Introduction
A Foreign Direct Investment (FDI) is an investment in one country in the form of control of an entity in another country. For this reason, it differs from foreign portfolio investments with its direct management approach. In general, foreign direct investment includes “mergers and acquisitions, construction of new facilities, investment of foreign business profits, and bank loans.” FDI is capital inflow into the balance of payments, long-term investment and short-term investment. Foreign direct investment often involves cooperative management, joint ventures, and the transfer of technology and expertise. These investments are flowing into India due to the government’s supportive policies, enabling business environment, global competitiveness and trade.
Types of Foreign Direct Investment:
- Horizontal: Depending on the type of foreign direct investment, the business expands domestically to other countries. Businesses do the same business in abroad.
- Vertical: In this case, a business expands to other countries by moving to different levels of the chain. Therefore, companies work abroad, but these activities are related to big business.
- Joint Venture: When investing in two different companies in different markets, the work done is called Joint Venture Foreign Direct Investment. Therefore, foreign direct investment is not directly linked to the economic activity of the investor.
- Platform: Here, a business opens to other countries, but the products produced by the business are later exported to our country
Foreign Direct Investment Route
- Automatic Route: In this route, foreign direct investment is allowed without prior approval of the Government of India or the Reserve Bank of India.
- Government Route: According to the government method, approval of the Government of India is required before investment. Foreign direct investment proposals under the government’s route are decided by department/department managers.
Government Initiatives
In recent years, India has emerged as an attractive destination for foreign direct investment due to positive government policies. India has developed various schemes and policies that have helped to boost India’s FDI. These schemes have prompted India’s FDI investment, especially in upcoming sectors such as defence manufacturing, real estate, and research and development. Some of the major government initiatives are:
- Due to the Make in India Initiative, FDI equity inflow in the manufacturing sector has increased by 57% over the previous 8 years.
- The Foreign Investment Facilitation Portal (FIFP) is a new online single-point interface of the government for investors to facilitate Foreign Direct Investment proposals to evaluate and further authorise them under the Government approval route.
- In the civil aviation sector, 100% FDI is allowed under automatic routes in brownfield airport projects.
- For single-brand retail trading, local sourcing norms have been relaxed for up to 3 years and 100% FDI is allowed under automatic route.
- The government has amended the Foreign Exchange Management Act (FEMA) rules, allowing up to 20% FDI in insurance company LIC through the automatic route.
- In September 2021, the Union Cabinet announced that to boost the telecom sector, it will allow 100% FDI via the automatic route, up from the previous 49%.
- Many reforms like 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 promote the production of Man-Made Fibre (MMF) Apparel, MMF Fabrics and Products of Technical Textiles, and more initiatives are taken by the government to enhance export and to promote FDI in the textile sector.
Sectors
- Infrastructure: 10% of India’s GDP is based on construction activity. 100% FDI under automatic route is permitted in construction sector for cities and townships.
- Electronics system design and manufacturing: The Electronics system design and manufacturing (ESDM) sector in India is rapidly growing and India is poised to become a global electronics manufacturing hub in the future.
- Information technology: FDI in IT sector is one of the biggest in India. Lots of global companies got their R&D offices in India. Bengaluru, Pune, Mumbai and Hyderabad are considered global IT hubs.
- Railways: 100% FDI is allowed under Automatic route in most of areas of Railways, other than the operations like, High-speed trains, electric trains, passenger cars, high-speed passenger cars, etc.
- Chemicals: India has cancelled the production licenses of all chemicals except hydrocyanic acid, phosgene, isocyanates and their derivatives. 100% FDI is allowed in Chemical sector under automatic route.
- Airlines: 100% foreign investment is allowed in scheduled or regional air transportation services or scheduled domestic passengers.
Road Ahead
Additionally, India lowered corporate taxes and simplified labour laws. India continues to be an attractive market for international investors in terms of both short and long-term prospects. India’s low productivity is one of the most promising opportunities for foreign direct investment. The work of the government in India is also very good. Improvements in government efficiency could benefit public finances (albeit strained by the pandemic) and India’s business partners’ prospects regarding government finances and subsidies to private companies. All these factors could enable India to attract $120-160 billion in foreign direct investment annually by 2025.
