India’s FDI Journey Hits $1 Trillion

According to data from the Department for Promotion of Industry and Internal Trade (DPIIT), the cumulative amount of FDI inflows into India has crossed the $1 trillion milestone ($1,033.40 billion) in the April 2000-September 2024 period.

Key Highlights

1. Growth in FDI: The decade from 2014-2024 saw an increase of 119% in FDI inflows compared to the preceding decade (2004-2014) according to the Union Ministry of Commerce and Industry.
2. FDI Increase Over Two Decades: India’s FDI inflows have increased approximately 20 times from 2000-01 to 2023-24.
3. Sector-wise FDI: Over the period from 2000-2024, the service sector attracted the highest equity inflow, amounting to $115.18 billion.

What is Foreign Direct Investment (FDI)?

FDI refers to investments made by a foreign entity in an Indian business with the intention of long-term operation, through capital instruments, in unlisted companies or in 10% or more of the paid-up equity capital of listed Indian companies.

Typically, FDI is a long-term investment and is considered a non-debt creating capital flow.

1. Routes of FDI

1. Automatic Route: The foreign investor needs to inform the Reserve Bank of India (RBI) after the investment has been made, without requiring prior approval.
2. Government Approval Route: Foreign investors are required to obtain approval from the concerned Ministry or Department before making an investment.

2. Regulations Governing FDI in India

1. FDI Policy 2020 and FEMA (Non-debt Instrument) Rules, 2019 govern FDI in India.
2. Primary Regulators: The Department for Promotion of Industry and Internal Trade (DPIIT) and the Reserve Bank of India (RBI) oversee FDI policies and rules.

Sectors where FDI is Prohibited Lottery Business Gambling and Betting Real Estate Business except development of townships, REITS etc. Nidhi Companies Trading in Transfer-able Development Rights (TDRs) Chit Funds Cigarette and Tobacco Manufacturing Sectors not open to Private sector (Atomic Energy and Railway Operations)

 

Foreign Direct Investment (FDI) vs. Foreign Portfolio Investment (FPI)

Parameters	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Form of Investment	Long-term investment in business enterprises	Investment in financial assets like stocks and bonds
Type of Investment	Includes financial and non-financial assets, including resources, technology, and securities	Focused on financial assets such as stocks and bonds
Volatility	Low volatility due to extended investment periods	High volatility due to quick investor sentiment changes
Investor Control	Higher control over business decisions	Limited control, passive investors
Liquidity	Low liquidity due to long-term investments	Highly liquid, easily tradable assets

 

Challenges for FDI in India

1. Complex Regulations and Policy Uncertainty: The intricate regulatory framework, including issues with tax laws and transfer pricing, leads to compliance challenges for foreign investors.
   • Example: Vodafone's dispute over retrospective taxation.
2. Institutional Deficiencies: Bodies like the Competition Commission of India (CCI) have been less effective in curbing anti-competitive practices.
   • Example: The Flipkart controversy, which resulted in India losing its preferential treatment under the U.S. Generalized System of Preferences (GSP).
3. Concentration of FDI: FDI is disproportionately concentrated in a few sectors like services and in urban regions, leading to developmental inequalities.
   • Example: The lack of infrastructure in rural areas deters FDI.
4. Impact on Local Businesses: The extensive operations of foreign companies often threaten local businesses that struggle to compete.
   • Example: The opposition to Walmart’s entry into India.
5. Impact on the Labor Market: FDI may raise concerns over job security and the displacement of local workers.
   • Example: Legal action against companies like Amazon and Uber for poor working conditions in India.

Challenges Faced by the Indian Economy Due to FDI

1. Dependency on Foreign Capital: Relying on foreign investment can lead to economic fluctuations due to external factors.
   • Example: The global recession, protectionist measures, and the Russia-Ukraine war led to a drop in FDI inflows in 2023.
2. Development vs. Environment: Poorly managed FDI projects can harm ecosystems and communities.
   • Example: Vedanta Resources’ mining activities in Niyamgiri Hills faced opposition due to environmental concerns.
3. Intellectual Property Concerns: Inadequate management of technology and intellectual property can prevent India from fully utilizing the expertise brought by international companies.
   • Example: Bio-piracy in India’s pharmaceutical sector.

Steps Taken to Promote FDI Inflows

1. Schemes for FDI Promotion: Initiatives like Make in India, Start-up India, PM Gati Shakti, National Industrial Corridor Programme, and the Production Linked Incentive (PLI) Scheme have boosted FDI inflows in alignment with Atmanirbhar Bharat.
2. Promoting Ease of Doing Business (EoDB): Steps to reduce compliance burdens include the Jan Vishwas (Amendment of Provisions) Act, 2023, which has led to the reduction of over 42,000 compliances and decriminalized more than 3,800 provisions.
3. Project Development Cells (PDCs): Each Ministry/Department has established PDCs to fast-track investment processes.
4. Technological Interventions:
   • The National Single Window System (NSWS) simplifies FDI approvals.
   • The Foreign Investment Facilitation Portal (FIFP) serves as a single point for facilitating FDI.
5. State Investment Summits: States like Gujarat and Uttar Pradesh have hosted Global Investment Summits to attract FDI.
   • Example: The Vibrant Gujarat Global Summit attracted FDI worth USD 55 billion between 2002-2022.

Way Forward

1. Infrastructure and Skill Enhancement: Strengthening infrastructure (e.g., high-speed rail, expressways) and upskilling the workforce in emerging sectors like renewable energy, semiconductors, and electric vehicles (EVs) can further attract FDI.
2. Policy Reforms for Balanced FDI Inflows: Specific policies and separate rules for manufacturing and service sectors within Special Economic Zones (SEZs) will encourage more balanced FDI distribution.
   • Recommendation: The Baba Kalyani Committee has suggested creating policies to attract FDI in manufacturing.
3. Dispute Resolution and Contract Enforcement: Streamlining dispute resolution and strengthening contract enforcement through dedicated arbitration and commercial courts can provide legal certainty and enhance investor confidence.
4. Promote Tier-II and Tier-III Cities: Encouraging FDI in smaller cities through cluster-based development initiatives like Bulk Drug Parks and Mega Food Parks can help spread investment across regions.
5. Bilateral Investment Treaties (BITs): Strengthening and updating BITs with key nations can further ensure investor confidence by clearly defining terms and conditions for foreign investments.

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