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When a foreign entity takes ownership in a business entity situated in another country it is known as FDI. It is also known as ‘Inbound investment’. FDI Policy in India allows a foreign entity to participate in the day-to-day working of the business entity in the other country. It leads to the economic development of the country as the foreign entity brings wealth, technology, and knowledge to the country. It also creates jobs in the country. It bridges the gap between domestic savings and investments. In this blog, we will discuss FDI Policy in India.
FDI is a significant non-debt financial source for the development of an economy. These investments have been on the rise in India because of the government’s policy framework, vast resources, economic influence, and global competitiveness.
The nodal department for the formulation of policies on Foreign Direct Investment (FDI) is the Department for Promotion of Industry & Internal Trade (DPIIT) under the Ministry of Commerce and Industry. Based on the remittance report framed by the Reserve Bank of India (RBI), DPIIT maintains a track record of all the inward FDI into India.
FDI is generally made in open economies which have growth prospects, skilled workforce, and fewer entry barriers. Before the LPG Reform, FDI in India was low and limited to a few sectors only. As India had just become independent, there was fear in the mind of Indians to open up the economy for foreign capital due to the previous exploitation. In 1990, India suffered from a huge financial crisis. The inflation rates were high, political instability reduced the international credit of the country. The foreign exchange went so low that it was difficult to pay even for a week’s imports. Thus, the FDI growth in India was stunted.
After the LPG Reform in 1991, India liberalized the process of foreign investments with the help of the International Monetary Fund & World Bank. Policy changes were made to make India an investor-friendly destination. Even after the policy changes, many sectors were kept outside the purview of FDI and most of the foreign investments came through the government route. There were also gaps between the FDI approved and the actual FDI inflows which narrowed down the FDI Policy in India. India was receiving FDIs but it was far from satisfactory when compared to the global market. The Government kept on making efforts to improve the FDI Policy in India.
Finally, the Make in India program was launched in 2014. It is a flagship program of the Government to promote investment. It introduced liberal and transparent rules and opened FDI in almost all sectors through an automatic route. This program made substantial accomplishments across 27 sectors including manufacturing and service. Post the Make in India program, FDI inflows rose rapidly. With USD 45.15 billion in 2014-2015 set a record for the highest FDI at USD 83.6 billion in 2021-2022. The key sectors in which FDIs are made include the service sector, IT and software, real estate, automobiles, and pharmaceuticals. For the current financial year I.e. 2022-2023 the FDIs in India are projected to be healthy despite the Ukraine-Russia war, U.S. monetary policy, global recession, and other global issues. Recently India has also rolled out the production-linked incentive (PLI) scheme to attract further investments.
There are four routes through which FDI can flow into India. They are:
Category 1- 100% FDI is permitted through Automatic Route.
Category 2- 100% FDI is permitted with Government Approval.
Category 3- FDI beyond a specific limit requires Government Approval.
Category 4- FDI is permitted under both routes subject to a limit.
As per Regulation 15 of the Foreign Exchange Management (Transfer/Issue of Security by a Person Resident outside India) Regulation, 2017 the following activities are completely prohibited from receiving FDI:
Further, the FDI Policy in India, 2020 also prescribes that an entity of a country that shares borders with India or where the beneficial owner of the investment into India is located in a country sharing its borders with India can invest only through the government route. Even the case of transfer of ownership which benefits a country that shares with India requires Government approval. Earlier the FDI Policies covered only bordering countries like Pakistan and Bangladesh; however, the revision in FDI Policy in 2020 also brought China under the government route.
The following are the merits of having an FDI Policy in India:
The following are the demerits of having an FDI Policy in India:
FDI is an important facet of non-debt financial investment in a country and is a source of economic growth. Therefore, a robust and easy FDI policy should be promoted. Just as India’s FDI Policy has made FDI in India easy and a one-step process. An easy and liberal FDI policy results in higher investments just as India witnessed after amending its policies in recent years.
Also Read: FDI Compliances in India: A Complete Overview
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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