Foreign Indirect Investment: India's Global Economic Strategy

Foreign direct investment (FDI) is a substantial, long-term investment made by a company or government in a foreign entity. In India, FDI is a key driver of economic growth and development, with the country receiving approximately $70 billion in FDI during the 2022-23 fiscal year. FDI in India can be made through two routes: the automatic route, which does not require prior government approval, and the government route, which necessitates approval from the Indian government before investment. The Indian government has implemented various policies and initiatives to enhance FDI, including the Make in India campaign, liberalisation of FDI policies, and the implementation of the Goods and Services Tax (GST). FDI in India has increased significantly over the years, with the total FDI inflows in the last 23 years (April 2000 - March 2023) amounting to $919 billion. The top sectors attracting FDI in India include services, computer software and hardware, trading, telecommunications, and the automobile industry.

Foreign Direct Investment (FDI) in India: Definition and Types

Foreign Direct Investment (FDI) is an investment made by a company or individual in one country into a business entity located in another. FDI is a key driver of economic growth and is a major source of non-debt financial resources for the economic development of a country.

FDI is distinct from foreign portfolio investment, where a foreign entity merely purchases equity shares of a company. In FDI, the foreign entity acquires a controlling stake in the company and has a say in its day-to-day operations. FDI also involves the transfer of technology, knowledge, skills, and expertise to the host country.

FDI in India:

The investment climate in India has improved significantly since the country's economic liberalisation in 1991, with the government easing FDI norms. As a result, FDI inflows have increased consistently, with the country receiving $45.14 billion in 2014-15 and $84.83 billion in 2021-22, the highest ever annual FDI inflow. In the first five months of the 2020-21 financial year, India received a total FDI inflow of $35.73 billion, a 13% increase from the same period in the previous year.

FDI in India can take place through two routes: the automatic route and the government route. Under the automatic route, prior approval from the Government of India or the Reserve Bank of India is not required. In contrast, the government route mandates approval from the respective Administrative Ministry or Department of the Government of India.

FDI is allowed in most sectors in India, either partially or wholly. Some of the major sectors attracting FDI in India include:

• Services (finance, banking, insurance, outsourcing, R&D)
• Computer software and hardware
• Trading
• Telecommunications
• Automobile industry
• Pharmaceuticals
• Defence manufacturing
• Railway infrastructure
• Petroleum and natural gas
• Tourism and hospitality

However, FDI is prohibited in certain sectors, including:

• Agricultural or plantation activities (except horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
• Atomic energy generation
• Lotteries and gambling businesses
• Real estate (except townships, commercial projects, etc.)
• Cigarette or tobacco-related industries

The Impact of FDI on India's Economic Growth

Foreign direct investment (FDI) has been a key driver of India's economic growth, with total FDI inflows of $729.8 billion over the last 20 years (April 2000 to September 2020). FDI has positively impacted India's economy in several ways, including:

Technology Transfer and Skill Development

FDI facilitates technology transfer to domestic companies, leading to skill development and enhanced productivity. Foreign investors introduce advanced production techniques, managerial practices, and technical know-how, which can improve the competitiveness of local industries.

Employment and Income Growth

FDI has led to an increase in employment opportunities and improved standards of living. As foreign companies set up operations or expand in India, they create jobs for the local workforce, contributing to reduced unemployment rates and increased per capita income.

Economic Growth and Development

The influx of foreign capital, technology, and skills has stimulated investment, expanded production capacities, enhanced productivity, and increased output and exports. FDI has also provided access to global markets and supply chains, further boosting India's economic growth.

Infrastructure Development

FDI has contributed to the development of infrastructure in sectors such as telecommunications, transportation, energy, and urban development, supporting economic activities and improving overall infrastructure.

Balance of Payments and Forex Reserves

FDI inflows have led to a surplus in the balance of payments, causing the rupee to appreciate against the dollar. This has resulted in a significant rise in foreign exchange reserves, which, according to the Quantity Theory of Money, has led to an increase in money supply and inflation.

Stock Market Performance

FDI has positively impacted the Indian stock market. The inflow of foreign capital has led to solid growth in companies, attracting more capital and raising more funds for businesses.

Government Finances

FDI has increased tax revenues for the government, enabling higher government spending on developmental projects.

Complement to Domestic Investment

FDI acts as a complement to India's low domestic investment rate (about 32%) due to low savings. It raises competitiveness among businesses, fosters innovation and efficiency, and improves the standard of living through better products and services.

Greenfield Projects and Cross-Border M&A

Multinational companies have pursued strategic collaborations with top domestic business groups, resulting in an 83% increase in cross-border M&A to $27 billion in 2020. India was the third-largest recipient of greenfield projects, with 1,008 announcements, according to the World Investment Report 2023.

Sectoral Inflows and Economic Reforms

The services sector, computer software and hardware, trading, telecommunications, and the automobile industry have been the major recipients of FDI in India. The government has implemented economic reforms and initiatives, such as the "Make in India" campaign and liberalization of FDI policies, to further enhance FDI inflows.

Government Initiatives to Promote FDI in India

The Indian government has implemented several initiatives to promote foreign direct investment (FDI) in the country. Here are some key government initiatives:

• Make in India: Launched in 2014, this initiative aims to facilitate investment, foster innovation, build world-class infrastructure, and establish India as a manufacturing, design, and innovation hub. The government has prioritised the development of a robust manufacturing sector, and Make in India was one of the first 'Vocal for Local' campaigns to bring India's manufacturing capabilities to the global stage.
• FDI Policy Reforms: The government has introduced FDI policy reforms to open up new sectors for growth and make India a more attractive investment destination.
• Ease of Doing Business: This initiative aims to expedite the implementation of reforms to enhance the country's business environment. Inter-departmental reviews are conducted regularly to ensure the execution of action points, and efforts are made to engage states in business reforms.
• Investment Clearance Cell (ICC): Announced in the 2020-21 budget, the ICC aims to provide "end-to-end" facilitation and support to investors, including pre-investment advisory services, land bank information, and assistance with clearances at the central and state levels.
• One District One Product (ODOP): The ODOP programme aims to identify and promote the manufacture of unique products in each of India's districts that can be marketed globally. This initiative will help realise the district's potential, boost economic growth, create jobs, and promote rural entrepreneurship.
• Empowered Group of Secretaries (EGoS) and Project Development Cells (PDCs): The Union Cabinet approved the formation of EGoS and PDCs to fast-track investments in coordination with state governments. The goal is to increase the pipeline of investable projects in India, attract more domestic and foreign investments, and provide a more investor-friendly ecosystem.
• Production Linked Incentive (PLI) Schemes: With a focus on making India 'Atmanirbhar' (self-reliant), the government has announced PLI schemes for 13 key manufacturing sectors to enhance India's manufacturing capabilities and exports. These sectors include mobile manufacturing, pharmaceuticals, automobiles, textiles, and more.
• National Infrastructure Pipeline (NIP) and National Monetisation Pipeline (NMP): These initiatives have been implemented to facilitate investments in the country.
• Reduced Corporate Tax Rates: Lower corporate tax rates have been introduced to encourage domestic and foreign investments.
• Easing NBFC and Bank Liquidity Problems: The government has taken steps to address liquidity issues in non-banking financial companies (NBFCs) and banks, creating a more favourable environment for investors.

Sectors with High FDI Inflow in India

Foreign direct investment (FDI) has been a significant driver of India's economic growth, with the country witnessing a ~20-fold increase in FDI inflows from 2000-01 to 2023-24. The services sector, computer software and hardware, trading, telecommunications, and the automobile industry are among the top sectors attracting high FDI inflows in India.

Services Sector

The services sector, including finance, banking, insurance, business outsourcing, R&D, courier, and technology testing, has consistently attracted high FDI inflows in India. In FY 2023-24, the services sector accounted for 16.33% of India's total FDI equity inflow, amounting to US$113.49 billion.

Computer Software and Hardware

Computer software and hardware is another sector that has witnessed significant FDI inflows into India. In FY 2023-24, this sector attracted 15.20% of India's total FDI equity inflow, amounting to US$105.62 billion.

Trading

The trading sector, which includes wholesale and retail trading, e-commerce, and cash and carry wholesale trading, has also been a significant recipient of FDI inflows in India. In FY 2023-24, trading accounted for 6.31% of India's total FDI equity inflow, amounting to US$43.85 billion.

Telecommunications

Telecommunications is another sector that has attracted high FDI inflows into India. In recent years, the Indian government has implemented reforms and eased FDI norms in this sector, making it more attractive to foreign investors. In FY 2023-24, telecommunications accounted for 5.72% of India's total FDI equity inflow, amounting to US$39.78 billion.

Automobile Industry

The automobile industry in India has also witnessed substantial FDI inflows. In FY 2023-24, this sector attracted 5.27% of India's total FDI equity inflow, amounting to US$36.65 billion. The Indian government has implemented policies such as allowing 100% FDI under the automatic route, which has contributed to the high FDI inflows in this sector.

India's Position in Global FDI Inflows

The total FDI inflows into India during the last 24 years (April 2000 to June 2024) amounted to $1,013.4 billion, with the last 10 years (April 2014 to June 2024) accounting for nearly 67% of this figure, at $725.96 billion. The highest annual FDI inflow was recorded during the fiscal year 2021-22, with $84.83 billion, while the inflows for the fiscal year 2023-24 stood at $70.95 billion.

The services sector, computer software and hardware, trading, telecommunications, and the automobile industry were the top five sectors attracting the highest FDI equity inflows during the last 24 years. In terms of geographical sources, Mauritius, Singapore, the USA, the Netherlands, and Japan were the top five countries contributing to FDI equity inflows into India for the same period.

The state of Maharashtra received the highest FDI equity inflow during October 2019 to June 2024, followed by Karnataka, Gujarat, Delhi, and Tamil Nadu.

FDI inflows into India have been facilitated by the government's proactive policy framework, a dynamic business environment, improving global competitiveness, and a growing economic influence. Initiatives such as the "Make in India" campaign, liberalization of FDI policies, implementation of the Goods and Services Tax (GST), and the establishment of Special Economic Zones (SEZs) have all contributed to enhancing India's attractiveness for FDI.

The country's ranking in the World Competitive Index and the Global Innovation Index has also improved, further boosting its appeal for FDI. India's FDI inflows are expected to increase, with the country aiming to attract at least $100 billion annually in gross FDI, reflecting its potential as a major global hub for foreign investments.

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