Foreign Investment In India: Who's Leading The Pack?

India is one of the world's fastest-growing economies, with a large and youthful population. In recent years, it has implemented significant structural economic reforms aimed at enhancing the business environment, including liberalising restrictions on foreign investment. In the financial year 2024, Singapore was the leading source of foreign direct investment (FDI) into India, valued at over $11 billion, followed by Mauritius, the US, the Netherlands, and Japan. India has particularly strong investment ties with the US, the UAE, Germany, and France.

Singapore is India's top foreign investor

Singapore has emerged as India's largest source of foreign direct investment (FDI) for the past few years. In the 2023-24 financial year, Singapore's FDI inflows into India stood at $11.77 billion, despite a 31.55% drop from the previous year. Singapore accounted for roughly 24% of total FDI inflows into India during this period, with the computer and hardware sector receiving the highest amount of FDI equity inflow.

Singapore's position as India's top foreign investor is significant, given that overseas capital inflows into India have contracted by about 3.5% due to global economic uncertainties. Singapore's prominence as a preferred jurisdiction for investment in India is attributed to various factors, including its competitive tax regime, efficient regulatory setup, and status as a prominent financial hub. Singapore also attracts global investors seeking to invest in Asia.

Historically, Mauritius has been the top source of FDI into India due to its status as a tax haven. However, the Indian government's crackdown on tax havens and the amendment of the India-Mauritius tax treaty in 2016 reduced Mauritius's attractiveness, making Singapore the preferred route for foreign capital into India.

The growing strength of business relationships between Singapore and India is evident, and Singapore's favourable business environment, talented workforce, and trusted regulatory framework make it a desirable location for investors.

The US is India's second-largest foreign investor

The US is India's largest trading partner and the largest destination for Indian exports. In 2023, bilateral trade between the two countries exceeded $190 billion, and the US and India have set an ambitious target of achieving bilateral trade worth $500 billion by 2025.

The economic partnership between the two nations is broad-based and multi-sectoral, encompassing trade and investment, defence and security, education, science and technology, pharmaceuticals and biotechnology, civil nuclear energy, environment, clean energy, space technology and applications, health, and research and development.

The US and India have strong business relations, with several American companies fulfilling indispensable needs in the Indian market. American companies are also preparing to set up operations in India as an alternative to China. Some well-known American companies in India include Amazon, Citibank, Coca-Cola, Google, American Express, Pepsico, Hewlett Packard, IBM, JP Morgan Chase, and Apple Inc.

The US and India have taken several steps to strengthen their economic partnership. In March 2023, the two countries held the 5th Ministerial-level meeting of the bilateral Commercial Dialogue in New Delhi, with a renewed focus on future and emerging areas of bilateral commercial partnership. The India-US Commercial Dialogue and the corresponding CEO Forum focus on trade and commerce relations and aim to identify areas for closer collaboration and promote a mutually beneficial business environment.

The India-US Trade Policy Forum is another platform for continuous engagement between the two countries to enhance bilateral trade and investment relations and resolve any issues in these areas.

Several American companies have also announced significant investments in India. For example, Amazon plans to invest an additional $1 billion in India, while Google has announced a $10 billion investment in India's digitisation fund. Amazon Web Services (AWS) has revealed plans to invest $12.7 billion in cloud infrastructure in India by 2030, and Microsoft has begun work on its fourth data centre in India, with plans to invest around INR 15,000 crore over the next 15 years.

Mauritius is India's third-largest foreign investor

Mauritius is the third-largest foreign investor in India, preceded by Singapore and the United States. Between 2000 and 2017, Mauritius was the largest source of foreign direct investment (FDI) in India, accounting for 34% of all FDI inflows. In 2023-24, Mauritius was the second-largest source of FDI, with investments totalling $7.97 billion, a decrease from $6.13 billion in 2022-23.

Mauritius has traditionally been a top destination for channeling investments into India due to its favourable tax policies and status as a tax haven. Companies could set up shell or holding companies in Mauritius, where no economic activity occurs, and channel their profits through these entities to take advantage of the country's low effective tax rate of 3%. Additionally, the absence of withholding tax and capital gains tax on dividends made Mauritius an attractive jurisdiction for tax avoidance.

However, in recent years, the Indian government has taken steps to curb the use of Mauritius as a tax haven. In 2016, India amended its tax treaty with Mauritius, introducing a source-based taxation regime for capital gains. This change eliminated the tax advantage previously enjoyed by companies routing investments through Mauritius. As a result, Mauritius' attractiveness as an investment hub for India has diminished, with Singapore now emerging as the preferred jurisdiction for foreign investment into India.

Despite the recent decline in FDI inflows from Mauritius, the country still accounts for a significant proportion of India's total FDI. From April 2000 to March 2024, Mauritius accounted for 25% of India's total FDI inflows, amounting to $171.84 billion.

India's FDI inflows reached $81.7 billion in 2020-21

India's foreign direct investment (FDI) inflows reached a record-breaking $81.72 billion in 2020-21, a 10% increase from the previous financial year. This growth is attributed to the Indian government's policy reforms, investment facilitation, and ease of doing business.

The top investor countries for 2020-21 were Singapore (29%), the USA (23%), and Mauritius (9%). In terms of sectors, computer software and hardware attracted the highest inflows, accounting for around 44% of total FDI equity inflows. This was followed by the construction (infrastructure) activities (13%) and services sectors (8%).

Gujarat was the top recipient state during 2020-21, receiving 37% of total FDI equity inflows, with the majority of investments going into the computer software and hardware sectors. Maharashtra and Karnataka were the next biggest recipients, with 27% and 13% shares, respectively.

The Indian government has implemented structural economic reforms to enhance the business environment and attract more foreign investment. These include liberalising restrictions on foreign investment, updating bankruptcy and labour laws, abolishing retroactive taxation, and replacing state border taxes with a national Goods and Services Tax.

In 2022, India remained an attractive destination for FDI, with inflows reaching USD 49.3 billion, making it the eighth-largest FDI recipient worldwide. The total stock of FDI in the country that year stood at USD 510.7 billion, around 15.1% of its GDP.

India's FDI inflows are driven by ICT investments

India's FDI inflows have been driven by a range of factors, including strategic investments from international corporations, favourable government policies, and a dynamic business environment. However, Information and Communications Technology (ICT) investments have been particularly significant in driving India's FDI inflows.

ICT investments have played a pivotal role in shaping India's economic landscape and contributing to its growth. The country's rapid economic growth, coupled with a vast and fairly insulated domestic market, has made it an attractive destination for global brands looking to capitalise on burgeoning demand. Notable ICT investments in India include Google and Meta's $4.5 billion and $5.7 billion investments, respectively, into India's largest telecom provider, Jio Platforms, in 2020. In the same year, Amazon invested $3 billion in the country, following a $2 billion investment in 2014. These investments have contributed to India's FDI inflows, which reached a record level of US$84.84 billion during 2021-22.

The Indian government's proactive policy framework and initiatives, such as the "Make in India" campaign, have also played a significant role in driving FDI inflows. Liberalisation of FDI policies, particularly in sectors like retail, defence, insurance, and telecom, has been a key strategy. Additionally, the implementation of the Goods and Services Tax (GST) has improved transparency, while Special Economic Zones (SEZs) provide dedicated spaces with tax incentives for investors. These factors have made India an attractive destination for FDI, with the country ranking 10th in top destinations for FDI in 2022.

ICT investments have also been crucial in driving FDI inflows into specific Indian states. Maharashtra, Karnataka, and Gujarat received 70% of the $70.9 billion in foreign investment between April 2022 and March 2023. The services sector (including banking, finance, and insurance) and the tech sector account for one-third of all FDI inflows into these states. While manufacturing (excluding automobiles) is not yet a top-five sector for foreign investors, the "Make in India" campaign is expected to further boost FDI inflows in this sector.

In conclusion, India's FDI inflows are driven by a combination of strategic investments, favourable government policies, and a dynamic business environment. However, ICT investments have been particularly significant, with global brands making large plays into the country's economy and driving FDI inflows into specific sectors and states. As India continues to implement reforms and improve its business environment, it is expected to attract even more FDI inflows in the coming years.

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