Trend on Foreign Direct Investment (FDI) in India

In News

• India is rapidly emerging as a preferred country for foreign investments in the manufacturing sector.

Recent Trend

• Total FDI Inflows:
  • India received the highest annual FDI inflows of USD 84.835 billion in FY 21-22 overtaking last year’s FDI by USD 2.87 billion. 
• Top 5 sourcing nations for FDI equity flows into India in FY 2021-22 are:-
  • Singapore (27.01%);
  • USA (17.94%) 
  • Mauritius (15.98%), 
  • Netherland (7.86%) and 
  • Switzerland (7.31%). 

• Top 5 sectors receiving highest FDI Equity Inflow during FY 2021-22 are-
  • Computer Software & Hardware (24.60%), 
  • Services Sector (Fin., Banking, Insurance, Non Fin/Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (12.13%), 
  • Automobile Industry (11.89%), 
  • Trading 7.72% and 
  • Construction (Infrastructure) Activities (5.52%).
• Top 5 States receiving highest FDI Equity Inflow during FY 2021-22 are:-
  • Karnataka (37.55%), 
  • Maharashtra (26.26%), 
  • Delhi (13.93%), 
  • Tamil Nadu (5.10%) and 
  • Haryana (4.76%)
• Increasing FDI Inflow in Manufacturing Sectors:
  • India is rapidly emerging as a preferred country for foreign investments in the manufacturing sector. 
  • FDI Equity inflow in Manufacturing Sectors have increased by 76% in FY 2021-22 (USD 21.34 billion) compared to previous FY 2020-21 (USD 12.09 billion).
• As per the UNCTAD World Investment Report (WIR) 2022, in its analysis of the global trends in FDI inflows, India has improved one position to 7th rank among the top 20 host economies for 2021.

Foreign Direct Investment (FDI)

• About:
  • It refers to the conditions when a company or investor takes ownership and controls operation in a business entity in another country.
  • With FDI, foreign companies are directly involved with day-to-day operations in the other country which implies that along with bringing money, they also bring knowledge, skills and technology.
  • It is an important non-debt monetary source for India’s economic development.
• Requirements:
  • All foreign investments are required to be in compliance with the applicable entry route, sectoral cap, attendant conditions, sectoral laws, Companies Act, 2013 and rules thereunder, pricing guidelines, documentation and reporting requirements.
• FDI Routes:
  • Automatic Route – In India FDI up to 100% is allowed in non-critical sectors through the automatic route, not requiring security clearance from the Ministry of Home Affairs (MHA). 
  • Government Route – Prior government approval or security clearance from MHA is required for investments in sensitive sectors such as defence, media, telecommunication, satellites, private security agencies, civil aviation and mining, besides any investment from Pakistan and Bangladesh.

Benefits of FDI

• Increase in Economic growth
• Development of human capital
• Improved technology, tools and skills
• Rise in exports
• Facilitates the stability in the exchange rate
• Creation of a Competitive Market
• Helps in combating climate change

Challenges of FDI

• Unethical access to local markets
• Hindrance of domestic investment
• Not suitable for strategically important industries
• Investors have less moral attachment
• The risk from policy changes

Government Efforts to Promote FDI

• Transformative reforms across sectors: The Government has implemented several transformative reforms under the FDI policy regime across sectors such as insurance, defence, telecom, financial services, pharmaceuticals, retail trading, e-commerce, construction & development, civil aviation, manufacturing etc.
• Regulatory Relaxations: The Government continues to liberalise investment restrictions, eliminate regulatory barriers, nurture international relations and improve the business environment. 
• FDI Policy Changes: Changes are made in the FDI policy after having consultations with stakeholders including apex industry chambers, associations, representatives of industries/groups and other organisations.
• Production Linked Incentive (PLI) scheme: The Government introduced a Production Linked Incentive (PLI) scheme for the various sectors that gives large impetus to the FDI inflow.

Source: PIB