FDI in Indian economy

Foreign direct investment (FDI) in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FDI

Mains level : Features of India's FDI Policy

The FDI in India grew by 13% to a record of $49.97 billion in the 2019-20 financial years, according to official data.

Get aware with the recently updated FDI norms. Key facts mentioned in this newscard can make a direct statement based MCQ in the prelims.

Ex. FDI source in decreasing order: Singapore – Mauritius – Netherland – Ceyman Islands – Japan – France

Data on FDI

  • The country had received an FDI of $44.36 billion during April-March 2018-19.
  • The sectors which attracted maximum foreign inflows during 2019-20 include services ($7.85 billion), computer software and hardware ($7.67 billion), telecommunications ($4.44 billion), trading ($4.57 billion), automobile ($2.82 billion), construction ($2 billion), and chemicals ($1 billion).
  • Singapore emerged as the largest source of FDI in India during the last fiscal with $14.67 billion investments.
  • It was followed by Mauritius ($8.24 billion), the Netherlands ($6.5 billion), the U.S. ($4.22 billion), Caymen Islands ($3.7 billion), Japan ($3.22 billion), and France ($1.89 billion).

What is FDI?

  • An FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
  • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
  • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
  • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
  • In a narrow sense, it refers just to building a new facility, and lasting management interest.

FDI in India

  • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
  • 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.

Back2Basics

Amendment in the FDI Policy for curbing opportunistic takeovers/acquisitions of Indian companies

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