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In its Global Investment Trend Monitor report, the United Nations Conference on Trade and Development said that the Foreign Direct Investment (FDI) on a global level remained flat in the year 2019 at 1.39 trillion dollars. It saw a 1% decline from the year 2018. However, South Asian countries recorded a 10 % increase in FDI to 60 billion dollars, and the notable thing is that this growth was mainly driven by India, with a 16 % increase in inflows. The UNCTAD mentioned that Indian country stood among the top 10 recipients of the Foreign Direct Investment in 2019, where it saw a reasonable growth than the previous year. In its report, UNCTAD mentioned that India attracted 49 billion dollars in inflows, where the majority went into service industries and information technology under FDI in India 2019.
Thus, it can be said that the FDI growth in South Asia was massively due to the foreign investments made in India in 2019. Here we shall discuss the FDI in India 2019, but before that, let’s have a basic understanding of Foreign Direct Investment (FDI).
Table of Contents
One can have a basic understanding of FDI from the term itself “Foreign Direct Investment.” It means when an investor from some other country makes an investment in the business located in the country. It can also be understood when a company takes ownership of the business situated in another country. It helps the foreign companies to be directly involved in the day to day business activities in another country. This implies that they not only bring money with them but also skills, knowledge, and technology.
Usually, FDI happens when an investor either establishes foreign business operations or acquires the foreign business assets, whether it is controlling interest in a foreign company or establishing ownership in such company.
Foreign Direct Investment is a vital source of money for India’s economic development. In the wake of the 1991 crisis, economic liberalization began in India. Since then, FDI increased steadily (FDI in India 2019) in this country. Today, India is part of the top 100 countries in ease of doing business, and it ranks number 1 globally in the Greenfield FDI ranking.
FDI is an important tool for facilitating economic growth, especially for a developing nation like India. In order to increase the flow of foreign investment, the process of liberalization is implemented, but it must be noted that liberalization comes with some regulations as well.
There are two ways that FDI comes in India-
The non-resident investor or the Indian company under the automatic route doesn’t require any prior approval from the Government of India or Reserve Bank of India for the investment.
The sectors that fall under the 100% automatic route category includes agriculture and animal husbandry, air transport services, airports, asset reconstruction companies, automobiles, biotechnology, broadcast content services, chemicals, duty-free shops, E-commerce activities, Food processing, services under Civil Aviation such as maintenance and repair organizations, petroleum and natural gas, Pharmaceuticals, thermal power and so on.
In this case, the Government’s approval is mandatory. There can be no investment made without the approval of the Government under this route. The company is required to file an application via Foreign Investment Facilitation Portal that facilitates single-window clearance. Such an application is thereafter forwarded to the respective ministry. The ministry may either accept or reject the application after consulting from the Department for the promotion of industry and internal trade under the Ministry of Commerce. Then such a Department shall issue the Standard Operating Procedure for processing applications under the existing policy of FDI.
The sectors that fall under the “up to 100% Government route” category includes Banking and public sector- 20 %, Broadcasting Content Services- 49 %, Core Investment Company- 100 %, Food Products retail Trading- 100 %, Print media (publications, printing of scientific and technical magazines, specialty journals, periodicals and a facsimile edition of foreign newspapers- 100 %, Print Media that includes publishing of newspapers, periodicals, the Indian edition of foreign magazines containing news and current affairs- 26 %, Satellite (Establishment and Operations)- 100 %.
FDI is strictly prohibited with a few industries under any route. Such industries include:
It may be noted that Foreign Technology collaboration in any kind including licensing for franchise, brand name, trademark, management contract is also prohibited under Lottery business, Gambling and Betting activities; and the Real-estate Business mentioned here shall not include the construction of residential/commercial premises, bridges or roads, and REITs (Real Estate Investment Trusts) registered under SEBI (REIT) regulations, 2014.
India attracted FDI of approximately 49 billion dollars in 2019 that was 16 % more than what it attracted in the year 2018 as per the report of UNCTAD. Inflows into countries like Bangladesh and Pakistan saw a decline as compared to FDI in India 2019, and it was against the backdrop of weaker macroeconomic performance and uncertainty of policy for investors, including trade tensions.
India’s IT sector has attracted sizeable investments from major countries. This was due to its strength and core competency. The hardware sector and computer software in India attracted FDI inflows amounting to 39.47 billion dollars ranging between the period of the year 2000 to 2019 and ranks second in the inflow of FDI according to the data of the Department for promotion of industry and internal trade.
The size of the market of IT BPM sector in India was at 177 billion dollars in the year 2019. It saw a growth of 6.1 %, and it is estimated that the size of the industry might grow to 350 billion dollars by the year 2025. It has also contributed to the country’s GDP around 7.7 % and may contribute around 10 % of India’s GDP by 2025.
As per a survey conducted by Emerging Market Private Equity Association, India is one of the attractive emerging markets for the global partner’s investment for the future 12 months. The annual FDI inflows are expected to rise in India to 75 billion dollars over the next five years. Moreover, the Government of India is looking for FDI inflows worth 100 billion dollars in the coming two years, considering the inflow of FDI in India 2019.
Foreign Direct Investment is critical to economic growth. FDI Equity Inflow is an important source of non-debt financial resource for the economic development in India. India has been the preferred destination form many international foreign enterprises because of constructive factors like high economic growth, fast population growth, relatively lower wages, and special privileges in an investment like tax exemptions, etc.
Therefore the Indian Government’s policies and robust business environment have made sure that the country keeps on receiving the foreign capital. The Government has come up with various favorable initiatives in the last few years, like relaxing FDI norms throughout sectors like defense, oil refineries, telecom, power exchange, stock exchange, etc. The FDI ensures that employment is generated, and it also helps in achieving technical knowledge transfer.
FDI is an additional investment to the domestic investments of a country. Therefore, it can raise the level of the economy of that country. It can further add to the foreign exchange reserve of the host country, and it can relieve foreign exchange shortages of its economy. In the Indian scenario, the FDI in India 2019 has impacted the commerce and IT industry. The major positive impacts on the e-commerce include a boost to the infrastructural development and provide impetus to the manufacturing sector.
The FDI in India 2019 can impact every aspect of the Indian economy, and it has already helped the country gather new technology and provided an efficient working method. Another positive impact on e-commerce could be it may reduce the requirement of middlemen, which shall lead to lower transaction costs, reduced overhead, and less cost of labor and inventory.
There are many ways in which the FDI can benefit the recipient nation like, in this case, India. With the amount of benefit that was received from FDI in India 2019, it can increase the scope of employment and, thereby, economic growth. The creation of a job is one of the advantages that FDI brings with it. An increase in FDI boosts both the manufacturing and service sectors. It leads to the creation of jobs and further reduces the unemployment in the country. With higher incomes, the population is thereby equipped with buying power that further boosts the economy of the country.
FDI can also cause Human Resource development. It is one of the less obvious impacts of FDI. The skills gained and enhanced from training, and the experience boosts the education and the human capital quotient. Human capital, once developed, can train human resources in other companies, which may create a ripple effect. The FDI in India can cause transformation in the backward areas of the country as well. It may enhance the social economy of the area by transforming such areas into industrial units. For instance, the Hyundai unit in Tamil Nadu Sriperumbudur is an example of that.
The FDI in India 2019 may also cause an increase in exports as all goods produced through FDI are not meant for domestic consumption. Most of these products have global markets. The FDI investors have been further assisted by the creation of export-oriented units and economic zones in enhancing their exports from other countries.
India has gained access to the latest technologies and financing tools from across the world. This induction of new provisions and processes results in their diffusion to the local economy. This has also resulted in enhanced efficiency and effectiveness of the industry. If the flow of the FDI continues to be so just how it was in 2019, then it may translate into a continuous flow of foreign exchange. It shall ensure that the banks maintain a sufficient reserve of foreign exchange. It also ensures stable exchange rates.
FDI is also an important source of external capital and higher revenues for a country. The construction of factories requires some labor, materials, and equipments. When the construction is completed, the factory shall use some local employees and use further local materials and services. The employed people under such a factory will have money to spend. It creates more jobs.
Another impact that it may cause is the improved capital flow. It is particularly beneficial for countries that have limited domestic resources. FDI in India 2019 has certainly created a competitive market. The entry of foreign organizations in the Indian business has created a competitive environment where the domestic monopoly is broken. Having a healthy competitive environment drives the firms to enhance their processes continuously. It thereby fosters innovation, and the consumers also gain from this as they gain access to a variety of competitively priced products from which they could choose as they wish.
The UNCTAD expects the FDI flow to rise moderately, going ahead. This is due to the improvement in the global economy from its weakest performance since the global financial crisis in 2009. It further stated that GDP growth, gross fixed capital formation, and trade are expected to rise at the global level. If this is what the future holds, then how FDI in India 2019 was would be more enhanced in the coming years. However, it must be noted that certain risks also persist, as highlighted by the UNCTAD. It includes high debt accumulation among developing economies, geopolitical risks, and a possible shift towards protectionist policies.
Read, Also: Overview of Letter of Credit under FEMA Rules.
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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