Foreign Direct Investment (fdi) In India: Indian Economy
Introduction
A company with headquarters abroad that holds a majority ownership in a business operating in another nation makes a financial investment known as foreign direct investment. For India's economic development, Foreign Direct Investment (FDI) has been a crucial non-debt funding source. The Economic Survey 2021–2022 states that India received FDI of USD 44 billion.
Foreign Direct Investment (FDI): What Is It?
• A foreign direct investment (FDI) is a monetary investment made into a company or organization in another country by a party from that country with the aim of forming a long-term partnership.
• Gaining a long-term interest or developing one's firm internationally are two examples of foreign direct investment.
• In open economies with a skilled labor force and promising growth prospects, foreign direct investment (FDI) is widespread.
• More than just money, foreign direct investment (FDI) also offers expertise, technology, and knowledge.
• In order to take advantage of lower wages and other special investment incentives like tax reductions, foreign businesses invest in India.
• The daily activities of the other country are heavily influenced by foreign businesses that participate in FDI.
Foreign Direct Investment (FDI): Components
The Three Elements of FDI are:
• A foreign direct investor's purchase of stock in a company in a nation other than their own is referred to as equity capital.
• The fraction of a direct investor's earnings that are reinvested is the portion that is not returned to the direct investor or distributed as dividends through affiliates. Affiliates' leftover revenues are reinvested.
• Intra-company loans are transactions including both short- and long-term borrowing and lending between direct investors and affiliated businesses.
Advantages
• Foreign direct investment (FDI) can assist strengthen the economy of the nation in which it is produced, supporting local businesses and improving the investment environment. Emerging economies benefit from foreign direct investment.
• Technology diffusion, the development of human capital, and global commerce integration are all aided by foreign direct investment.
• Foreign expertise may be a crucial element in enhancing a nation's present technical procedures, and improvements in technology and processes increase a nation's domestic competitiveness.
• Additionally, it helps small businesses grow and makes the business environment more competitive.
• These factors all work together to boost economic growth, which is the most effective approach to lessen poverty in emerging nations.
Disadvantages
• Limitations on exchange rates and foreign direct investment may be detrimental to the investing nation.
• It sometimes discourages local investment by diverting resources elsewhere.
• Foreign direct investment can occasionally cause exchange rates to be manipulated, to one country's advantage and the other's detriment.
• From the perspective of the investor, foreign direct investment might be capital-intensive, making it high-risk or occasionally economically viable.
Foreign Direct Investment (FDI) And India
• Foreign direct investment (FDI) is a significant source of funding for India's economic development.
• India started to liberalize its economy after the financial crisis of 1991, and since then, FDI has gradually expanded in the nation.
• India is among the top 100 nations for ease of doing business (EoDB) and is now the top Greenfield FDI destination in the world.
• Up until November 2021, the most recent FDI aggregate data is accessible. Between April and November 2021, net FDI inflows fell to US$ 24.7 billion, but gross FDI inflows fell to US$ 54.1 billion as a result of reduced equity investment.
• Computer software and hardware attracted the greatest FDI equity inflows of US$ 7.1 billion from April to September 2021, according to FDI inflows by sector.
• Singapore continues to be the leading investment destination in terms of FDI equity inflow, followed by the United States.
India's Foreign Direct Investment (FDI) Routes
|
Category 1 |
|
Category 2 |
|
Category 3 |
|
100% FDI through Automatic Route |
|
Up to 100% FDI through Government Route |
|
Up to 100% FDI through Automatic + Government Route |
Automatic Route
The RBI or the Indian government does not required to approve FDI in advance for a non-resident or Indian enterprise.
The following industries allow FDI through the automated route:
• Medical devices: up to 100%
• Thermal power: up to 100%
• Insurance: up to 49%
• Infrastructure company in the securities market: up to 49%
• Pension: up to 49%
• Power exchanges: up to 49%
• Petroleum Refining (By PSUs): up to 49%
• Civil Aviation
o Airports both greenfield and brownfield projects: up to 100%
o Ground handling and maintenance and repair firms: up to 49%
o Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and Regional Air Transport Service: up to 49%
• Ports and harbor construction: up to 100%
• Railway infrastructure: up to 100%
Government Route
This type of investment requires authorization from the government.
Through the Foreign Investment Facilitation Portal, which offers a one-stop shop for clearance, the corporation must submit an application.
The application is subsequently forwarded to the relevant ministry, which will decide whether to accept it or reject it in coordination with the Department for Promotion of Industry and Internal Trade (DPIIT) of the Ministry of Commerce.
The DPIIT will publish a Standard Operating Procedure (SOP) for handling FDI applications in accordance with the current policy.
Sectors that allow FDI through the government-approval method include:
• Core Investment Company: 100%
• Multi-Brand Retail Trading: 51%
• Mining & Minerals separations of titanium bearing minerals and ores: 100%
• Print Media (publications/printing of scientific and technical magazines/specialty journals/periodicals and a facsimile edition of foreign newspapers): 100%
• Satellite (Establishment and operations): 100%
• Print Media (publishing of newspaper, periodicals, and Indian editions of foreign magazines dealing with news & current affairs): 26%
Prohibition Of FDI
In the following industries, FDI is not permitted:
• The lottery industry includes both government and private lotteries, as well as internet lotteries.
• Gambling and betting, including casinos.
• Nidhi corporation and chit funds.
• Transferable Development Rights (TDRs).
• Tobacco or tobacco substitutes for cigars, cheroots, cigarillos, and cigarettes.
• Two activities/sectors that are not open to private sector investment are atomic energy and railway operations.
FDI'S Effect On The Economy
• Over time, foreign direct investment (FDI) aids in economic growth. MNCs transfer technology to domestic companies, causing organic business growth or expansion and job creation.
• FDI enhances a company's financial statement by increasing its assets. Businesses make more money, and employee productivity rises along with it.
• With increases in per capita income, consumption also grows. The government spends more money as tax receipts increase.
• In response to rising exports and a positive balance of payments, the rupee appreciates against the dollar.
• Technology transfer, or the migration of technical know-how, results from FDI. This migration of technical know-how leads to skill development, which, when combined with more capital, increases productivity and profitability.
• Investment returns also increase after a few years and have a gestation period.
• Additionally, FDI significantly boosts India's domestic investment stock, which is low as a result of low savings.
Promotional Measures For FDI
• Government programs like the production-linked incentive (PLI) plan for electronics manufacturing in 2020 have been announced in an effort to attract foreign investment.
• In order to promote FDI inflow, the government changed its FDI Policy 2017 in 2019 to permit 100% FDI through the automated mechanism in coal mining activities.
• The government has also permitted 26% FDI in the digital industry. Due to favorable demographics, high mobile and internet penetration, high spending, and quick technical adoption in India, the sector has exceptionally high return possibilities, opening up a sizable market for international investment.
• The Indian government's online single point of contact for investors to facilitate FDI is the Foreign Investment Facilitation Portal (FIFP). The Department for Promotion of Industry and Internal Trade of the Ministry of Commerce and Industry is in charge of running it.
• The government's intentions to permit private train operations and put airports up for auction have garnered interest from foreign investors, which is anticipated to increase FDI inflow.
• In addition, it is anticipated that significant investments will be made in lucrative industries like military manufacturing, where the government raised the automatic route FDI threshold from 49% to 74% in May 2020.
FDI Policy Changes: 2020–2021
• Sector of Insurance: Using the automatic procedure, the government raised the FDI cap allowed in insurance companies from 49 to 74 percent, allowing for foreign ownership and control with safeguards. By facilitating the flow of long-term capital, a global technology, processes, and global best practices, this will aid in the development of India's insurance sector.
• When the government has provided "in-principle" approval for the strategic disinvestment of a PSU operating in the oil and gas industry, foreign investment up to 100% may be made utilizing the automatic method.
• Sector of telecom services: Under the automatic route, foreign investment is permitted up to 100% in this industry.
FDI Policy Update
• A company from a country that borders India on land, or if the beneficial owner of an investment in India is based in or a citizen of such a country, is only permitted to invest through the government channel, per the new FDI policy.
• A transfer of ownership in an FDI agreement that benefits any nation that borders India also needs government approval.
• Investors from nations not covered by the new regulation need just notify the RBI after a transaction instead of asking prior authorization from the relevant government department.
• The former FDI policy only permitted Bangladesh and Pakistan to invest through the government route in all industries. The revised rule has made Chinese companies subject to the government's route screening.
Conclusion
The benefits of FDI to the economy are enormous, and a thorough FDI process identifies key economic sectors that offer the best return on investment. This investment boosts company competitiveness, promotes innovation and efficiency, and elevates the standard of living by bringing improved goods and services to market.