FDI in Indian economy

Everything about FDI at one place

FDI in Indian economy

The Bilateral Investment Treaties (BITs) to review


From UPSC perspective, the following things are important :

Prelims level : Model BIT

Mains level : Paper 3- Reviev of BITs


The report of the Standing Committee on External Affairs on ‘India and bilateral investment treaties (BITs)’ was presented to Parliament last month.

Factor’s that necessitated the review of India’s BITs

  • Investor’s started suing India frequently: Since 2011, when India lost its first investment treaty claim in White Industries v. India, foreign investors have sued India around 20 times for alleged BIT breaches.
  • This made India the 10th most frequent respondent-state globally in terms of investor-state dispute settlement (ISDS) claims from 1987 to 2019 (UNCTAD).
  • Adoption of new Model BIT: India adopted a new Model BIT in 2016, which marked a significant departure from its previous treaty practice.
  • Negotiating new BITs: India is in the process of negotiating new investment deals (separately or as part of free trade agreements) with important countries such as Australia and the U.K.

Recommendations of the Committee

  • 1] Speed of the existing negotiations: India has signed very few investment treaties after the adoption of the Model BIT.
  • It recommends that India expedite the existing negotiations and conclude the agreements at the earliest because a delay might adversely impact foreign investment.
  •  2] Sign more BIT’s in core sector: The committee recommends that India should sign more BITs in core or priority sectors to attract FDI.
  • Generally, BITs are not signed for specific sectors.
  •  It will require an overhauling of India’s extant treaty practice that focuses on safeguarding certain kinds of regulatory measures from ISDS claims rather than limiting BITs to specific sectors.
  • 3] Fine-tune Model BIT: Model BIT gives precedence to the state’s regulatory interests over the rights of foreign investors.
  • The Model BIT should be recalibrated keeping two factors in mind:
  • a) tightening the language of the existing provisions to circumscribe the discretion of ISDS arbitral tribunals.
  • b) striking a balance between the goals of investment protection and the state’s right to adopt bonafide regulatory measures for public welfare.
  • 4] Improve the capacity of government officials: The committee recommends bolstering the capacity of government officials in the area of investment treaty arbitration.
  •  While the government has taken some steps in this direction through a few training workshops, more needs to be done.
  • What is needed is an institutionalised mechanism for capacity-building through the involvement of public and private universities.
  • The government should also consider establishing chairs in universities to foster research and teaching activities in international investment law.

Need to improve poor governance

  • A very large proportion of ISDS claims against India is due to poor governance.
  • This includes changing laws retroactively which led to Vodafone and Cairn suing India.
  • Annulling agreement in the wake of imagined scam which resulted in taking away S-band satellite spectrum from Devas.
  • The judiciary’s fragility in getting its act together (sitting on the White Industries case for enforcement of its commercial award for years).


  • The Committee could have emphasised on greater regulatory coherence, policy stability, and robust governance structures to avoid ISDS claims.
  • The government should promptly assemble an expert team to review the Model BIT.

Consider the question “India is one of the most frequent respondent-state globally in terms of investor-state dispute settlement (ISDS) claims. In context of this, examine the reasons for such frequent disputes and suggest the way forward.” 


The committee’s report on India’s BITs have novel suggestions, but it is lacking in several aspects.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Back2Basics: ISDS mechanism

  • Investor-state dispute settlement (ISDS) is a mechanism in a free trade agreement (FTA) or investment treaty that provides foreign investors, with the right to access an international tribunal to resolve investment disputes.
  •  ISDS promotes investor confidence and can protect against sovereign or political risk.
  • If a country does not uphold its investment obligations, an investor can have their claim determined by an independent arbitral tribunal, usually comprising three arbitrators.

FDI in Indian economy

Is India’s current investor rush too much of a good thing?


From UPSC perspective, the following things are important :

Prelims level : Impact of funding surge on economy

Mains level : Paper 3- PE funding in India

Human traits driving financial markets

  • To imitate and to conform — do what others around us are doing — are common and very powerful human tendencies.
  •  In financial markets, “herd behaviour” is a warning sign: When markets are doing well, people invest for no other reason than their neighbours having become wealthier (and vice versa).
  • There is another human trait that affects markets — success increases risk appetite.
  • If someone’s financial investments work, they are very likely to invest more, and ignore safety measures.

Factors driving the private equity investments

  • Better physical infrastructure (rural roads, electrification, phone penetration, data access).
  • Several layers of innovation (universal bank account access, surging digital payments on the “India Stack”).
  • 45 lakh software developers (largest in the world).
  • Maturing industries (for example, as research budgets of Indian pharmaceutical manufacturers have grown 10 times in the last 15 years.
  • The ecosystem can take on more challenging projects now, versus just generic filings a decade back).
  • Strong medium-term economic growth prospects create fertile ground for private equity investments.
  • Investors with patient capital (knowing that the businesses will not make money for several years) are now betting on and financing a faster transition to electric vehicles than was earlier anticipated.
  • In financial services, innovative methods of lending, insurance underwriting and wealth management are being experimented with, which are likely to only expand the market meaningfully.
  • An army of Software-as-a-Service (SaaS) firms have been funded in the hope of revolutionising the development and distribution of software.
  • There are also new-age distribution and logistics companies, education technology firms, and branded consumer goods suppliers, in addition to “normal” e-commerce, gaming and food-delivery startups.

Risks involved in a rapid infusion of capital

  • Allocation inefficiency: Theoretically, an economy India’s size is capable of absorbing the $52 billion of PE funding seen over the last 12 months, but in practice, such a rapid surge creates allocation inefficiency. 
  •  As investors rush to deploy ever-larger sums of money, they appear to be running out of companies to invest in that can productively deploy this capital.
  • The result is companies’ valuations rising manifold within months and small firms getting more capital inflows than they can deploy, often resulting in wasteful business plans.
  • When investors rush to deploy funds, the risk of fraud rises — inadequate disclosures and weak due diligence are compounded by incentives to misrepresent financial data.
  • The discovery of any such frauds would likely freeze funding for the industry for a few quarters.

Why now?

  • India has never lacked entrepreneurs, but lacked risk capital given the low per capita wealth.
  • As savers like pension and insurance funds in the developed world responded to record-low interest rates by allocating more to PE as an asset class, private funding markets have grown rapidly in the last 15 years globally.
  • In India, PE funding has exceeded public-market fund-raising every year in the past decade.
  • While earlier, only a few business groups could muster sizeable amounts of risk capital to establish new businesses and disrupt old ones, entrepreneurs can now lay hands on hundreds of millions of dollars if the idea makes sense.


For now, this flow of funds is a welcome booster for the economy as it recovers from the scars of the pandemic-driven lockdowns. While valuations can be volatile in the near term, we are in the early stages of this reshaping of India’s corporate landscape.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

FDI in Indian economy

Holding transnational corporations accountable


From UPSC perspective, the following things are important :

Prelims level : BIT

Mains level : Paper 3- Using BITs to hold TNCs accountable


Given the enormous power that transnational corporations (TNCs) wield, questions about their accountability have arisen often. There have been many instances where the misconduct of TNCs has come to light such as the corruption scandal involving Siemens in Germany.

Holding TNCs accountable: Background

  • The effort was made at the UN to develop a multilateral code of conduct on TNCs.
  • However, due to differences between developed and developing countries, it was abandoned in 1992.
  • Role of BITs: Aim was to use international law to institutionalise the forces of economic globalisation, leading to the spread of BITs.
  • Asymmetry in BITs: These treaties promised protection to foreign investors under international law by bestowing rights on them and imposing obligations on states.
  • This structural asymmetry in BITs, which confer rights on foreign investors but impose no obligations, relegated the demand for investor accountability.
  • In 2014, the UN Human Rights Council established an open-ended working group with the mandate to elaborate on an international legally binding instrument on TNCs and other businesses concerning human rights.
  • Since then, efforts are being made towards developing a treaty and finding ways to make foreign corporations accountable.
  • The latest UN report is a step in that direction.

UN report on human rights-compatible international investment agreements

  • The UN working group on ‘human rights, transnational corporations (TNCs) and other businesses’ has published a new report on human rights-compatible international investment agreements.
  • It urges states to ensure that their bilateral investment treaties (BITs) are compatible with international human rights obligations.
  • It emphasises investor obligations at the international level i.e., the accountability of TNCs in international law.

Using BITs to hold TNCs accountable

  • BITs can be harnessed to hold TNCs accountable under international law.
  • The issue of fixing accountability of foreign investors came up in an international law case, Urbaser v. Argentina (2016).
  • Subjecting corporates to international law: In this case, the tribunal held that corporations can be subjects of international law and are under a duty not to engage in activities that harm or destroy human rights.
  • The case played an important role in bringing human rights norms to the fore in BIT disputes.
  • It also opened up the possibility of using BITs to hold TNCs accountable provided the treaty imposes positive obligations on foreign investors.
  • Recalibrating BITs: In the last few years, states have started recalibrating their BITs by inserting provisions on investor accountability.
  • Issues with BITs: However, these employ soft law language and are hortatory.
  • They do not impose positive and binding obligations on foreign investors.
  • They fall short of creating a framework to hold TNCs accountable under international law.

Takeaways for India

  • The recent UN report has important takeaways for India’s ongoing reforms in BITs.
  • Best endeavour clauses not enough: India’s new Model BIT of 2016 contains provisions on investor obligations.
  • However, these exist as best endeavour clauses. They do not impose a binding obligation on the TNC.
  • Impose positive binding obligations: India should impose positive and binding obligations on foreign investors, not just for protecting human rights but also for imperative issues such as promoting public health.
  • The Nigeria-Morocco BIT, which imposes binding obligations on foreign investors such as conducting an environmental impact assessment of their investment, is a good example.

Consider the question ” Ensuring that the bilateral investment treaties (BITs) are compatible with international human rights obligations in the need of the hour. In light of this, assess the progress made globally on this issue and suggest way forward for India in framing its BITs.”


Reforms would help in harnessing BITs to ensure the answerability of foreign investors and creating a binding international legal framework to hold TNCs to account.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

FDI in Indian economy

RBI, IRDAI nod must for FDI in bank-led insurance


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : FDI in insurance

Applications for foreign direct investment in an insurance company promoted by a private bank would be cleared by the RBI and IRDAI to ensure that the 74% limit of overseas investment is not breached.

What does one mean by Insurance?

  • Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
  • The company pools clients’ risks to make payments more affordable for the insured.
  • Insurance is a capital-intensive business so has to maintain a solvency ratio. The solvency ratio is the excess of assets over liabilities.
  • Simply put, as an insurance company sells more policies and collects premiums from policyholders, it needs higher capital to ensure that it is able to meet future claims.
  • In addition, insurance is a long gestation business. It takes companies 7-10 years to break even and start becoming profitable.

Types of Insurance

Insurance sector of India

  • The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 percent.
  • The insurance industry of India has 57 insurance companies 24 are in the life insurance business, while 34 are non-life insurers.
  • Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
  • In addition to these, there is a sole national re-insurer, namely the General Insurance Corporation of India (GIC Re).
  • Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors, and third-party administrators servicing health insurance claims.
  • In India, the overall market size of the insurance sector is expected to be $280 billion in 2020.

Recent developments

The chronological order of events:

  1. Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972)
  2. Constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999
  3. Opening up of the sector to both private and foreign players in 2000
  4. Increase in the foreign investment cap to 26% from 49% in 2015
  5. Increase in FDI limit from 49% to 74% in March 2020

Issues with India’s insurance sector

Insurance is considered a sensitive sector as it holds the long-term money of people. Various attempts were made in the past to open up the sector but without much success.

  • Lower insurance penetration due to various economic reasons such as poverty, etc.
  • Domination of the Public Sector ex. LIC
  • Trust issues in private insurances due to insolvency of private players
  • Saving habits of the public

Significance of the recent amendment

  • The current amendment is an enabling amendment that gives companies access to foreign capital if they need it.
  • It is an important shift instance as the increase in the FDI cap means insurance companies can now be foreign-owned and -controlled as against the current situation wherein they are only Indian-owned and -controlled.
  • The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 percent, as against a global average of more than 7 percent.

What does this mean for Indian insurance companies?

  • India has more than 60 insurance companies specializing in life insurance, non-life insurance, and health insurance.
  • The number of state-owned firms is only six and the remaining are in the private sector.
  • A higher FDI limit will help insurance companies access foreign capital to meet their growth requirements.

How does this impact Indian promoters of insurance companies?

  • Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks.
  • Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures.
  • Over the years, the sector has seen large-scale consolidation and exits of many promoters.
  • A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures.

What higher does FDI mean for policyholders?

  • Higher FDI limits could see more global insurance firms and their best practices entering India.
  • This could mean higher competition and better pricing of insurance products.
  • Policyholders will get a wide choice, access to more innovative products, and a better customer service and claims settlement experience.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Back2Basics: Foreign Direct Investment

  • An FDI is an investment in the form of 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 the Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of the FDI application under the 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 Foreign Direct Investment.

FDI in Indian economy

For Cairns dispute, international arbitration is not the way forward


From UPSC perspective, the following things are important :

Prelims level : BITs

Mains level : Paper 3- Cairn Energy case


The recent move by Cairn to seize India’s sovereign assets in order to enforce its arbitration award has brought into focus the dispute and the related issues.

Utility of Bilateral Investment Treaties (BIT)

  • After the World Wars, as more countries gained sovereignty, they tended to look at foreign investments as a form of neo-colonialism.
  • Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
  • The BITs help to adopt standards for prompt, adequate and effective compensation in case of expropriation.
  • With the advent of globalisation, BITs became the means for foreign investment in developing countries.
  • Although the impact of investment agreements on foreign investments remains highly contextualised and inconclusive, these came to govern international investment relations.
  • The BITs retained the old-world construct that allowed international arbitration.
  • However, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.

The Cairn Energy case

  • In 2012, explanations were added to the Income Tax Act 1961 — these provisions were deemed as having a retrospective effect.
  • This was more in response to the Supreme Court’s decision in the Vodafone case which denied the income tax department’s assertion of tax claims arising from the offshore transfer of interest that substantially derived their value from India.
  • The 2012 explanations to the IT Act indeed sought to fix tax avoidance. 
  • Looking into the details of the Cairn case, one can see the series of reorganisations that tip-toed around tax laws of multiple jurisdictions, resulting in the non-payment of tax. 
  • Taxing offshore indirect transfers — a structuring device to gain tax advantage from the indirect sale of assets — is not unique to India (336 tax treaties contain such an article).
  • It is also possible to see that the underlying assets of the subsidiaries were immovable assets in India.
  • The UK-India tax treaty allowed for taxation of capital gains as per Indian law.
  • India challenged the admissibility of the case before the arbitration tribunal.
  • However, the case rests on a distinction between tax and tax-related investment.
  • Surely, all investments have tax implications and the acceptance of such a distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
  • The option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
  •  For this reason, over the years, there has been a rising trend in tax disputes involving BITs.
  • The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.

Way forward

  • The case raises many questions that administrators must address through reform.
  • India’s model BIT introduced in 2016 rectifies the issue of the distinction between tax dispute and investment-related taxation dispute through the specific exclusion of taxation.
  •  The recognition of a tax-related investment dispute, distinct from a tax dispute, should not undermine such a carve-out.


It is also important to note even if the award is enforced, the matter of tax avoidance stands pending before the High Court. Given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.

FDI in Indian economy

Failure to comply with international judicial rulings hurts India’s image as an investment destination


From UPSC perspective, the following things are important :

Prelims level : BITs

Mains level : Paper 3- Honouring the adverse international judicial ruling in dispute with investors

The article highlights the lack of immediate compliance by the Indian government in awards involving foreign investors.

Why honouring award is important

  • An important factor that propels investors to invest in foreign lands is that the host state will honour contracts and enforce awards even when it loses.
  • But when the host state refuses to do so, it shakes investors’ confidence in the host state’s credibility towards the rule of law, and escalates the regulatory risk enormously.
  • To an extent, this has been India’s story over the last few years
  • Last year, India lost two high-profile bilateral investment treaty (BIT) disputes to two leading global corporations — Vodafone and Cairn Energy — on retrospective taxation.
  •  India has challenged both the awards at the courts of the seat of arbitration.
  • As India drags its feet on the issue of compliance, it harms India’s reputation in dealing with foreign investors.

Antrix-Devas agreement cancellation dispute

  • The other set of high-profile BIT disputes involve the cancellation of an agreement between Antrix, a commercial arm of the Indian Space Research Organisation, and Devas Multimedia.
  • This annulment led to three legal disputes — a commercial arbitration between Antrix and Devas Multimedia at the International Chambers of Commerce (ICC), and two BIT arbitrations brought by the Mauritius investors and German investors.
  • India lost all three disputes. 
  • The ICC arbitration tribunal ordered Antrix to pay $1.2 billion to Devas after a U.S. court confirmed the award earlier this year.
  • After the ICC award, Indian agencies started investigating Devas accusing it of corruption and fraud.
  • Last month, the National Company Law Tribunal (NCLT) ordered the liquidation of Devas on the ground that the affairs of the company were being carried on fraudulently.
  • This has led to Devas issuing a notice of intention to initiate a new BIT arbitration against India, sowing the seeds for complex legal battles again.

Implications for investment in India

  • A closer reading of these cases reveals that whenever India loses a case to a foreign investor, immediate compliance rarely happens.
  • Instead, efforts are made to delay the compliance as much as possible.
  • While these efforts may be legal, it sends out a deleterious message to foreign investors.
  • It shows a recalcitrant attitude towards adverse judicial rulings.
  • This may not help India in attracting global corporations to its shores to ‘make for the world’.

Consider the question “What are the factors that are leading to more Indian business disputes being settled elsewhere? What are the implications of delay by the government in honouring the awards of the disputes?” 


As India aspire to be the global destination of FDI, it needs to burnish its image on the dispute resolution front by honouring the awards.

FDI in Indian economy

What explains the surge in FDI inflows?


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- What explained increased total FDI in Indian?

The article analyses the factors contributing to the claim of 10% rise in total Foreign Direct Investment in 2020-21 and its impact on economy.

Making sense of increased FDI

  • Total foreign direct investment (FDI) inflow in 2020-21 is $81.7 billion, up 10% over the previous year, reported a recent Ministry of Commerce and Industry press release.
  •  The short press release highlighted industry and State-specific foreign investment figures without detailed statistical information.
  • The Reserve Bank of India (RBI) bulletin, which was released a week earlier, has the details.

What explains increased gross inflows

  • The gross inflow consists of (i) direct investment to India and (ii) repatriation/disinvestment.
  • The disaggregation shows that direct investment to India has declined by 2.4%.
  • Hence, an increase of 47% in “repatriation/disinvestment” entirely accounts for the rise in the gross inflows.
  • In other words, there is a wide gap between gross FDI inflow and direct investment to India.
  • Similarly, measured on a net basis (that is, “direct investment to India” net of “FDI by India” or, outward FDI from India), direct investment to India has barely risen (0.8%) in 2020-21 over the last year.
  • What then accounts for the impressive headline number of 10% rise in gross inflow?
  • It is almost entirely on account of “Net Portfolio Investment”, shooting up from $1.4 billion in 2019-20 to $36.8 billion in the next year.
  • That is a whopping 2,526% rise.
  • Further, within the net portfolio investment, foreign institutional investment (FIIs) has boomed by an astounding 6,800% to $38 billion in 2020-21, from a mere half a billion dollars in the previous year.
  • This explains the surge in gross FDI inflows which is entirely on account of net foreign portfolio investment.

How FDI is different from FII

  • FDI inflow, in theory, is supposed to bring in additional capital to augment potential output (taking managerial control/stake).
  • In contrast, foreign portfolio investment, as the name suggests, is short-term investment in domestic capital (equity and debt) markets to realise better financial returns.
  • But the conceptual distinctions have blurred in official reporting, showing an outsized role of FDI and its growth in India.

How FPI distorted equity markets?

  • The deluge of FII inflow did little to augment the economy’s potential output.
  • It added a lot of froth to the stock prices.
  • When GDP has contracted by 7.3%  in 2020-21 on account of the pandemic and the economic lockdown, the BSE Sensex nearly doubled from about 26,000 points on March 23, 2020 to over 50,000 on March 31, 2021.
  • BSE’s price-earnings (P-E) multiple — defined as share price relative to earnings per share — is among the world’s highest, close behind S&P 500 in the U.S.

FDI inflow’s contribution to domestic output

  • As Figure below shows, between 2013-14 and 2019-20, the ratio of net FDI to GDP has remained just over 1% (left-hand scale), with no discernible rising trend in it.
  • The proportion of net FDI to gross fixed capital formation (fixed investment) is range-bound between 4% and 6%.
  • These stagnant trends are evident when the economy’s fixed investment rategross fixed capital formation to GDP ratio — has plummeted from 31.3% in 2013-14 to 26.9% in 2019-20 (right-hand scale).
  • Thus, FDI inflow’s contribution to domestic output and investment remains modest.


The flood of FIIs has boosted stock prices and financial returns. These inflows did little to augment fixed investment and output growth.

FDI in Indian economy

Factors driving FDI in India


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Factors driving FDI in India

The article explains the four factors that explain the FDI inflows in India.

India’s economic decade

  • Almost every major global company is either contemplating or operating on the assumption that India is a key part of their growth story.
  • Google, Facebook, Walmart, Samsung, Foxconn, and Silver Lake have been just a handful of the firms that made huge investments in Inda.
  • As a result, India saw the fastest growth in Foreign Direct Investment (FDI) inflows among all the major economies last year.
  • Meanwhile, India’s latest FDI totals still lags behind the highest tallies in other markets such as China and Brazil.

Issues faced by investors and factors driving investment

  • Frequent shifts in the policy landscape and persistent market access barriers are standard complaints levied against India by the business community.
  • The government’s push to build a “self-reliant” India has also rattled skittish investors and smaller companies that lack the resources to navigate on-the-ground hurdles.
  • Still, investors recognise that doing business in India — or any emerging market  — comes with inherent risks but that adaptation in approach is critical to success.
  • Four core dynamics drive this calculus and explain why multinational companies are making India an essential part of their growth story.

4 Factors driving FDI in India

1) India’s population

  • What India offers through its nearly 1.4 billion people and their growing purchasing power is uniquely valuable for multinationals with global ambitions.
  • No other country outside of China has a market that houses nearly one in six people on the planet and a rising middle class of 600 million.

2) Shifting geopolitics

  •  Rising U.S.-China competition is forcing multinationals to rethink their footprints and production hubs.
  • Savvy countries such as Vietnam have capitalised on this opportunity to great effect, but India is finally getting serious about attracting large-scale production and exports.

3) Digital connectivity

  • Cheap mobile data have powered a revolution across India’s digital economy and connected an estimated 700 million Indians to the Internet.
  • More than 500 million Indians still remain offline, this is a key reason why leading global tech companies are investing in India and weathering acute policy pressure.
  • Domestic Indian companies have also demonstrated their ability to innovate and deliver high quality services at scale.
  • The partnerships and FDI flows linking multinationals and Indian tech firms will continue to unlock shared market opportunities for years to come.

4) National resilience

  • Despite facing the scourge of the novel coronavirus head on, India has managed the pandemic better than many of its western peers and restored economic activity even before implementing a mass vaccination programme.
  • These are remarkable developments, and yet they speak to India’s underlying resilience even in the face of historic challenges.

Shared value creation

  • Unlocking opportunities in the Indian market cannot take the form of a one-way wealth transfer.
  • Companies need to demonstrate their commitment to India.
  • Successful companies do this by placing shared value creation at the heart of their business strategy.
  • They tie corporate success to India’s growth and development.
  • They forge enduring partnerships and lasting relationships, elevate and invest in Indian talent, align products with Indian tastes, and ultimately tackle the hardest problems facing India today.

Consider the question “Despite the issues faced by the investors, India witnessed the fastest growth in the FDI inflows among all the major economies amid pandemic. In light of this, examine the factors driving the FDI in India.”


For leading companies with global ambitions and a willingness to make big bets, the rewards of investing in the Indian market are substantial and well worth pursuing.

FDI in Indian economy

Insurance (Amendment) Bill, 2021


From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : FDI in Insurance

The Rajya Sabha has passed the Insurance Amendment Bill 2021 that increases the maximum foreign investment allowed in an insurance company from 49% to 74%.

It is very intriguing to see several amendments in news these days. Isn’t it?

Insurance Amendment Bill

  • The Bill seeks to amend the Insurance Act, 1938.
  • The Act provided the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders and its shareholders.
  • It also had provisions regarding the regulator (the Insurance Regulatory and Development Authority of India).

Key highlights of the bill

The Bill seeks to increase the maximum foreign investment allowed in an Indian insurance company.

() Foreign investment

  • The Act allows foreign investors to hold up to 49% of the capital in an Indian insurance company, which must be owned and controlled by an Indian entity.
  • The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control.
  • However, such foreign investment may be subject to additional conditions as prescribed by the central government.

() Investment of assets 

  • The Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities.
  • If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India.
  • The Act specifies in an explanation that this will also apply to an insurer incorporated in India, in which at least: (i) 33% capital is owned by investors domiciled outside India, or (ii) 33% of the members of the governing body are domiciled outside India.
  • The Bill removes this explanation.

Expected outcomes

  • More capital at dispense: The FDI limit increase is also expected to provide access to fresh capital to some of the insurance companies, which are struggling to raise capital from their existing promoters.
  • Better solvency: This would not only increase the solvency position for some insurers but would provide long-term growth capital for other companies to invest in newer technologies.
  • Insurance penetration: These technologies would not only help in managing losses but also in customer acquisition and thus insurance penetration.
  • Technological impetus: The additional funds could be used to invest in technology to adapt to the evolving customer needs like responsive service through digital platforms.

FDI in Indian economy

Need for national security shield in FDI


From UPSC perspective, the following things are important :

Prelims level : FEMA

Mains level : Paper 3- Security imperatives of FDI


Relaxation on Chinese FDI

  • Last April, India had subjected all Chinese FDI to mandatory government screening.
  • The aim was to curb opportunistic takeovers of Indian companies, a concern fuelled by sharp corrections in equity markets in March 2020.
  • Several economies including the US, Australia, Canada and Germany faced similar concerns.
  • They blocked specific takeover attempts, using special laws for national security screening of inward FDI.
  •  In the absence of similar legislation, India did not differentiate between investments which raised genuine national security concerns and those that did not.
  • This is a crucial shortcoming.
  • With market indices now hovering at their peaks, reportedly India may allow Chinese FDI up to 25 per cent in equity under the automatic route.

Regulation of FDI and issues with it

  • India regulates foreign investments primarily through FEMA.
  • FEMA clearly provides two specific macro-prudential objectives — facilitating external trade and payments; and promoting orderly development and maintenance of foreign exchange markets in India.
  • Accordingly, it empowers the central government and the RBI, acting in consultation with each other, to regulate capital account transactions.
  • These regulations determine who can invest through the FDI route, in which sector and how much.
  • In practice, however, FEMA regulations have often responded to concerns not strictly related to macro-prudential objectives.
  • One such concern has been national security.

Need for the law to scrutinise FDI from national security angle

  • Shortcoming of FEMA underscores the need for India to emulates its western peers and enact a statute specifically designed for national security screening of strategic FDI.
  • Unlike FEMA, this new statute must explicitly lay down legal principles for determining when a foreign acquisition of an Indian company poses genuine national security threats.
  • In this regard, a policy paper published by the Peterson Institute for International Economics three types of legitimate threats from foreign acquisitions.

3 Types of threat from foreign acquisitions

1) Dependency on foreign supplier

  • The first threat arises if a foreign acquisition renders India dependent on a foreign-controlled supplier of goods or services crucial to the functioning of the Indian economy.
  • For this threat to be credible, it needs to be further established that the industry in which the acquisition is supposed to take place is tightly concentrated, the number of close substitutes limited, and the switching costs are high.

2) Technology transfer

  • The second threat emanates from a proposed acquisition transferring a technology or an expertise to a foreign-controlled entity that might be deployed by that entity or a foreign government in a manner harmful to India’s national interests.
  • The credibility of this threat again depends on whether the market for such technology or expertise is tightly concentrated or if they are readily available elsewhere.

3) Threat of infiltration, surveillance or sabotage

  • The third threat arises if a proposed acquisition allows insertion of some potential capability for infiltration, surveillance or sabotage via human or non-human agents into the provision of goods or services crucial to the functioning of Indian economy.
  • This threat is particularly credible when the target company supplies crucial goods or services to the Indian government, its military or even critical infrastructure units and the switching costs are high.

Way forward

  • The above stated 3 types of threats could provide conceptual clarity in the new statute could make national security assessments objective, transparent and amenable to the rule of law.
  • On procedure, the statute must empower only the finance minister to reject certain strategic foreign acquisitions on national security grounds.
  • Both the power and accountability mechanisms should be hardcoded into the statute itself, as is the case in some mature parliamentary democracies.
  • For instance, the Australian Foreign Acquisitions and Takeovers Act, 1975 empowers the treasurer to block certain foreign acquisitions on national security grounds.
  • Similarly, the Investment Canada Act, 1985 empowers a minister to reject certain foreign acquisitions.

Consider the question “India needs to recognise the national security threat emanating from strategic FDI. This requires identifying threats. In lights of this, examine the types of threats and suggest the ways to deal with it.” 


Overall, India’s tryst with Chinese FDI underscores the importance of identifying specific national security threats emanating from strategic FDI and addressing them objectively. This is too sensitive a matter to be left to capital controls under FEMA. A dedicated statute for national security screening of inward FDI would be best suited for handling such issues.

FDI in Indian economy

Indian investments and BITs


From UPSC perspective, the following things are important :

Prelims level : ISDS

Mains level : Paper 3- Termination of BITs and its implications for India

The article examine the termination of agreement for the development of East Container Terminal by Sri Lanka in the context of unilateral termination of bilateral investment treaties by India.


  • Recently, Sri Lanka terminated 2019 agreement with India and Japan that aimed to jointly develop the strategic East Container Terminal (ECT) at the Colombo port.
  • Apart from analysing the diplomatic fallout of this problematic decision for India-Sri Lanka ties, the issue also needs to be looked at through the prism of the India-Sri Lanka bilateral investment treaty (BIT).

India-Sri Lanka  BIT and its termination

  • In 1997, India and Sri Lanka signed a BIT to promote and protect foreign investment in each other’s territories.
  • It empowers individual foreign investors to directly sue the host state before an international tribunal if the investor believes that the host state has breached its treaty obligations.
  • This is known as investor-state dispute settlement (ISDS).
  • Article 3(2) of this treaty provides that investments and returns of investors of each country shall, at all times, be accorded fair and equitable treatment (FET) in the other country’s territory.
  • The normative content of the FET provision has been fleshed out by scores of ISDS tribunals in the last two decades.
  • The tribunals have persistently held that an important component of the FET provision is that the host state should protect the legitimate expectations of foreign investors. 
  •  In a case known as International Thunderbird Gaming Corporation v Mexico, it was held that the concept of legitimate expectations relates to a situation where the host state’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure to honour those expectations could cause the investor (or investment) to suffer damages.
  • Sri Lanka, by signing the agreement to jointly develop the ECT at the Colombo port, created such expectations on the part of Indian investors.
  • However, the twist in the tale is that India unilaterally terminated the India-Sri Lanka BIT on March 22, 2017.
  • This termination was part of the mass repudiation of BITs that India undertook in 2017 as a result of several ISDS claims being brought against it.
  •  In cases of such unilateral termination, survival clauses in BITs assume significance because they ensure that foreign investment continues to receive protection during the survival period.
  • But, in the case of the investment in developing the ECT at the Colombo port, this survival clause will be inconsequential, since the agreement was signed in 2019, i.e., after India unilaterally terminated the BIT.

Important lessons

  • As a consequence of the onslaught of ISDS claims in the last few years, India has developed a protectionist approach towards BITs.
  • However, an important attribute that perhaps has not received much attention is that BITs are reciprocal.
  •  BITs do not empower merely foreign investors to sue India, but also authorise Indian investors to make use of BITs to safeguard their investment in turbulent foreign markets.
  • Accordingly, given India’s emergence as an exporter, and not just an importer of capital, the government should revisit its stand on BITs.

Consider the question “Examine the implications of unilateral termination of bilateral investment treaties(BITs) by India.”


India needs to adopt a balanced approach towards BITs with an effective ISDS provision. This will facilitate Indian investors in defending their investment under international law should a country, like Sri Lanka, renege on an agreement.

FDI in Indian economy

Why Surge in FPI in India?


From UPSC perspective, the following things are important :

Prelims level : FDI and FPI

Mains level : Paper 3- Investment in India

While emerging economies have been facing the crunch of foreign capital due to the pandemic, India is witnessing the surge of FPI: a sign of investors confidence in the economy. 

Surge in FDI: Sign of trust India has built

  • In the September quarter, FDI doubled year-on-year to $28.1 billion dollars.
  • While foreign portfolio investor (FPI) inflows across emerging economies witnessed a decline due to the pandemic, India recorded a surge to $13.5 billion – a testimony to investor confidence in India’s growth story.
  • This surge in foreign funds amid the pandemic has been possible because of the continuous effort of the government, businesses, and agencies to make India a sought-after destination.

Strategies used by the government

Various steps described below signalled the government’s intention to open up the economy to investments.

Such steps include the following:-

  • Allowing NRI’s to acquire up to 100% stake in Air India.
  • 26% FDI in the digital sector.
  • Permitting 100% FDI through automatic route in the coal mining sector.
  • 100% FDI for insurance intermediaries.
  • The National Infrastructure Pipeline, a 13 trillion project to open up avenues for infrastructure investment for global investors.
  • Apart from these steps, the more recent Production Linked Incentive (PLI) scheme worth an estimated 1.5 lakh crore is also a testimony to the government’s intention to encourage entrepreneurship and investment in the country.
  • Steps to skill-train 3 lakh migrant workers the country to realign the rural youth towards industry-relevant jobs is also a step in the right direction.

Reducing dependency

  • The urgency the Indian government has shown to reduce dependency on China as a hub of the global supply chain.
  • Also, providing an enabling alternative environment has struck the right chord with the world as we see global biggies contemplating a move to India.

Consider the question “India witnessed a steady flow of foreign capital while the world was battling pandemic. What are the factors responsible for this? What are the risks associated with such capital in the economy?”


While persisting with its efforts to attract the capital, the government also needs to focus on improving the productivity and export competitiveness of the economy.

Back2basics: Difference between FDI and FII

  • FDI is an investment that a parent company makes in a foreign country.
  • On the contrary, FII is an investment made by an investor in the markets of a foreign nation.
  • While FIIs are short-term investments, the FDI’s are long term investment.
  • FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.

FDI in Indian economy

Differentiating FDI and trade


From UPSC perspective, the following things are important :

Prelims level : FDI

Mains level : Paper 3- Differentiating between trade and investment

Differentiating between trade and investment is necessary for reaping the benefits that come with foreign investment in firms. However, the concerns over the source of funds are not unfounded. So, some caution is warranted in dealing with FDI.

Let’s look into the debate

  • Government is asking its citizens to aim for self-reliance.
  • So, should India continue to allow investment inflows from China? This is the debate.
  • China has invested $4 billion in Indian startups in the past 5 years.
  • This amount would be higher if funds located in tax havens with Chinese ownership are also accounted for.

Some of the questions raised in the debate

  •  Is trade of products like buttons, crockery same as long-term foreign investments in high-risk new age technology-driven products?
  • Is it economically prudent for a country to fulfil all its capital requirements or compromise on innovation due to lack of thereof?

 Trade vs FDI

  • Trade just helps the country fulfil its requirements of those goods and services (G&S) that may not available in the country.
  • Investments provide the capital to build infrastructure that can plug the G&S deficit, even, sell it to other markets.
  • Trade just provides entry of G&S.
  • FDI inflow is a route for transferring capabilities, technology, building linkages, business capabilities etc.
  • FDI helps generate employment, public assets, tax revenues and develop markets, none of this is contributed by the trade of merchandise.
  • Foreign investment does have an adverse impact on domestic markets in the short-run by crowding out domestic competition or investment.
  • In fact, attracting FDI in employment-intensive sectors can create positive economic and social spillovers.
  • Possibilities to increase exports often arise from companies with significant levels of FDI.
  • Foreign investor exposes itself to regulatory, economic and geo-political risks of the country.

Foreign investment in Indian firms: Two aspects to consider

  • While discussing the funding composition of the likes of Paytm, OYO hotel chain or Ola, two aspects need to be considered.
  • 1) These companies are Indian companies operating under the law of land, creating economic opportunities for the youth and contributing to the welfare of the Indian community.
  • 2) Success of these ventures is not solely due to the investment, but because of the novelty of the product offering.
  • Investments in start-ups involve high risk; the list of failed start-ups with Chinese investment is bound to be much longer.
  • In the absence of technology giants in India, we may also end up draining the brain to countries with a stronger financial ecosystem for fresh ideas.

Apprehension over FDI in India

  • Apprehensions related to investments from any country per se, are not unwarranted in India.
  • This is mainly because history suggests foreign investment can potentially lead to economic colonisation.
  • However, times have changed and so has the world order.
  • Steady inflow of investments can exist without impacting the economic or political stability of the country.
  • To do so we should practice some of the following recommendations.

How to address the concern over FDI

  • Investment funds can be set up outside the home country of the investor or be routed through companies located at tax havens.
  • It is not always possible to map the investor to the country.

How to solve this problem

  • To solve this identify sectors based on sensitivity, the investment required, technology, employment and social impact.
  • Tighten regulations related to data storage and access by companies through data localisation in these sensitive sectors.
  • Modify the offset policy in defence to ensure a certain portion of the profits is invested in the SMEs.
  • To further India’s interests in nascent sectors such as machine learning, HealthTech, maximum period for an investor to be invested in a greenfield should be limited to 10 years.
  • All firms receiving foreign investment should have a plan to contribute to India’s exports within the product lifecycle and minimum employment generation.
  • Ease listing norms for firms so that funds through public and private placement can be raised by wholly Indian owned companies.
  •  BSE SME & Start-ups Platform has helped 322 companies raise Rs. 3,320.48 crores from the market. Start-ups should be encouraged to make use of the platform wherever possible.
  • Domestic procurement of raw material and intermediate goods has to be non-negotiable as far as possible.

Consider the question “What are the challenges and opportunities associated with foreign investment and suggest the ways to address the challenges.”


From being treated as a ‘dumping bazaar’ to now attracting investors, India does not need to shy away from investments; it certainly needs to be wary of pure trade which limits India’s potential and drive to produce indigenously.

Back2Basics: Offset policy

  • The offset policy, introduced in 2005, mandates foreign suppliers to spend at least 30% of the contract value in India.
  • It was first revised in 2006 and then again in 2011 and in 2016. Another round of tweaking is currently underway.


FDI in Indian economy

Foreign direct investment (FDI) in India


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.


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

FDI in Indian economy

The deal raises several concerns for privacy, net-neutrality and consumer welfare


From UPSC perspective, the following things are important :

Prelims level : 10 % condition for FDI.

Mains level : Paper 3-What are the implications of two dominant players in IT and telecom respectively coming together for data privacy and net neutrality?

Facebook’s decision to acquire a 9.99 per cent stake in the parent company of Reliance Jio could have several implications. It could impact retail stores which we are trying hard to protect by restricting FDI in retail. Second, it could have implications for net neutrality. Third, it would have implications for data privacy.

Implications for the country’s retail landscape

  • Recently, Reliance Industries and Facebook announced that the California-based social media giant will acquire a 9.99 per cent stake in Jio Platforms limited, the holding company of Reliance Jio, for $5.7 billion (Rs 43,574 crore).
  • At its core, the idea is to create an ecosystem around JioMart, enabling customers to access the local Kirana stores using WhatsApp, combining both offline and online retail.
  • This ability to connect millions of local businesses with end consumers, and provide them a seamless online transaction experience could radically alter the country’s retail landscape.
  • Both firms have stressed on the new opportunities for businesses of all sizes, and especially for the millions of small businesses across the country.
  • With the ongoing lockdown in the country only reaffirming the importance of the local Kirana store — major online delivery channels have struggled to reach consumers during this period — integration is bound to be an enticing proposition.

Opportunities for cross-selling

  • A scaling up of this model will also provide opportunities for cross-selling — significantly increasing the upside for firms and increasing the valuation of its retail arms.
  • At present, though, the reach of WhatsApp Pay is limited — just over a million Indians are reported to currently have access to the pay feature.
  • But this sort of model is popular in other Asian economies such as China, Korea and Japan where apps like WeChat have a wide range of product offerings, which induces consumer stickiness.
  • This arrangement also allows Jio to greatly expand its product offering to its more than 370 million-odd subscriber base.
  • The deal may also open up the entire WhatsApp consumer base of around 400 million — to Reliance, including those on other telecom platforms such as Airtel and Vodafone.

The following concern could arise from the deal and the UPSC can frame a question based on these concern, like ” Recently a global IT giant acquired a significant stake in an Indian telecom giant. Discuss the various issues which could arise from coming together of such dominant players.”

What are the concerns in such deals?

  • Implications for consumer welfare: Given the dominant market position of the players, concerns over the market structure and its implications for consumer welfare are bound to arise.
  • Questions over net neutrality: The tie-up also raises questions on net neutrality with the possibility of preferential treatment being granted.
  • Data privacy issue: Third, given the data privacy issues highlighted in the past by the Cambridge Analytica episode, for instance, there are apprehensions over the enormous amounts of data that will be collected by these entities.
  • This concern gains significance especially when India still does not have a personal data protection law.


Whenever two dominant players of respective fields come together, it gives rise to concern. The government must keep watch on the implications and how such a deal plays out in the future. If the concerns raised turn out to come true, maybe India should come out with the antitrust law of its own.


FDI in Indian economy

Recent amendments to FDI policy – a boon or a bane?


From UPSC perspective, the following things are important :

Prelims level : Routes of FDI, External commercial borrowing etc.

Mains level : Paper 3- What are the factors responsible for declining FDI in India? Discuss the changes made in FDI policy amid covid pandemic.

This article deals with the recent changes made by the government in the FDI policy. The major change was that the government approval route was made mandatory for investment coming from certain countries. There are certain ambiguities and issues with the latest changes.These are discussed here.

What changes were made in the FDI policy?

  • Government approval route for investment: Investment is permitted through government route only in the following cases-
  • 1) An entity situated in a country which shares a land border with India.
  • 2) Where the owner of investment into India is situated in or is a citizen of any such country.
  • Further, any transfer of ownership of any existing or future foreign direct investment (FDI) in an entity in India (indirectly or indirectly) resulting in the beneficial ownership falling within the purview of the above restrictions, would require the government’s approval.

Ambiguities arising due to press note

  • There appear to be certain ambiguities arising from the press note and the amendments to the Rules.
  • The usage of the term “FDI” in the press note and the relevant amendments to Rule 6(a) of the Rules, seem to suggest that the restrictions are on investments that are structured as FDI.
  • FDI is defined under the Rules to mean investment through equity instruments by a person resident outside India in an unlisted Indian company, or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company
  • The restriction doesn’t seem to be on investments by an FPI registered with SEBI.
  • FPI is permitted to invest in listed or to be listed Indian companies’ securities, in the manner set out in Schedule II of the Rules.
  • Also not on investments under the FVCI route.
  • Investment through FVCI is an investment in the securities of Indian companies operating in certain specific sectors, in the manner set out in Schedule VII of the Rules.
  • It is also unclear if “foreign investments” in LLPs, not being FDI, would also be subject to these restrictions.
  • This ambiguity is further amplified by the subject line of the press note, which reads “curbing opportunistic takeovers/acquisitions of Indian companies”, without making any reference to LLPs.
  • And the amendments to Rule 6(a) of the Rules, which only pertain to investments in equity instruments of an Indian company under Schedule I of the Rules.

The points mentioned here add to our understanding of FDI and issues with it. A question based on the issue can be asked, for ex-“What are the reasons for a steady decline in FDI in India? To what extent FDI poilcy is responsible for this?”

Difficulties in seeking government approval

  • The requirement of seeking government approval may also pose operational difficulties for many entities.
  • For instance, the approval requirement seems to be applicable in all cases of further investments irrespective of the threshold.
  • It applies whether or not such investments are in the form of rights issue (where all or almost all existing shareholders also participate) or preferential allotments.
  • Which results in causing some amount of hardship for entities to raise further capital, especially where entities already have existing investments from investors situated in countries like China.
  • The amendments to the Rules also do not attempt to clarify the applicability of the approval requirements where there is no change in the shareholding percentage of the investor pursuant to a follow-on investment.
  • Another aspect which is important, is the usage of the terms “directly or indirectly” in the context of transfer/ divestment of beneficial ownership of existing FDI, to entities in/ citizens of a country which shares a land border with India.
  • This may require global acquisitions of entities in other jurisdictions which have subsidiaries/ investee companies in India, by a person in one of India’s neighbouring countries, to be subject to the approval requirements, thereby impacting timelines for closing.

No restrictions on external commercial borrowings (ECB)

  • There are presently no such commensurate restrictions under the ECB regulations.
  • Therefore, an eligible borrower could avail ECB from a recognised lender.
  • That includes a foreign equity holder in one of India’s neighbouring countries which are FATF compliant for any immediate funding requirements.
  • Any conversion of the ECB or any part thereof, into shares of the Indian company, would be subject to the restrictions and approval requirements under the FDI policy and the Rules.


The government/RBI should provide necessary clarifications on these issues and ambiguities at the earliest. With there being no sunset clause presently contemplated on the applicability of these restrictions, only time will tell if the amendments to the Rules are a boon to the economy and a step in the right direction, or otherwise.

Back2Basics: What is ‘Rights issue’

  • Cash-strapped companies can turn to rights issues to raise money when they really need it.
  • In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price.
  • A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
  • This type of issue gives existing shareholders securities called rights.
  • With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.
  • The company is giving shareholders a chance to increase their exposure to the stock at a discount price.
  • Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares.
  • The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares’ value.
  • Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares.
  • Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.

What is the Limited Liability Partnership (LLP)?

  • LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
  • In a general partnership, all partners share liability for any issue that may arise.
  • The LLP is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements depending on your legal jurisdiction.

What is the FVCI route of investment?

  • Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and established outside India and registered with Securities and Exchange Board of India under Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.
  • The amount of consideration for all investment by an FVCI has to be received/made through inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India.
  • The foreign currency account and SNRR account shall be used only and exclusively for transactions under the relevant Schedule.

FDI in Indian economy

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


From UPSC perspective, the following things are important :

Prelims level : FDI in India

Mains level : Features of India's FDI Policy

The Government of India has reviewed the extant Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19.


  • The Indian policy revision is meant for sectors and enterprises other than defence, space, atomic energy and sectors and activities “prohibited for foreign investment”.
  • It was understood that the Indian decision was a response to the news of an incremental purchase of shares in HDFC by the People’s Bank of China.

FDI is an all-season hot topic for both prelims as well as mains. Reading the newscard will make you aware of its scope. We can expect a mains question like –  Recent amendment in the FDI Policy aims for curbing opportunistic takeovers/acquisitions of Indian companies. Elucidate.


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 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.

What is the amendment about?

  • 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.

In response to China

  • China accused that India’s recently adopted policy goes against the principles of the World Trade Organisation (WTO).
  • It tends to violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.


  • The amended policy brings every kind of Chinese investors to India within the ambit of government approval reducing the space for private business negotiations.
  • The decision would face difficulties, especially if the government tried to attribute nationality to venture capital funds.

Back2Basics: 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.

FDI in Indian economy

 Indian’s decision on FDI to stop predatory Chinese hunt for Indian companies


From UPSC perspective, the following things are important :

Prelims level : FDI in India.

Mains level : Paper 3- Implications of growing Chinese investment in India.

This editorial discusses the implications of growing Chinese investment in India. After People’s Bank of China bought 1 per cent stake in HDFC bank, Indian government made prior government approval mandatory for investment from countries sharing border with India. Various aspects of the move are discussed here.

No separating commerce and security in dealing with China

  • India’s move to prevent a predatory Chinese hunt for Indian companies comes at a time when the stock market has been badly bruised by the coronavirus.
  • It underlines the emerging perception in India that there is no separating commerce and security in dealing with China.
  • India’s concerns are similar to those being expressed elsewhere in the world.
  • A number of European countries have already moved in that direction.
  • In recent years, apprehensions have grown, in both the developing and developed world, that China is targeting their infrastructural, industrial and technological assets for control.
  • But many governments were willing to give the benefit of doubt to Beijing.
  • That willingness has rapidly eroded in the wake of the corona crisis that has devastated the Western world.

Taking economic advantage of other nation’s misery

  • Although few world leaders want to join the US President in publicly attacking China.
  • Many of them know that Beijing bears some responsibility for letting a health emergency in one of its cities become a global pandemic.
  • That Chinese companies, with access to easy money and strong political support in Beijing, are now taking economic advantage of other nations’ misery has added insult to injury.
  • While most leaders are preoccupied with the corona crisis, they are not likely to let Beijing have its way.
  • Even in Britain, where the Boris Johnson government is now taking a second look.
  • Last week, the British Foreign Secretary, said there will be no going back to “business as usual” with China.

China’s growing influence has been posing challenges for India on various fronts. Its growing footprint on India’s economy is one of such challenges. The UPSC frames question in relation to China from various angles. So, the penetration of China in India economy is also an important aspect from the Mains perspective.

Rethinking the commercial engagement with China

  • Beyond the question of accountability for the spread of the coronavirus, many countries are rethinking the very nature of their commercial engagement with China.
  • Gaming the system by China: On a host of issues ranging from trade and investment to intellectual property protection, there is an inescapable sense that China has gamed the global system for unilateral gains.
  • India late in learning: India certainly has had a longer learning curve than the West in recognising the relationship between commerce and national security.
  • Since the early 1990s, Delhi bet that expanding economic cooperation with China will help mitigate political disputes.
  • But the differences have only become intractable even as China became stronger economically.
  • India gave China an easy pass into the WTO.
  • India’s trade deficit: It let cheap imports from China undermine India’s manufacturing sector and run up a massive trade surplus.
  • India allowed massive Chinese penetration of its telecom, digital and other advanced sectors only to discover the multiple negative consequences.
  • India’s new approach: The last few years have seen a new approach that has seen India oppose China’s Belt and Road Initiative and walk out of the RCEP negotiations citing the trade imbalance with China.


The decision on Chinese FDI can be seen as one of the piece of the puzzle India has to face on the various front. But the puzzle of dealing with a rising China’s strategic economic onslaught will test India for a long time.

FDI in Indian economy

[op-ed snap] There is a contradiction in trying to attract foreign investors before reforming labour, land acquisition laws


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : FDI India - challenges


India launched the Make in India campaign in 2014 with these words: “Sell anywhere but manufacture here.” 


    • Emulate China — India wanted to emulate China in attracting foreign investment to industrialise India. 
    • Manufacturing growth – to increase the manufacturing sector’s growth rate to 12-14% per annum.
    • Manufacturing share – to increase this sector’s share in the economy from 16 to 25% of the GDP by 2022.
    • Employment – to create 100 million additional jobs by then.

Status of FDI & exports

    • FDI – Foreign direct investment has increased from $16 billion in 2013-14 to $36 billion in 2015-16. 
    • Stagnant – FDIs have plateaued since 2016 and are not contributing to India’s industrialisation. 
    • Declining – FDIs in the manufacturing sector are on the wane. In 2017-18, they were just above $7 billion, as against $9.6 billion in 2014-15. 
    • Services – they cornered most of the FDIs — $23.5 billion, more than three times that of the manufacturing sector.
    • Export-led growth – Few investors have been attracted by this prospect. India’s share in the global exports of manufactured products remains around 2% — China’s is around 18%.

Reasons for failure

    • Shell companies – a large fraction of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies. Most of these investments were “black money” from India, which was routed via Mauritius. 
    • Productivity – The productivity of Indian factories is low.
      • According to a McKinsey report, workers in India’s manufacturing sector are almost four and five times less productive than their counterparts in Thailand and China. 
      • This is not just because of insufficient skills, but also because the size of the industrial units is too small for attaining economies of scale, investing in modern equipment and developing supply chains. 
    • Small companies – Labour regulations are more complicated for plants with more than 100 employees. Government approval is required under the Industrial Disputes Act of 1947 before laying off any employees and the Contract Labour Act of 1970 requires government and employee approval for simple changes in an employee’s job description or duties.
    • Infrastructure is also a problem area. 
    • Although electricity costs are about the same in India and China, power outages are much higher in India.
    • Transportation takes much more time in India. 
      • According to Google Maps, it takes about 12.5 hours to travel the 1,213 km distance between Beijing to Shanghai. A Delhi to Mumbai trip of 1,414 km takes about 22 hours. 
      • Average speeds in China are about 100 km per hour, while in India, they are about 60 km per hour. 
      • Railways in India have saturated while Indian ports have constantly been outperformed by many Asian countries.
      • The 2016 World Bank’s Global Performance Index ranked India 35th among 160 countries. Singapore was ranked fifth, China 25th and Malaysia 32nd. 
      • The average ship turnaround time in Singapore was less than a day; in India, it was 2.04 days.
    • Governance – Bureaucratic procedures and corruption continue to make India less attractive to investors.
      • In the World Bank’s Ease of Doing Business index, India is ranked 77 among 190 countries. 
      • India ranks 78 out of 180 countries in Transparency International’s Corruption Perception Index
      • To acquire land to build a plant remains difficult. 
      • India has slipped 10 places in the latest annual Global Competitiveness Index compiled by the Geneva-based World Economic Forum (WEF).


    • There is clearly a contradiction in the attempt to attract foreign investors to Make in India before completing the reforms of labour and land acquisition laws. 
    • Liberalization is not the panacea for all that ails the economy, but it is a prerequisite if India intends to follow an export-oriented growth pattern.

Steps in the direction

    • Reduction of the company tax from about 35 to about 25% comparable with most of India’s neighbors. 
    • This is also consistent with the government’s effort to compete with Southeast Asian countries, to attract FDIs. 
    • In the context of the US-China trade dispute, several companies will shift their plants from China to other Asian countries. 
    • According to the Japanese financial firm Nomura, only three of the 56 companies that decided to relocate from China moved to India. Of them, Foxconn is a major player which will be now assembling its top-end iPhones in India.

New challenge

India will have to face another external challenge too as it sees capital fleeing the country. The net outflow of capital has jumped as the rupee has dropped from 54 a dollar in 2013 to more than 70 to a dollar in 2019.

FDI in Indian economy

[pib] Cabinet approves proposal for Review of FDI policy on various sectors


From UPSC perspective, the following things are important :

Prelims level : FDI

Mains level : Benefits of easing FDI norms

  • The Union Cabinet has approved the proposal for Review of Foreign Direct Investment on various sectors.

What is FDI?

  • Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
  • Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.
  • FDI are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

Major decisions on FDI by the Cabinet

I. 100% FDI under automatic route in coal mining and associated infrastructure

  • It will attract international players to create an efficient and competitive coal market.

II. 100% FDI in contract manufacturing under automatic route

  • Manufacturing through contract contributes equally to the objective of Make in India.
  • FDI now being permitted under automatic route in contract manufacturing will be a big boost to Manufacturing sector in India.

III. Relaxing FDI rules for single brand retail; expands definition of 30% domestic sourcing

  • It will lead to greater flexibility and ease of operations for SBRT entities, besides creating a level playing field for companies with higher exports in a base year.

IV. Online retailing under single-brand retail; relaxing rule of mandatory brick-and-mortar store

  • Permitting online sales prior to opening of brick and mortar stores brings policy in sync with current market practices.
  • Online sales will also lead to creation of jobs in logistics, digital payments, customer care, training and product skilling.

Benefits from FDI Policy Reform

  • The above amendments to the FDI Policy are meant to liberalize and simplify the FDI policy to provide ease of doing business in the country, leading to larger FDI inflows and thereby contributing to growth of investment, income and employment.
  • It will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment and growth.

FDI in Indian economy

US Federal Reserves rate cut and its impact on India


From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : USD inflow in India

  • The US Federal Reserve has announced a quarter-percentage-point cut in interest rates — the first rate cut by the US central bank in 11 years.

Why is US Fed’s rate-cut significant?

  • The cut in interest rates is the first time since the 2008 financial crisis.
  • What is ironic is that this move comes despite a strong US economy and indicators such as job market data showing renewed buoyancy.
  • The rate cut follows months of pressure from US President who has been pushing the American central bank for a cut in rates.

Impact on India

  • A rate cut cycle means a weaker dollar, which is good for the US but may not be so for the rest of the world.
  • It has been seen in the past that as the dollar weakens due to lower growth tendencies, the rupee has tended to strengthen which will pose a conundrum for us as exports will come under pressure.
  • The exports will be reduced due to lower global growth and a stronger rupee. This will not be good for the current account deficit (CAD).


  • A rate cut in the US is good for emerging market economies and is projected to catalyse a debt and equity market rally in countries such as India.
  • Typically, emerging economies such as India tend to have higher inflation and thereby higher interest rates than those in developed countries such as the US and Europe.
  • As a result, investors would want to borrow money in the US at low-interest rates in dollar terms and then invest that money in bonds of emerging countries such as India in terms to earn a higher rate of interest.
  • When the US Fed cuts its interest rates, the difference between interest rates of the two countries increases, thus making India more attractive for the currency carry trade.

FDI in Indian economy

Mauritius leaks


From UPSC perspective, the following things are important :

Prelims level : Mauritius leaks

Mains level : FDI routes in India

Mauritius Leaks

  • According to the recently released data by the International Consortium of Investigative Journalists (ICIJ), as many as 50 entities, or one-fourth of those disclosed in the Mauritius leaks, had India as their only country or one of the countries of activity.

India-Mauritius connection

  • The Double Taxation Avoidance Agreement (DTAA) was signed between India and Mauritius in 1982.
  • Under this,any entity could apply for tax residency and pay zero capital gains tax.
  • This became the principal reason why Mauritius emerged as a top channel for investments being routed into India.
  • Over 200,000 emails, contracts and bank statements leaked from Mauritius show how it was used by corporates to facilitate partnerships with multinationals.
  • This was done without paying any capital gains tax, remit profits as Foreign Direct Investment (FDI) to India.

Why is the Mauritius connection important?

  • In 2016, India amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius, and the new provisions — capital gains tax, instance — are now fully applicable.
  • Almost a third of India’s FDI came through Mauritius.
  • There was strong resistance from Mauritius. They were benefited in the sense that lots of support and infrastructure like accounting firms and firms that set up companies and get income from that.

FDI in Indian economy

[op-ed snap] Building confidence, BIT by BIT


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : New model of bilateral investment treaties should balance state and investor's rights


Indian bilateral investment treaties need to strike a balance between foreign investor interests and those of the state .

Current  Economic scenario

  •  The GDP growth rate is at a five-year low, domestic consumption is sinking, the business confidence index has plunged, and India has recorded its highest unemployment rate in the last 45 years.
  • To add to this list of woes is a claim made by Arvind Subramanian, India’s former Chief Economic Adviser, that India’s GDP has been overestimated.
  • Foreign direct investment (FDI) equity inflows to India in 2018-19 contracted by 1%, according to the government’s own data.

Lost opportunity

1.Shifting base of global supply chains –

  • This contraction in FDI inflows comes at a time when global supply chains are shifting base as a result of the ongoing trade war between the U.S. and China. India has failed to attract firms exiting China.
  • Many of these supply chains have relocated to Vietnam, Taiwan, Malaysia and Indonesia.
  • India is clearly not the natural/first option for these firms for a host of reasons, such as poor infrastructure, rigid land and labour laws, a deepening crisis in the banking sector and a lack of structural economic reforms.

2. Termination of bilateral investment treaties  –

  • The decline in the FDI growth rate, despite the well-advertised improvement in India’s ease of doing business rankings, interestingly, has coincided with India’s decision, in 2016, to unilaterally terminate bilateral investment treaties (BITs) with more than 60 countries; this is around 50% of the total unilateral termination of BITs globally from 2010 to 2018.
  • Unilateral termination of BITs on such a mass scale projects India as a country that does not respect international law.
  • India also adopted a new inward-looking Model BIT in 2016 that prioritises state interests over protection to foreign investment.

Impacts of BITs

Studies have shown that BITs positively impacted foreign investment inflows to India.

Bad regulation in previous BIT

  • True, India’s BITs gave extensive protection to foreign investment with scant regard for the state’s interests — a characteristically neoliberal model.
  • This design flaw could have been corrected by India negotiating new balanced treaties and then replacing the existing ones with the new ones instead of terminating them unilaterally, which has created a vacuum.

Reasons for increased BIT claims

  • Importantly, the design flaw was not the real reason for the increasing number of BIT claims.
  • Judiciary’s interference – A large number arose either because the judiciary could not get its act together (an example being inordinate delays in deciding on the enforceability of arbitration awards) or because it ruled in certain cases without examining India’s BIT obligations such as en masse cancellation of the second generation telecom licences in 2012.
  • Executive interference – Likewise, the executive — the Manmohan Singh government — got the income tax laws retrospectively amended in 2012 to overrule the Supreme Court’s judgment in favour of Vodafone and cancelled Devas Multimedia’s spectrum licences in 2011 without following due process, thus adversely impacting Mauritian and German investors.
  • In correcting the pro-investor imbalance in India’s BITs, India went to the other extreme and created a pro-state imbalance as evident in the Model BIT.

Way Forward

  • Indian BITs should strike a balance between the interests of foreign investors and those of the state.
  • A certain degree of arrogance and misplaced self-belief that foreign investors would flock to India despite shocks and surprises in the regulatory environment should be put to rest.
  • Clarity, continuity and transparency in domestic regulations and a commitment to a balanced BIT framework would help India project itself as a nation committed to the rule of law, both domestically and internationally, and thus shore up investor confidence.
  • As the 2019 World Investment Report confirms, since India is fast becoming a leading outward investor, balanced BITs would also help in protecting Indian investment abroad.


What is Foreign Direct Investment (FDI)?

FDI means where a foreign company, generally an MNC, may invest in a country in any of the following 3 forms:

#1. Setup a plant or project to manufacture a commodity- consumer goods, capital goods, automobile, aircrafts, ships etc. It may also engage itself in construction activity- highways, roads, bridges, ports, airports, real estate etc.

#2. Setup network for providing services- banking, insurance, shipping, telecom, software, civil aviation etc.

#3. Only provide technology by way of Technology Transfer through any company of the country. It can provide technology only or provide technology along with #1 & #2 above

Foreign Portfolio Investment (FPI):

  • It means that foreign investors, generally Foreign Institutional Investors in case of India (FIIs are very large investors who invest bulk amounts just like Mutual Funds), invest in country stock market by investing in shares, debentures, bonds, Mutual Funds etc.
  • The objective here is to make capital gains in the stock markets
  • Hence this is investment is also called ‘Hot Money’ or ‘Fly-by-Night Money’ as it has a tendency to move from one country to another in search of quick profit
  • Therefore it has a potential to cause volatility in those markets from where it leaves

FDI routes:

#1. Automatic

A foreign company wishing to invest in India doesn’t have to seek prior approval of any body/ agency in India
It can straight away bring in investments in India & has only to inform the RBI within 1 month of bringing its investment in a certain sector
This route is relatively hassle free due to which more than 55% of total FDI has come through this route

#2. Foreign Investment Promotion Board (FIPB)

It was established in 1992 (just after L-P-G reforms)
Investments upto Rs. 5000 crore from notified sectors have to go through its approval

#3. Cabinet Committee on Economic Affairs (CCEA)

This approves investments above Rs. 5000 crores from notified sectors

Merits of FDI:


  • Adds to the productive capacity of a nation (by definition, as mentioned above)
  • Long term and stable- Because an MNC would continue to manufacture in a country, earn profits, engage in exports and thus spread its wings across the world as it enjoys a global name
  • No repayment obligation on part of the country where it is operating. This is the most important feature
  • Brings in capital and bolsters FOREX reserves
  • Brings in technology
  • Helps export promotion (because of global brands)
  • Generates employment
  • Expands markets (domestic as well as foreign)
  • International Best Practices- Brings in latest administrative and work culture
  • Infuses competition among domestic industries

What is the impact of FDI on Inflation?


  • FDI has been generally touted as a measure to dampen inflation. But this can NOT be concluded in all situations
  • The FDI’s impact on dampening the inflation is based upon the assumption that FDI would result in the developing of country’s back-end infrastructure and crack the supply bottlenecks. Practically, it may or may not happen
  • Economics has no rule to link FDI and Inflation because inflation may have many reasons behind it rather than only infrastructure and supply bottlenecks
  • Generally the FDI’s role in containing inflation is supported by the facts that- it improves infrastructure, improves supply chain, brings permanent investment


  • May threaten a country’s economic and political sovereignty (remember East
  • India Company which came to India just as a trader)
  • It may bring obsolete technology (this was true especially during 1950-90 because US and UK were the only countries bringing FDI. But now due to many countries bringing FDI, there is competition and this risk is reduced)
  • Focus on short term profit earning tactics rather than long term investments with a view of national industrial development
  • Indulging in cut-throat competition
  • Indulging in transfer pricing practices

Why Foreign Investors go for FDI?

  • To take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive
  • To gain tariff-free access to the markets of the country
  • To acquire lasting interest in enterprises operating in the target country.

What attracts FDI?

  • The growth rate of the source economy is an important determinant
  • The political and economic stability of the target region
  • How ‘open’ the economy is towards foreign trade (both imports and exports)
  • The policies, rules, regulations and loopholes incidental thereto
  • For example, Mauritius has been top FDI source for India due to the later (loophole) reasons

Recent FDI reforms (November 2015):

#1. Townships, shopping complexes & business centres – all allow up to 100% FDI under the auto route

Conditions on minimum capitalisation & floor area restrictions have now been removed for the construction development sector

#2. India’s defence sector now allows consolidated FDI up to 49% under the automatic route

FDI beyond 49% will now be considered by the Foreign Investment Promotion Board

Govt approval route will be required only when FDI results in a change of ownership pattern

#3. Private sector banks now allow consolidated FDI up to 74%

#4. Up to 100% FDI is now allowed in coffee/rubber/cardamom/palm oil & olive oil plantations via the automatic route

#5. 100% FDI is now allowed via the auto route in duty free shops located and operated in the customs bonded areas

#6. Manufacturers can now sell their products through wholesale and/or retail, including through e-commerce without Government Approval

#7. Foreign Equity caps have now been increased for establishment & operation of satellites, credit information companies, non-scheduled air transport & ground handling services from 74% to 100%

#8. 100% FDI allowed in medical devices

#9. FDI cap increased in insurance & sub-activities from 26% to 49%

#10. FDI up to 49% has been permitted in the Pension Sector

#11. Construction, operation and maintenance of specified activities of Railway sector opened to 100% foreign direct investment under automatic route

#12. FDI policy on Construction Development sector has been liberalised by relaxing the norms pertaining to minimum area, minimum capitalisation and repatriation of funds or exit from the project

To encourage investment in affordable housing, projects committing 30 percent of the total project cost for low cost affordable housing have been exempted from minimum area and capitalisation norms

#13. Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents

#14. Composite caps on foreign investments introduced to bring uniformity and simplicity is brought across the sectors in FDI policy

#15. 100% FDI allowed in White Label ATM Operations White Label ATMs? Answer in comments>

Crux of the reforms:

  • To further ease, rationalise and simplify the process of foreign investments in the country
  • To put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors is wasted
  • Refining of foreign investment norms in construction is to facilitate the construction of 50 million houses for poor
  • Opening up of the manufacturing sector for wholesale, retail and e-commerce is aimed at motivating industries to Make In India and sell it to the customers here instead of importing from other countries

Sectoral caps:

  • Petroleum Refining by PSU (49%)
  • Teleports (setting up of up-linking HUBs/Teleports),Direct to Home (DTH), Cable Networks (Multi-system operators (MSOs) operating at national, state or district level and undertaking upgradation of networks towards digitalisation and addressability), Mobile TV and Headend-in-the-Sky Broadcasting Service (HITS) – (74%)
  • Cable Networks (49%)
  • Broadcasting content services- FM Radio (26%), uplinking of news and current affairs TV channels (26%)
  • Print Media dealing with news and current affairs (26%)
  • Air transport services- scheduled air transport (49%), non-scheduled air transport (74%)
  • Ground handling services – Civil Aviation (74%)
  • Satellites- establishment and operation (74%)
  • Private security agencies (49%)
  • Private Sector Banking- Except branches or wholly owned subsidiaries (74%)
  • Public Sector Banking (20%)
  • Commodity exchanges (49%)
  • Credit information companies (74%)
  • Infrastructure companies in securities market (49%)
  • Insurance and sub-activities (49%)
  • Power exchanges (49%) power exchanges? What are the issues with them? Hint- Economic Survey 2015-16 Chapter 11>
  • Defence (49% above 49% to CCS)
  • Pension Sector (49%)

Sectors which need Govt (FIPB/ CCEA) approval:

  • Tea sector, including plantations – 100%
  • Mining and mineral separation of titanium-bearing minerals and ores, its value addition and integrated activities -100%
  • FDI in enterprise manufacturing items reserved for small scale sector – 100%
  • Defence – up to 49% under FIPB/CCEA approval, beyond – 49% under CCS approval (on a case-to-case basis, wherever it is likely to result in access to modern and state-of-the-art technology in the country)
  • Teleports (setting up of up-linking HUBs/Teleports), Direct to Home (DTH), Cable Networks (Multi-system operators operating at National or State or District level and undertaking upgradation of networks towards digitisation and addressability), Mobile TV and Headend-in-the Sky Broadcasting Service(HITS) – beyond 49% and up to 74%
  • Broadcasting Content Services: uplinking of news and current affairs channels – 26%, uplinking of non-news and current affairs TV channels – 100%
  • Publishing/printing of scientific and technical magazines/specialty journals/periodicals – 100%
  • Print media: publishing of newspaper and periodicals dealing with news and current affairs- 26%, Publication of Indian editions of foreign magazines dealing with news and current affairs- 26%
  • Terrestrial Broadcasting FM (FM Radio) – 26%
  • Publication of facsimile edition of foreign newspaper – 100%
  • Airports – brownfield – beyond 74%
  • Non-scheduled air transport service – beyond 49% and up to 74%
  • Ground-handling services – beyond 49% and up to 74%
  • Satellites – establishment and operation – 74%
  • Private securities agencies – 49%
  • Telecom-beyond 49%
  • Single brand retail – beyond 49%
  • Asset reconstruction company – beyond 49% and up to 100%
  • Banking private sector (other than Branches) – beyond 49% and up to 74%, public sector – 20%
  • Insurance – beyond 26% and up to 49%
  • Pension Sector – beyond 26% and up to 49%
  • Pharmaceuticals – brownfield – 100%

All sectors other than these are under automatic route.

Sectors where FDI is prohibited:

  • Lottery Business including Government /private lottery, online lotteries, etc.
    Gambling and Betting including casinos etc.
  • Chit funds
  • Nidhi company-(borrowing from members and lending to members only)
  • Trading in Transferable Development Rights (TDRs) <What are TDRs? Answer in comments>
  • Real Estate Business (other than construction development) or Construction of Farm Houses
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  • Activities/ sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than construction, operation and maintenance of
    (i) Suburban corridor projects through PPP,
    (ii) High speed train projects,
    (iii) Dedicated freight lines,
    (iv) Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities,
    (v) Railway Electrification,
    (vi) Signaling systems,
    (vii) Freight terminals,
    (viii) Passenger terminals,
    (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and
    (x) Mass Rapid Transport Systems)
  • Services like legal, book keeping, accounting & auditing.

Published with inputs from Swapnil
Notify of
1 Comment
Newest Most Voted
Inline Feedbacks
View all comments
pradeep rj Rap
pradeep rj Rap
1 year ago

Gratitude for the excellent insight. FDI will help the new association with getting honestly drawn in with the regular activities of the business substance arranged in another country. Visit Vakilsearch site to know about FDI in India