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Context

• India rapidly emerges as a preferred investment destination with Foreign Direct Investment (FDI) inflows increasing 20-fold in the last 20 years.
• Highest ever annual FDI inflow of 83.57 billion US Dollars were recorded in the Financial Year 2021-22.
• This figure stood at 45.15 billion US Dollars.

Major feats achieved this year

• 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.

Significance of rising FDI

• This is a testament of India’s status among global investors.
• It also signifies political, economic and social stability

What is Foreign Direct Investment (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.

Features of FDI

• Any investment from an individual or firm that is located in a foreign country into a country is FDI.
• Generally, FDI is when a foreign entity acquires ownership or controlling stake in the shares of a company in one country, or establishes businesses there.
• It is different from foreign portfolio investment where the foreign entity merely buys equity shares of a company.
• In FDI, the foreign entity has a say in the day-to-day operations of the company.
• FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills and expertise.
• It is a major source of non-debt financial resources for the economic development of a country.

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%

FDI prohibition

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

Limitations created by FDI

• Hindrance of domestic investment: Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local companies start losing interest to invest in their domestic products.
• Risk from political changes: Other countries’ political movements can be changed constantly which could hamper the investors.
• Negative exchange rates: FDI can sometimes affect exchange rates to the advantage of one country and the detriment of another.
• Higher costs: When investors invest in foreign counties, they might notice that it is more expensive than when goods are exported. Oftentimes, more money is invested into machinery and intellectual property than in wages for local employees.
• Economic non-viability: Considering that FDI may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
• Expropriation: Constant political changes can lead to expropriation. In this case, those countries’ governments will have control over investors’ property and assets.
• Modern-day economic colonialism: Many third-world countries, or at least those with a history of colonialism, worry that foreign direct investment would result in some kind of modern-day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitation.
• Poor performance: Multinationals have been criticized for poor working conditions in foreign factories.

Recent amendments in 2020

• The govt. has amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017.
• In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership, such subsequent change in beneficial ownership will also require Government approval.

The present position and revised position in the matters will be as under:

Present Position

• A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
• However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route.
• Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Revised Position

• A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.

[spot the difference]

• However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
• Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Various policy initiatives

The government has taken plenty of initiatives to attract FDI in India:

• The government has amended rules of the Foreign Exchange Management Act (FEMA), allowing up to 20% FDI in the insurance company LIC through the automatic route.
• The Government of India is considering easing scrutiny on certain FDI from countries that share a border with India.
• The implementation of measures like PM Gati Shakti, single window clearance and GIS-mapped land bank are expected to push FDI inflows in 2022.
• The government is likely to introduce at least three policies as part of the Space Activity Bill in 2022. This Bill is expected to clearly define the scope of foreign FDI in the Indian space sector.
• In September 2021, the Union Cabinet announced that to boost the telecom sector, they’ll allow 100% FDI via the automatic route in, up from the previous 49%.
• In August 2021, the government amended the Foreign Exchange Management (non-debt instruments) Rules, 2019, to allow the 74% increase in FDI limit in the insurance sector.