or producing a similar kind of products as ZARA. Thus, both companies are in the same industry of merchandise and apparel. Therefore, the FDI (Foreign Direct Investment) will be termed as Horizontal FDI (Foreign direct investment).

Vertical FDI (Foreign Direct Investment)

The second FDI is known as Vertical FDI, which also comes under a type of FDI (Foreign Direct Investment). Vertical FDI can be termed as an investment made within a supply chain in a company, which may either or not belong to the same industry. At the time of vertical FDI, a business is more likely to invest in an overseas firm or an entity that may supply or sell products to it. Moreover, Vertical FDI (Foreign direct investment) can be classified into backward vertical integrations and forward vertical integrations. Take an example- the SWISS coffee producer, namely Nescafe, may prefer to invest in coffee plantations located in different countries, including Brazil, Vietnam, etc. As the investing company will purchase or invest in a supplier (supply) chain, this kind of FDI will come under the ambit of backward vertical integration. Subsequently, a Forward Vertical integration will be termed whenever a company or an entity keep investments in another nation's company (foreign company), which has a high ranking in the entire Supply chain. Consider an example: It is true that an Indian coffee company would prefer to invest in a French grocery brand if possible.

Conglomerate FDI (Foreign Direct Investment)

In a conglomerate, FDI (Foreign Direct Investment) refers to when a company or an entity invests in another foreign business which is unrelated to its core business. As the investing company have no prior experience in the working activities of the Foreign Company's area of expertise, such an association usually comes with a joint venture. In a broader sense, whenever investments are made among two different companies of different interests or different industries, such FDI investments are known as Conglomerate FDI. Take, for example, the US retail Walmart Company, which may prefer to invest in Tata Motors, the Indian Automobile Tycoon.

Platform FDI Investments

The fourth FDI can be termed as Platform FDI. Platform FDI refers to whenever any business expands its presence in another foreign country, but the product manufactured by such business is transported or exported to any third country. Take an example: The French perfume brand has established its manufacturing plant in the USA, and it exports such products to other countries in Asia, Africa, and Europe.

India's status as an attractive destination for Foreign Direct Investment (FDI) has been solidified by a series of factors, including its impressive performance in global competitiveness and innovation indices. Ranking 40th in the World Competitive Index 2023 and securing 40th position in the Global Innovation Index 2023, India has demonstrated significant improvement, which has bolstered investor confidence. Recent investments and developments across various sectors further underline India's appeal to both domestic and international investors.

Recent Investments and Developments in FDI

Among the notable events that significantly contribute to the Indian Foreign Direct Investment (FDI) landscape is the World Food India-2023, which was organised in New Delhi by the Ministry of Food Processing Industries and attracted potential investments with a record level of US$ 4 billion. Moreover, schemes such as PMKSY, PLISFPI, and PMFME have also accelerated investments in the Food processing sector. Partnerships, including NTPC Green Energy Limited with the GOM (Government of Maharashtra) in terms of green hydrogen and renewable energy projects, showcase India's growing focus on sustainable development. The renewable energy sector has witnessed a significant FDI, with a volume of US$ 6.14 billion from April Month 2020 to September 2023. The sector has attracted FDI, and India's Policy allows up to 100% FDI via the government's automatic route. Moreover, the opening of this sector for private players has led to substantial investments, with record levels of US$ 120 million attracted during the first 9 months of FY24, showcasing the rapid growth and interest in this sector. Karnataka's economy is high and sealed by MoUs, with a volume worth US$ 2.76 billion, approx. INR 23,000 core with global giants, showcasing a robust economy for the state. Significant agreements include data centres, digital healthcare, and smart city infrastructure. In the same manner, DP World's agreements with the Gujarat state government, focusing on port development and economic zones, highlighted the state's proactive approach to attracting potential investments. The automotive sector has also witnessed significant developments, as Hyundai Motors acquired General Motor's India Talegaon Plant, located in Maharashtra, and announced a significant investment of US$ 721.94 million. Moreover, Mercedes-Benz's also planned investment worth US$ 24.03 million and Boeing's inauguration of innovative engineering and technology near Bengaluru contribute significantly to the industry's confidence in Indian market potential.

Such FDI investments span different sectors, such as healthcare, technology, e-commerce, and finance, which reflects India's diverse investment opportunities. Furthermore, with the ongoing efforts to enhance the business environment and attract foreign capital, India continues to position itself and prove to be a better strategic location for investments across different sectors, which ultimately drives the country's economic growth and development.

Indian Government Initiatives under FDI

In the past years, India has proved itself as an attractive strategic location for Foreign Direct Investment (FDI). This has been possible just because of favourable developed schemes and different policies, which help in enhancing the Indian FDI landscape. Such schemes have led India’s FDI investment to record levels, especially in sectors including defence manufacturing, real estate, and research and development. A list of significant Indian government initiatives, including

  • Union Cabinet Minister has approved and signed a bilateral investment treaty between India and the United Arab Emirates with the intent to boost potential investor confidence, attract foreign investments in India, and create opportunities for overseas direct investment, which can potentially develop into the creation of new jobs. Moreover, this is done to stimulate investments within India, paralleled with the objective 'Atmanirbhar Bharat' to promote the production of domestic manufactured goods, reduce imports and enhance exports.
  • The government has made significant amendments to the FDI (Foreign Direct Investment) policy related to the space industry, which is paralleled with the objective 'Atmanirbhar Bharat'. This kind of amendment liberalised the Indian space sector and allowed 100% foreign direct investment (FDI) in specified sub-sector activities. This significant reform is believed to enhance the ease of doing business in India and is likely to attract huge FDI inflows and stimulate investments, income and employment growth in the country.
  • Aligned with the objective and vision of [Atmanirbhar Bharat], the union cabinet has duly approved the PLI scheme for white goods, including the Air conditioners and LED lights, with a volume of budget US$ 752 million (approx. INR 6,328 crore) from FY21-23 to FY28-29. This scheme has led 64 applicants, with a total volume investment of US$ 816 million (Approx. 6,766 crore).
  • It is evident that government initiative namely [MAKE IN INDIA] have led FDI equity inflow in the manufacturing landscape, in between FY14-22 has significantly increased over 57% over the past 8 years (2006-14).

Moreover, the Reserve Bank of India has taken several actions to enhance the foreign exchange inflows in the country. Such significant actions include

  • Additional Foreign currency Non-Resident (Banks) {FCNR (B)} and Non-Resident (External) Rupee (NRE) deposits are now exempted from the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.
  • Banks were authorised to accept new FCNR (B) and NRE deposits without adherence to current interest rate regulations during October of FY22.
  • All new issuances of 7-year and 14-year government securities (G-Secs) are now included under the fully accessible route (FAR) for foreign portfolio Investors (FPIs).
  • FPIs are allowed to invest in commercial paper and non-convertible debentures with an original maturity of up to one year.
  • The limit for external commercial borrowings (ECBs) via automated route is temporarily increased from US$ 750 million to US$ 1.5 billion per fiscal year.
  • The all cost ceiling under ECB framework is increased by 100 basis points, subject to the borrower holding an investment grade rating.
  • Authorised Dealer Category-I (AD Cat-I) banks are now allowed to utilize the foreign currency borrowings duly obtained abroad for funding foreign currency loans to organisations, catering to various end uses other than exports.
  • The government of India has increased FDI in the defence sector by liberalizing it to 74% via automatic route and 100% via government route.
  • Within the civil aviation sector, the government has led 100% FDI under the automatic routes in brownfield airport projects.
  • Indian government has made significant amendment the Foreign Exchange Management Act, (FEMA) rules, and allowed 20% FDI in insurance company LIC via automated route.
  • The government is now considering an easy scrutiny approach on specific FDIs from countries that share borders with India.
  • Implementation of measures including PM Gati Shakti, a single clearance and GIS-mapped land bank is believed to push the FDI inflows in India during FY22.
  • IN FY22, the government has introduced three policies of the Space Activity Bill 2022, and expected to clearly define the scope of FDI in the Indian Space Sector.
  • Major reforms likewise National Technical Textiles, Silk Samagra-2 Scheme, Seven Pradhan Mantri Mega Integrated Textile Region and Apparel (PM MITRA) Parks, production linked incentive (PLI) scheme for Textiles to enhance the production of Man-Made fibre (MMF) Apparel, MMF fabrics and products of Technical Textiles, and other several initiatives are undertaken by the government of India to enhance the export and to increase FDI inflow in India under Textile landscape.

Future of Foreign Direct Investment (FDI) in India

India has recently turned into a significant global centre for foreign direct investment (FDI). A survey held in 2022 reports that India is listed as one of the three top global FDI destinations and reportedly. 80% of global investors have plans to invest in India. Moreover, India is facilitating huge discounts on corporate tax and simplified labour laws. As per the ORCD FDI (foreign direct investment) restrictiveness index, India has reduced its restriction on FDI with an overall record reduced from 0.42 in 2003 to 0.21 in 2020. India has positioned itself as an attractive market for international investors in terms of short and long-term prospects. Low-skill manufacturing in India is one of the most promising industries for FDI. India has turned to implement an efficient governance policy, and recent developments in government efficiency are primarily due to relatively stable public finance despite COVID-19 challenges and optimistic sentiment among Indian business stakeholders concerning the funding and subsidies duly offered by the government to private firms. All such factors contribute to India attracting foreign direct investment (FDI) of approx. US$120-160 billion yearly by 2025.

Frequently Asked Questions

Foreign Direct Investment (FDI) refers to investment made by a foreign entity, individual, or company in the business interests of another country, with an intent to establish a business setup or acquire business assets in the same country.

Foreign direct investment (FDI) is crucially important in India's economic development as it facilitates capital inflows, technological advancements, and employment generation and helps with global integration. It mitigates gaps in between the investment deficit, enhances domestic production and increases competitiveness in the global market landscape.

In India, the Foreign direct investment policy has liberalized different sectors, including manufacturing, services, infrastructure, retail, e-commerce, and pharmaceuticals, among many more. Moreover, certain sectors such as defences, telecom, and banking have specific FDI caps and regulations.

Foreign Direct Investment (FDI) can easily enter in India, using different route, such as automatic route, where no approval is needed, and the government route, where you need prior approval from the Foreign Investment Promotion Board (FIPB) or the concerned government authorities.

The government offers a wide range of incentives and concessions to attract foreign direct investment (FDI) in India, which includes specific relaxation in taxation, duty exemptions, relaxed regulations, and special economic zones (SEZs) like GIFT City with the best infrastructure facilities.

Department for Promotion of Industry and Internal Trade (DPIIT) regulates foreign direct investment (FDI) in India under the Ministry of Commerce and Industry. The Indian government is more likely to review and update FDI policies on a timely basis to ensure a proper and effective alignment of FDI with the economic objectives and national interests.

FDI inflows significantly contribute to Indian economic growth by providing innovative technology transfer, enhancing infrastructure, and productivity, creating job opportunities, and providing all-round development across various sectors.

FDI inflows results in the creation of new jobs in all sectors and contribute to skill development, generate income, and helps to eliminate poverty from the country.

With the ongoing economic reforms, significant infrastructure development, and favourable investment environment, India turns to be a FDI magnet to attract high FDI inflows in country. Indian government is focusing on ease of doing business and several initiatives like Make in India layout a road win map for the future of FDI prospects in the country. It is expected that India will attract FDI approx. US$ 120-160 billion till 2025.

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