FDI in Indian economy

FinMin pushes for reforms to spur FDI inflows


From UPSC perspective, the following things are important :

Prelims level: Foreign Direct Investment (FDI)

Mains level: Read the attached story


Central Idea

  • The Finance Ministry of India emphasized the need to address challenges faced by global investors to facilitate Foreign Direct Investment (FDI) flows.
  • In this article, we delve into the factors affecting FDI inflows and propose measures to attract and sustain FDI in India.

What is Foreign Direct Investment (FDI)?

  • FDI refers to the investment made by individuals, companies, or governments from one country into business interests located in another country.
  • It involves the direct ownership or control of assets in the foreign country, typically in the form of establishing new ventures, acquiring existing businesses, or creating strategic partnerships.

Understanding FDI

Imagine you have a successful toy manufacturing company based in Country A. You have been experiencing steady growth and want to expand your business operations to a new market in Country B. However, entering a foreign market can be challenging due to unfamiliarity with the local business environment, regulations, and market dynamics.

To overcome these challenges, you decide to make a Foreign Direct Investment (FDI) in Country B. Instead of exporting toys from Country A to Country B, you establish a new manufacturing plant or acquire an existing toy company in Country B. By doing so, you gain direct ownership and control over the assets and operations in Country B.


India’s FDI feats

  • In terms of investor countries of FDI Equity inflow, Singapore is at the top with 27%, followed by the US with 18% and Mauritius with 16% for the FY 2021-22.
  • Computer Software & Hardware’ has emerged as the top recipient sector of FDI Equity inflow during this period with around 25% share followed by Services Sector and Automobile Industry with 12% each.
  • With 53 % Karnataka has received the majority share of FDI equity in the `Computer Software & Hardware’ sector.

FDI in India

  • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
  • Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country.
  • India, today is a part of top 100-club on Ease of Doing Business (EoDB) and globally ranks number 1 in the Greenfield FDI ranking.

There are two routes by which India gets FDI.

1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

  • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
  • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

Sectors that come under the ‘100% Automatic Route’ category are

  • Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services under civil aviation sector)
  • Airports (Greenfield + Brownfield),
  • Asset Reconstruction Companies,
  • Auto-components, Automobiles,
  • Biotechnology (Greenfield),
  • Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services,
  • Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs), Chemicals, Coal & Lignite, Construction Development,
  • Construction of Hospitals,
  • E-commerce Activities, Electronic Systems,
  • Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal ores, Other Financial Services,
  • Pharmaceuticals, Plantation sector
  • Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways,
  • Single Brand Retail Trading, Textiles & Garments,
  • Thermal Power,
  • Tourism & Hospitality and
  • White Label ATM Operations.

Sectors that come under up to 100% Automatic Route’ category are

  • Infrastructure Company in the Securities Market: 49%
  • Insurance: up to 49%
  • Medical Devices: up to 100%
  • Pension: 49%
  • Petroleum Refining (By PSUs): 49%
  • Power Exchanges: 49%

Sectors that come under the ‘up to 100% Government Route’ category are

  • Banking & Public sector: 20%
  • Broadcasting Content Services: 49%
  • Core Investment Company: 100%
  • Food Products Retail Trading: 100%
  • Mining & Minerals separations of titanium bearing minerals and ores: 100%
  • Multi-Brand Retail Trading: 51%
  • Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
  • Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
  • Satellite (Establishment and operations): 100%

Prohibited Sectors

There are a few industries where FDI is strictly prohibited under any route. These industries are

  • Atomic Energy Generation
  • Any Gambling or Betting businesses
  • Lotteries (online, private, government, etc.)
  • Investment in Chit Funds
  • Nidhi Company
  • Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
  • Housing and Real Estate (except townships, commercial projects, etc.)
  • Trading in TDR’s
  • Cigars, Cigarettes, or any related tobacco industry

Benefits offered by FDI

  • Employment generation: FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country.
  • Economic growth: Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
  • Human capital development: Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ripple effect, it can train human resources in other sectors and companies.
  • Technology boost: The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.
  • Increase in exports: Many goods produced by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented units help to assist FDI investors in boosting exports from other countries.
  • Exchange rate stability: The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
  • Improved Capital Flow: Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.
  • Creation of a Competitive Market: By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies.
  • Climate mitigation: The United Nations has also promoted the use of FDI around the globe to help combat climate change

Factors Affecting recent FDI inflows

(1) Inflationary Pressures and Tighter Monetary Policies

  • The dip in FDI inflows in 2022-23 can be attributed to inflationary pressures and tighter monetary policies.
  • Policymakers should address these factors to encourage a favorable investment climate.

(2) Geopolitics vs. Geography

  • The Ministry highlights the influence of “political distance more than geographical distance” on FDI flows.
  • Geopolitical factors have dominated over traditional geographical considerations.

(3) Global FDI Trends

  • Gross FDI flows declined by 16% in 2022, compared to the record high of $84.8 billion in 2021-22.
  • Net inflows experienced a sharper decline of 27.4%.
  • Similar trends were observed in emerging market economies, where net FDI inflows declined by 36% in 2022.

Challenges for India’s Growth Outlook

(1) External Sector Challenges:

  • The review identifies the external sector as a potential challenge for India’s growth in 2023-24.
  • Factors such as geopolitical stress, volatility in global financial systems, price corrections in global stock markets, El-Nino impact, and weak global demand could constrain growth.
  • Policymakers must closely monitor FDI data and undertake measures to facilitate FDI inflows.

(2) Fragmentation of FDI Flows:

  • The Ministry highlights the phenomenon of “friend shoring,” wherein FDI is directed towards geopolitically aligned countries.
  • This has led to a fragmentation of FDI flows globally, as per research from the International Monetary Fund (IMF).
  • Additionally, inflows from foreign portfolio investors (FPIs) into Indian markets have become less volatile.


  • To attract and sustain FDI inflows, India needs to address challenges related to inflation, monetary policies, geopolitical factors, and last-mile infrastructure.
  • Additionally, mitigating trade risks and fostering inclusive growth through job creation will contribute to a favorable investment climate.

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