ABSTRACT
Foreign Direct Investment (FDI) has emerged as a pivotal instrument in catalyzing economic transformation within emerging economies, particularly India. Post-1991’s liberalization marked a paradigmatic shift in India’s economic governance, wherein FDI was re-conceptualized not merely as a capital inflow mechanism, but as a strategic driver for technological innovation, employment generation, and infrastructure augmentation. This research examines the legal and policy architecture governing FDI in India, tracing its evolution from a protectionist framework to a liberalized, investor-friendly regime. It further interrogates the effectiveness of flagship initiatives such as Make in India, Startup India, and the Production-Linked Incentive (PLI) schemes in enhancing the quality and quantum of FDI. Through a sectoral and regional disaggregation of recent inflow data, the research analyzes the spatial and developmental asymmetries emerging from FDI allocation. However, while FDI contributes significantly to macroeconomic indicators, it also raises pressing concerns within the legal and regulatory ecosystem. The research critiques existing constraints such as sectoral caps, regulatory opacity, and adverse impacts on micro, small, and medium enterprises (MSMEs). In comparative terms, India’s FDI regime is assessed against competing jurisdictions like China, Vietnam, and Indonesia to evaluate its relative competitiveness and policy coherence. This research proposes advance calibrated legal and policy recommendations aimed at ensuring India’s sustained attractiveness as a global FDI destination, with an emphasis on institutional stability, judicial predictability, and digital governance. It underscores the necessity for a nuanced legal framework that maximizes benefits while mitigating the structural risks inherent in excessive capital dependence.
Keywords: Foreign Direct Investment, Economic Growth, Liberalizatiom, Make in India, Startup India, Production Linked Incentive, Sectoral Caps.
INTRODUCTION
FDI, in its most formal definition, refers to an investment made by a firm or individual in one country into business interests located in another country, typically by acquiring a lasting interest and a degree of control in an enterprise. The legal framework governing FDI is often enshrined in bilateral investment treaties (BITs), multilateral agreements, and domestic legislations such as India’s Foreign Exchange Management Act (FEMA), 1999, supplemented by sectoral regulations and guidelines issued by the Department for Promotion of Industry and Internal Trade (DPIIT). In essence, FDI embodies not merely a capital inflow but a complex legal relationship grounded in rights, obligations, and expectations between the investor and the host state, thereby necessitating an equilibrium between economic ambition and regulatory sovereignty.[1]
In the context of developing economies, particularly India, FDI holds a pivotal role as a catalyst for inclusive economic transformation. It functions as a conduit for augmenting domestic capital, promoting enterprise competitiveness, and enhancing the technological and managerial capacity of host industries. The significance of FDI becomes especially pronounced in the backdrop of fiscal constraints and underdeveloped domestic capital markets. Through the lens of developmental jurisprudence, FDI is viewed not merely as a financial infusion but as a strategic tool to stimulate industrial diversification, reduce regional disparities, and integrate domestic markets with global value chains. India’s positioning as a preferred investment destination is deeply influenced by macroeconomic stability, demographic dividend, and an evolving reform-centric legal ecosystem.[2]
Nevertheless, the influx of FDI in a developing polity like India invokes a nuanced legal balancing act, preserving the sovereignty of policy-making while offering predictability and protection to foreign investors. The importance of FDI must be considered within a matrix of legal safeguards including investor-state dispute settlement (ISDS) mechanisms, repatriation norms, and non-discriminatory treatment, which collectively shape the investment climate. The Indian state’s dual imperative, to attract FDI while safeguarding local enterprises and socio-economic equity, raises critical jurisprudential questions on the limits of liberalization. Thus, the discourse on FDI in India is not merely economic but intrinsically legal, reflecting a dynamic interplay between globalization and sovereign regulatory power.
[1] FDI & FEMA: Reinforcing Indian economy (Resurgent India (Firm) ed., 2014).
[2] Id.