Foreign Direct Investment in India

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As per the International Monetary Fund (IMF), Foreign Direct Investment, commonly referred to as FDI is an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor. It is not 'portfolio foreign investment (supine investment in another country's securities like bonds and stocks)'. Inorganically or organically done investment in another country is not FDI. To understand the difference better, a British daily, the Financial Times puts it this way: “Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control”.

Ever since coming to power, the NDA government has taken a number of steps to bolster the FDI scenario in India. It has enabled international entities like Carrefour and Walmart to come and invest in the multi-brand retail market in India. The retail market in India has been growing at a substantial rate and at present, it is worth somewhere around 28 billion dollars. It is expected that in 2020, this value will reach approximately 260 billion dollars. However, there are certain conditions that need to be fulfilled by international entities that are thinking of coming and investing in the retail market in India.

The minimum amount that needs to be invested by a foreign entity to gain entry in India’s retail market is 100 million dollars. There are also some restrictions in choosing the place where their stores can be opened. They can only start stores in cities where the population is at least 1 million. At least half of their investment should be for back-end infrastructure such as warehouses. They will also need to get permission from the state government where they wish to open their stores.

Foreign Direct Investment (FDI)

The economic development witnessed during the past two decades in India rests to a great extent on Foreign Direct Investment (FDI). FDI has been a vital non-debt financial force behind the economic upsurge in India. Special investment vantages like cheap cost wages and tax exemptions on the amount being invested attract foreign companies to invest in India. FDI in India is done across a wide range of industries and its relentless influx reflects the tremendous scope, faith and trust that foreign investors have in the Indian economy.

To ensure an uninterrupted inflow of FDI in India, the Indian government has created conducive trade atmosphere and effective business policy measures in place. This strategy is reflected in the steps taken by the government, such as easing out the restrictions levied on sectors like stock exchanges, power exchanges, defence, telecommunications and PSU oil refineries to name a few.

The Indian Market for FDI

The last fiscal (2014-15) year saw a considerable increase in the FDI made in India. India's pro-growth business policies have contributed a great deal in making this possible. The first five months of the 2014-15 fiscal year noticed a net inflow of US$ 14.1 million FDI in India, amounting to a good 33.5 percent rise in the FDI influx registered for the corresponding period during the previous fiscal year. With an aggregate investment of US$ 353,963 million between April 2000 and November 2014, neighbouring country Mauritius has become the country with the largest Foreign Direct Investment (FDI) inflow into India.

Advantages of FDI in India

There are several benefits of increasing foreign direct investment in India. First of all, with more FDI, consumers will be able to save 5 to 10 percent on their expenses because products will be available at much less rates and to top it all, the quality will be better as well. In short, it will be a win-win situation for the buyers. It is also expected that the farmers who face a lot of economic problems will also get better payment for their produce. This is a major benefit considering how many farmers have been giving up their lives lately. It is expected that their earnings will increase by 10 to 30 percent.

FDI is also supposed to have a positive effect on the employment scenario by generating approximately 4 million job opportunities. Areas like logistics will be benefited as well because of FDI and it is assumed that 6 million jobs will be created. The governments – both central and state – will be benefited because of FDI. An addition of 25-30 billion dollars to the national treasury is also expected. This is a substantial amount and can really play a major role in the development of Indian economy in the long term.

Steps Taken by Government to Promote FDI

The Indian Government has taken a number of steps to show its willingness to allow more foreign direct investment in the country. In the infrastructure development sector, it has relaxed the norms pertaining to area restriction, the laws regarding gaining a comfortable exit from a particular project and the requirements relating to minimum capitalization. If companies are ready to commit 30 percent of their investments for affordable housing, then the rules for minimum capitalization and area restriction will be waived off. It is expected that this will benefit the construction sector a lot, especially in the form of greater investment inflow.

The situation will only get better once sectoral conditions are further relaxed and the terms that have been used in the policy are clarified up to a greater extent. This is likely to get more investment especially in the newer areas. This will also act as a fillip for entities eagerly interested in developing plots for serviced housing. This is going to be a major development considering the fact that the land in the urban areas is inadequate. One also needs to factor in the high costs of land in this regard. It will also lead to the creation of cost-beneficial, affordable houses. It will help with the ‘Smart Cities’ programme as well. In the insurance sector too, the government has increased the upper limit of FDI from 26 percent to 49 percent. It is an amalgamation of different areas of investment such as:
  • Foreign portfolio investment
  • Foreign venture capital investment
  • Foreign institutional investment
  • Non-resident investment
  • Qualified foreign investment
The Indian Ministry of Finance has also proposed that 100 percent FDI will be allowed in railways-related infrastructure. However, this does not include the operational aspects. While it is true that the foreign investors will not be allowed to intervene in railway operations, they will be able to provide for high-speed trains, such as bullet train, and enhance the overall network in the process.

Investments in India during 2015-16

The ruling NDA government in the centre has announced a lot of relaxations for FDI and the business done under the FDI umbrella in India. The Union Budget presented in the Lok Sabha (the Lower House of the Parliament) by Finance Minister Arun Jaitley mentioned that the procedures through which the corporate houses attract foreign investment into India will be simplified and made uncomplicated. From now onwards, there will hardly be any difference between 'Portfolio Foreign Investment' and 'Foreign Direct Investment'. The composite cap has replaced the concept of individual cap; for instance, there is now a composite cap of 49 percent foreign investors allowed in the insurance sector.

The Indian government, during the 2014-15 fiscal year, announced that it would allow FDI worth US$ 14.65 billion into the railways infrastructure. Some of the most expensive and largest railway projects will be carried out under these investments.

During the next three years, ADAMA Agrochemicals, an Israeli firm, has set its targets to spend US$ 50 million in
India. The company plans to enhance R&D and manufacturing facilities in India to grow at a better rate than the current industry growth rate. Hundred percent FDI into the health sector will be allowed by the Department of Industrial Policy and Promotion (DIPP) to enable indigenous manufacturing and reduce imports of medical devices. By the next fiscal year, the value of medical devices in the world market will be worth US$ 400 billion. The equity investment in the real estate is expected to go twofold as the Indian government has allowed 100 percent FDI into the construction sector. As per the real estate experts' beliefs, the demand from foreign property buyers will rise. Currently valued at US$ 1.5 billion, the real estate equity will reach a value of US$ 3 billion in a few years, the experts and analysts opine.

FDI Equity Inflows from 2000-2015

S no.Financial Years 2000-01 to 2014-15 (up to February 2015) Equity FDI Flows into India
FIPB Route/ RBI’s Automatic Route/ Acquisition Route Equity capital of unincorpora ted bodies # Total FDI Flows %age growth over previous year (in US$ terms)
12000-012339614029-0
22001-0239041916130(+) 52%
32002-0325741905035(-) 18%
42003-042197324322(-) 14%
52004-0532505286051(+) 40%
62005-0655404358961(+) 48%
72006-071558589622826(+) 146%
82007-0824573229134843(+) 53%
92008-093136470241873(+) 20%
102009-1025606154037745(-)10%
112010-112137687434847(-)8%
122011-1234833102246556(+)34%
132012-1321825105934298(-)26%
142013-142429997536046(+) 5%
152014-15 (Apr – Feb, 2015)2881586341223not applicable

Expectations

It is expected that at the current rate and as far as the future implications are concerned, FDI may be doubled and reach a mark in excess of US$ 60 billion during the 2015-16 fiscal year. The experts believe that the foreign investors are displaying immense faith in the 'Make in India' drive of the Narendra Modi government and that may propel the FDI influx into India. Further advancement and upgradation of the infrastructure in various sectors is also expected as it has been noticed that various sectors like telecommunications, automobiles, computer software and hardware and construction development had registered huge FDI inflow during the 2013-14 and 2014-15 fiscal years.

How Will FDI Benefit India?

Industrial studies have revealed that as foreign investors’ confidence in the Indian government will increase, their levels of investment in India will also go up. In the 2015-2016 fiscal year, it is expected that FDI will exceed 60 billion US dollars. In the 2013-14 fiscal year, the aggregate foreign investment amounted to 29 billion dollars. This increase owes a lot to the high expectations that foreign investors have from the Modi administration.

It has been estimated that in the ongoing Twelfth Five Year Plan, which continues till 2017, India will need almost a trillion US dollars in FDI. This money will be used to develop infrastructure such as highways, airways and ports.

Last Updated on June 11, 2015