Foreign Direct Investment or FDI is an investment made by a firm or an individual in one country into business interests located in another country. Under Foreign Exchange Management Act (FEMA) governed by the Reserve Bank of India, FDI was introduced in the year 1991 by the then finance minister Dr Manmohan Singh. It started with a baseline of $1 billion in 1990. Today, India is a part of the top 100 club on Ease of Business Doing Businesses (EoDB). The gap between domestic savings and investment requirements can be filled with the help of foreign capital.
Advantages/ Disadvantages of FDI
Some of the FDI advantages are as follows:
i. FDI brings in financial resources
ii. FDI brings in new technologies, knowledge, skills, etc.
iii. Easy international trade.
iv. Development of human capital resources.
v. Tax incentives, etc.
Some of the disadvantages associated with FDI are as follows:
i. Hindrances to domestic investment and domestic companies.
ii. Adverse impact on the exchange rates of the country.
iii. The risk from political changes.
iv. FDI can sometimes be very risky and economically non-viable.
Types of Foreign Direct Investment
There are three types of FDI prevalent in the market. They are:
i. Horizontal FDI: The type of FDI in which funds are invested abroad in the same industry. For example, an investment made by firm X in firm Y and they both are engaged in the same industry.
ii. Vertical FDI: The type of FDI in which the investment is made within the supply chain, but not directly in the same industry. Backwards vertical integration and forwards vertical integration are its two types.
iii. Conglomerate FDI: The type of FDI in which an investment is made completely in a different industry.
FDI – Prohibited Sectors
There are some industries where FDI is strictly prohibited under any of the below mentioned routes. These are Atomic Energy Generation, Banking, Civil Aviation, Petroleum including Exploration/Refining/Marketing, Lottery Business including Government/private lottery/online lotteries, Chit Funds, Nidhi Company, Trading in Transferable Development Rights (TDR), Real Estate business or Construction of farmhouses, Gambling and Betting including casinos, Print Media, Broadcasting, Postal Services, Agricultural and Plantation Activities, etc.
FDI Routes in India There are 3 different types of FDI Routes in India; they are as follows:
i. The Automatic Route (100% FDI permitted) – This route allows investment into different sectors with less restriction. FDI norms and regulations are more liberalized. There is no prior approval required from the Reserve Bank of India (RBI) or Government of India (GoI) for any type of investment into the country by any overseas investor or any Indian company. Examples are:
i) Ports and Shipping, Railway Infrastructure.
ii) Medical devices & Thermal power: up to 100%.
iii) Insurance, Pension, Power Exchanges, Petroleum Refining, Infrastructure companies in the securities market: up to 49%.
ii. The Approval/Government Route (up to 100% FDI permitted) – Under this route, the foreign entity should compulsorily take the approval from the RBI or GoI before investing. The application should be filed through the Foreign Investment Facilitation Portal. The respective ministry/department should then approve or reject the application after consulting with the Department of Industrial Policy & Promotion (DIPP). Examples are:
i) Food Products Retail Trading, Core Investment Company, Satellite (Establishments & Operations): 100%
ii) Multi-Brand Retail Trading: 51%.
iii) Broadcasting Content Services: 49%.
iv) Print Media: 26%.
v) Banking and Public Sector: 20%.
iii. The Government + Automatic Route (up to 100% FDI permitted).
FDI Current Scenario
Department for Promotion of Industry and Internal Trade (DPIIT) stated that the FDI equity inflow in India stood at US$ 469.99 billion during April 2000 and March 2020. FDI equity inflow in India stood at US$ 49.97 billion during 2019-20.
The service sector in India attracted the highest share of FDI equity inflow of US$ 7.85 billion in 2019-20. It was followed by hardware and computer software US$ 7.67 billion then telecommunications and trading. India received the highest FDI from Singapore (US$ 14.67 billion) during 2019-20 followed by Mauritius (US$ 8.24 billion) then Netherlands and USA.
Some of the significant FDI investments made recently are as follows:
1. Jio Platforms Ltd. sold 25.24% stake worth Rs. 1.52 trillion to various investors like Facebook, Google, Qualcomm, General Atlantic, etc. between April 23 and July 16, 2020.
2. Amazon India announced US$ 1 billion investment for the digitisation of small and medium businesses and the creation of 1 million jobs by 2025 in January 2020.
3. Mastercard announced US$ 1 billion investment over the next five years to double its R&D effort in January 2020.
Some of the significant initiatives undertook by the Government are as follows:
1. The Government increased FDI in Defence manufacturing under the automatic route from 49% to 74% in May 2020.
2. The Government permitted NRIs to acquire up to 100% stake in Air India in March 2020.
3. The Government permitted 26% FDI in digital sectors in December 2019.
FDI plays a significant role in the economic growth of developing countries. Attracting significant FDI inflows has become a key battleground in the recently emerging markets. Moreover, this has led to the competition in framing policies and providing incentives to entice private investors to invest more and more.
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Author: Niket Khandelwal, Faculty of Law, University of Delhi