Welcome to another Back to School article. It’s been long time to get some basic topics to get refreshed. For any Economy Foreign Direct Investment (FDI) is one of the important factor for their economic growth. FDI helps Indian economy to create more jobs along with developing technological know-how and advancement. In this article we are going to see definition of FDI and FPI; Evolution of FDI in India, Present status of FDI in India and Conclusion/ my perspective.

Definition of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

The Foreign Direct Investment (FDI) is defined as an investment made by a foreign entity (or investor) in a home country for doing business or intention of establishing a lasting interest. The term lasting interest differentiates whether the investors have passive interest by holding securities of the investing country (Foreign Portfolio Investment – FPI) (or) by doing FDI for expanding one’s business in that country.  

In Simple, an investment made by a firm or individual in one country into business interests located in other country is known as FDI. Whereas, FPI refers to investments made in financial securities and other financial assets issued in another country. FPI have impacts in countries financial markets, by affecting the stock market prices, exchange rates and bond yields due to capital inflow as well as outflows. This is one of the main reason why Governments regulate FPI – i.e. to reduce volatility and maintain stability in their financial markets.

EVOLUTION OF FDI IN INDIA

The evolution of FDI in India can be broadly classified into three categories as follows:

• Restriction Phase: In 1969, Government of India enforced Monopolies and Restrictive Trade Practices Act (MRTP Act), where restrictions are imposed on the size of operations, transfer of shares, pricing of products and services etc… of foreign companies. The Foreign Exchange Regulations Act (FERA), was enacted in1973, which limited the foreign equity to 40%, limits could be raised to 74% on the sectors which are technology incentive, export-intensive and core-sector industries.
• Liberalization Phase: In 1991 as per the “Statement of Industrial Policy”, FDI, upto 51%, was allowed in automatic route in 35 highly priority industries. In 1996, the same was expanded to 111 industries under different categories (Part A upto 50%; Part- B upto 51%; Part C up to 74% and Part D up to 100%). A board was constituted to consider the cases under government route and named as Foreign Investment Promotion Board (FIPB).
• Globalization Phase: From the year 2000 the Indian economy is moving towards Globalization. A paradigm shift occurred by placing several sectors under the automatic route and keeping the sensitive sectors under the Government Approval Route.

PRESENT STATUS OF FOREIGN DIRECT INVESTMENT IN INDIA

The concept of Foreign Direct Investment (FDI) is widely changed since 2000-01. Earlier, FDI in India is mainly comprised of equity capital till 1999-2000. From 2000-01 the coverage of FDI has been expanded besides equity capital to include reinvested earnings (retained earnings of FDI companies) and other direct capital (like inter-corporate debt transactions between related entities), in line with international best practices.

The policy framework on FDI, framed by Government of India, is easy to understand and transparent. The main objective is to attract and to promote foreign investment in order to supplement the domestic capital, technology and skills, to achieve faster, inclusive and sustainable growth. 

There are two routes through which FDI is allowed in India they are i) Automatic route and ii) Government route.

1. Automatic Route – Without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
2. Government Route – The activities which are not covered under automatic rout requires prior approval of the Government.

The FDI inflows in India have increased significantly (approx. over 15 times) from 2000-01 to 2023-24. According to the Department for Promotion of Industry and Internal Trade (DPIIT), India’s cumulative FDI inflow stood at US$ 953.14 billion from April 2000 to September 2023.

This significant increase is mainly due to Government efforts in relaxing FDI norms and improving ease of doing business in India. The cumulative Total FDI inflow (i.e Equity inflow + ‘Re-invested earnings’ + ‘Other capital’) stood at US$ 15.34 billion from April 2023 to September 2023 stood at US$ 17.56 billion and FDI equity inflow for the same period stood at US$ 9.543 billion.

Major Sectors and States Which Attracts more FDI in India

According to FDI Statistics, the following five sectors attracts more FDI and sectors shows cumulative FDI equity inflow April 2000-September, 2023. India’s Service Sector attracted the larges FDI equity inflow of 16% (US$ 106.71 billion) followed by computer, software and hardware industry at 15% (US$ 97.31 billion). Trading takes third place with 6% (US$ 40.45 billion) followed by Telecommunications in the fourth place with 6% (US$ 40.45 billion) and Automobiles at fifth place with 5% (US$ 35.41 billion).

The States which received more number of FDIs from April 2000-September 2023 are

1. Maharashtra (US$ 61.92 billion) with 30% of FDI
2. Karnataka (US$ 47.31 billion) with 23% of FDI
3. Gujarat (US$ 19 billion) with 16% of FDI
4. Delhi (US$ 28.30 billion) with 14% of FDI
5. Tamil Nadu(US$ 9.85 billion) with 5% of FDI

FDI in India according to World Investment Report, 2023

According to UNCTAD World Investment Report, 2023, “The number of international project finance deals also rose in most regions, although more modestly. The most significant rise was in India, where project numbers increased by 64 percent, making it the recipient of the second largest number of international project finance deals. In the European Union, project numbers increased by 27 per cent, with significant increases in Italy (78 percent), Germany (57 percent) and Spain (10 percent)”.

 The report stated that “In South Asia, FDI flows to India rose by 10 per cent to $49 billion, making it the third largest host country for announced greenfield projects and the second largest for international project finance deals.”

The report also stated that “India became the third largest host country for announced greenfield projects and the second largest for international project finance deals. China, the second largest FDI host country in the world, also saw a 5 per cent increase.”

My Perspective and Conclusion

These are some of the basic of Foreign Direct Investments. India has become one of the attractive destination for Foreign Direct investments. Thanks to ease of doing business and Government’s FDI policy revamp. The Greenfield projects (new projects) are started attracting more FDI; this is one of the major development in any economy.

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