From April to August 2020, significant foreign direct investment (FDI) inflows were observed in India. Specifically, the country received a total of USD 35.73 billion in FDI during this period, marking the highest ever for the first five months of a financial year. Interestingly, this increase happened despite the country’s Gross Domestic Product (GDP) contracting by 23.9% in the first quarter of the financial year (April-June 2020.)
Comparison of FDI Inflows: Then and Now
The FDI inflow noted in the first five months of the 2020-21 financial year is USD 35.73 billion, which is 13% higher compared to the same period in 2019-20 when it was USD 31.60 billion. This new value also represents a total growth of 55%, jumping from USD 231.37 billion in 2008-14 to a whopping USD 358.29 billion in 2014-20.
Furthermore, FDI equity inflow – one of the three parts of FDI – received from April to August 2020, touched USD 27.10 billion. This figure not only sets a record for the first five months of a financial year, but it is also 16% more than the equivalent period in 2019-20 when it was USD 23.35 billion.
Government Measures Driving Growth in FDI
The Indian Government has been instrumental in driving growth in FDI inflow through its policy reforms, investment facilitation, and initiatives to ease the process of doing business in India. Thanks to these efforts, India rose to 9th place among the largest recipients of FDI in 2019, according to the World Investment Report 2020 by the United Nations Conference on Trade and Development (UNCTAD).
Furthermore, several schemes have been introduced, like the production-linked incentive (PLI) for electronics manufacturing, to entice foreign investors. Changes in FDI policy include permitting 100% FDI under automatic route in coal mining activities as well as a 26% FDI allowance in digital sectors.
FDI in Contract Manufacturing
In 2019, the Indian Government clarified that investments in Indian entities engaged in contract manufacturing are allowed under the 100% automatic route, provided these are through legitimate contracts. Contract manufacturing refers to the production of goods by one firm under the brand or label of another firm.
The Role of the Foreign Investment Facilitation Portal (FIFP)
The FIFP is the single point online interface between the Government of India and investors, designed to facilitate FDI. It is administered by the Department for Promotion of Industry and Internal Trade, under the Ministry of Commerce and Industry.
Expectations for Increased FDI Inflows
As per the current trends, it is expected that FDI inflows will continue to increase. This is because foreign investors have shown interest in the government’s moves to allow private train operations, bid out airports, and permit non-resident Indians (NRIs) to acquire up to 100% stake in Air India.
Furthermore, valuable sectors like defence manufacturing, where the government has increased the FDI limit under the automatic route from 49% to 74%, could potentially attract large investments in the future.
Decoding Foreign Direct Investment (FDI)
FDI happens when residents of one country acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country. This is different from Foreign Portfolio Investment (FPI) where the investor simply buys stocks and bonds of a company without gaining control over that company’s business.
FDI is composed of three components – equity capital, reinvested earnings, and intra-company loans. India attracts FDI through two routes – the Automatic Route, which doesn’t require prior approval, and the Government Route, requiring approval from the government.
The Importance of FDI
FDI plays a significant role in driving economic growth and is an important source of non-debt finance for India’s economic development. To keep attracting such investments, it is crucial to maintain a robust and accessible FDI regime especially in the post-pandemic period when market-seeking investments are expected to continue being attracted by India’s large market.
Last Modified: February 9, 2024