It is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). India rapidly emerges as a preferred investment destination with FDI inflows increasing 20-fold in the last 20 years. Highest ever annual FDI inflow of 83.57 billion US Dollars were recorded in the Financial Year 2021-22. This figure stood at 45.15 billion US Dollars. In terms of investor countries of FDI Equity inflow, Singapore is at the top with 27%, followed by the U.S.A with 18% and Mauritius with 16% for the FY 2021-22. ‘Computer Software & Hardware’ has emerged as the top recipient sector of FDI Equity inflow during this period with around 25% share followed by Services Sector and Automobile Industry with 12% each. With 53 per cent Karnataka has received the majority share of FDI equity in the `Computer Software & Hardware’ sector. In order to promote Foreign Direct Investment, the Government has put in place an investor-friendly policy, wherein most sectors except certain strategically important sectors are open for 100% FDI under the automatic route. 853 FDI proposals have been disposed off through the Foreign Investment Facilitation Portal in five years since abolishment of Foreign Investment Promotion Board or FIPB.
Foreign Direct Investment or FDI is a major driver of economic growth and is largely a matter of private business decisions. FDI inflows depend on a number of factors sub as availability of natural resources, infrastructure, market size, general investment climate etc. Govt of India has put in place a liberal and transparent policy for FDI with most sectors open to FDI under the automatic route.
FDI in emerging economies
- Economic benefits: FDI acts as a bridge by filling up budgetary gap, stabilize rupee and improves Balance of Payment situation. Capital inflows create higher output and jobs. Capital inflows can help finance a current account deficit. Long-term capital inflows are more sustainable than short-term portfolio inflows. For e.g., in a credit crunch, banks can easily withdraw portfolio investment, but capital investment is less prone to sudden withdrawals.
- Knowledge economy: Recipient country can benefit from improved knowledge and expertise of foreign multinational.
- Employment generation: FDI creates employment opportunity mainly in service sector and ITEC. Investment from abroad could lead to higher wages and improved working conditions, especially if the MNCs are conscious of their public image of working conditions in developing economies.
- Infrastructure development: FDI in construction, railways except operation help in developing projects like high-speed train, Freight corridor, etc
- Strengthen financial services: FDIs can enhance financial services of a country by not only entering its banking industry but also by extending other activities like merchant banking, portfolio investment etc. This, in turn, can result in the promotion of more companies. It has also helped the capital market within the country.
- The government’s policy is very dynamic one.
- The government has been from time to time relaxing more policies to include more items in the automatic list rather than restrictive list
- In 2020, schemes like production-linked incentive (PLI) scheme for electronics manufacturing, have been notified to attract foreign investments.
- In 2019, the Central Government amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities.
- Further, the government permitted 26% FDI in digital sectors. The sector has particularly high return capabilities in India as favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.
- FDI in manufacturing was already under the 100% automatic route, however in 2019, the government clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.
- Contract Manufacturing: Production of goods by one firm, under the label or brand of another firm.
- Foreign Investment Facilitation Portal (FIFP) is the online single point interface of the Government of India with investors to facilitate FDI. It is administered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
Foreign Direct Investment (FDI) is a major driver of economic growth and an important source of non-debt finance for the economic development of India. A robust and easily accessible FDI regime, thus, should be ensured. Economic growth in the post-pandemic period and India’s large market shall continue to attract market-seeking investments to the country.