Foreign Investment in India

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Foreign Investment in India overview

Foreign Investment in India has been the direct outcome of the liberal trade policies undertaken and implemented by successive governments. The liberalization program of the government aims at rapid and substantial growth of the country's economy and besides a harmonious integration with global economy. While foreign investment in India comprises of investments made by overseas companies in India, the reverse i.e. outflow of foreign investment from India is also prevalent in the Indian economy. Foreign investment in India has created some wonderful opportunities in the country in terms of creating employment and improving the basic infrastructure of the country.

Foreign Investment in India has huge potentials. However, foreign investment in India has its own share of advantages and disadvantages. Overseas investors must prepare themselves well in advance to face with adversities and deal with them properly. Some of the drawbacks that investors may have to face are bureaucratic hassles, infrastructural deficiencies, power shortages and sometimes political uncertainty. Despite these uncertainties, India presents a huge potential to global players to invest in the market. Many leading overseas brands have already invested while some of the companies have plans in the pipeline to invest in India.

Market Potential for Foreign Investment in India

India is the world's fifth largest economy in the world and has the third highest GDP in Asia. India is among one of the few markets in the world that offers such high prospects of growth and earning in virtually all sectors of the economy. The huge skilled workforce is one factor that ensures that foreign investors get a good return on their investments. To be successful in the India market, foreign investors will have to properly estimate the opportunities and drawbacks that are offered by the India markets.

Investor must make sure that they have a well designed plan which is backed by some serious thought resulted from extensive research. Another thing that companies will have to consider is that if they are thinking of short term profit, then perhaps it will not be fruitful, however long term retunes are guaranteed for an investor that has studied the market properly before investing the money. Once all these factors are given due considerations, investors will not have to worry about the outcome of their investments.

Foreign Investment Policy in India

The government has undertaken various liberal policy decisions to make the whole process of foreign investment in India hassle free. Some of the foreign investment policies include:

1. The list of industries that are eligible for automatic approval of foreign investment has been expanded by the Ministry of industry.
2. The upper limit of the rate of foreign investment in India has been raised to 74% from the earlier 51%; in some cases this has been increased to 100%.
3. Indian companies will no longer need prior clearance from the reserve Bank of India, RBI for inward remittance of foreign exchange or for issuing of shares to foreign investors.
4. The exchange control regulations has been amended by the government.
5. The ban against the use of foreign brand names/trademarks has been removed.
6. The corporate rate of corporate tax on foreign companies has been reduced from 65% to 55% by the government in the annual budget of 1994-95.
7. The government reduced long term capital gains rate for overseas companies to 20%
8. Under the Indian Income Tax Act, export earnings are exempted from corporate income tax for both overseas and domestic firms.
9. 100% inflow of foreign investment is permitted in strategic sectors such as roads, ports, tunnels, highways and harbors on the condition that the total investment in any of the sector should not exceed ` 1500 crore.
10. Any increase within the prescribed limit does not require permission from the foreign investment promotion board.

Procedure of Automatic Approval of Foreign Investment in India

Automatic approval facility for foreign investment in India is applicable to 35 high priority sectors mentioned in Annexure III in the statement of the New Industrial Policy. This approval was allowed for foreign investment up to 51% foreign equity. The revised foreign direct investment policy includes more than three sectors in the mining industry which can get automatic approval for half of the quantity of foreign investment and 13 other categories have also been introduced for automatic approval of foreign investment. These export units are required to work as per the export import policy of Government of India and register under the Ministry of Commerce.

Foreign Investment Promotion Board

Established under the Department of Industrial Policy and Promotion, the Foreign Investment Promotion Board is the only agency in India that deals with all matters relating to Foreign Direct Investment (FDI) and promotion of foreign investment in India. The board is chaired by the Secretary Industry, Department of Industrial Policy and Promotion, Government of India. The board, towards prompt clearance of the proposals, presented to it through decisive negotiation and discussion with budding investors. The primary functions of the Foreign Investment Promotion Board are mentioned below:
  • To ensure quick clearing of proposals for foreign investment :
  • Periodically review the implementation of the cleared proposals
  • Regular review the policies pertaining to FDI with concerned agencies including government bodies and private bodies in various sectors.
  • Doing investment promotion activities consisting of establishing contacts and inviting overseas companies to do business in India
  • Identifying sectors while keeping the national internet in mind where investments from aboard can be sought
  • Taking up activities for the promotion and facilitation of foreign direct investment as and when required

Relaxation in policies

The government has relaxed certain existing laws and made changes in some and in some cases enacted new laws to ensure better opportunities for foreign investment in India. A five year tax holiday has been extended to enterprises that are working in the development of infrastructural facilities. Foreign companies are allowed to start multimodal transport services in India even though they do not have a registered office in India. RBI permits 100% foreign investment in the construction of roads and bridges. Other measures include expansion of freely importable items on the open general license list to include certain consumer goods and enhancement of the scope of special import license.