Recent trends indicate a significant growth in the inflow of Foreign Direct Investment (FDI) into India. The first four months of the 2021-22 fiscal year (April – July), witnessed an increase of 62% in FDI inflows. This surge resulted in an impressive total of USD 27.37 billion, compared to the corresponding period last fiscal year (2020). Last year’s FDI growth stood at 10%, with a net investment of $82 billion.
Key Findings: Equity and Top Sectors
A noticeable aspect is the staggeringly high growth in FDI equity inflow. It increased by 112% to USD 20.42 billion in the April-July period of FY 2021-22. The leading sectors attracting FDI equity were the Automobile Industry, Computer Software & Hardware and the Services sector. The Automobile Industry emerged as the top performer, commanding a 23% share of the total FDI Equity inflow. It was closely followed by the Computer Software & Hardware (18%), and the Services Sector (10%).
Top Destinations for FDI in India
The states that attracted the most FDI included Karnataka, Maharashtra, and Delhi. Karnataka led the pack with a mammoth 45% share of the total FDI Equity inflows. Maharashtra followed closely with 23%, and Delhi accounted for 12%.
Defining Foreign Direct Investment
Foreign Direct Investment is the process where residents of a country (home country) acquire ownership of assets in another country (host country) with an aim to control the production, distribution, and other activities of a firm. This concept is different from Foreign Portfolio Investment (FPI) where a foreign entity just purchases stocks and bonds of a company and does not hold control over its business operations.
Components of FDI
FDI is generally composed of three components: Equity capital, reinvested earnings, and intra-company loans. The equity capital refers to the foreign direct investor’s purchase of shares in an enterprise outside its country. Reinvested earnings constitute the share of earnings that are not distributed as dividends or remitted to the direct investor but reinvested by affiliates. Intra-company loans refer to the borrowing and lending of funds between the direct investor (or enterprises) and their affiliate enterprises.
Roadmap to India’s FDI Inflows
FDI in India mainly comes through two routes: Automatic Route and Government Route. In the Automatic Route, no prior approval from the government or the Reserve Bank of India (RBI) is required. On the other hand, the Government Route necessitates approval from the government, facilitated by the Foreign Investment Facilitation Portal administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
Government Initiatives for promoting FDI
Several factors such as favorable demographics, impressive mobile and internet penetration, massive consumption patterns and technology uptake have played a crucial role in attracting investments. The government has launched schemes like National technical Textile Mission, Production Linked Incentive Scheme, and Pradhan Mantri Kisan SAMPADA Yojana to attract more investments. Government measures under the Atmanirbhar Bharat initiative aim to stimulate investments across sectors. Also, as part of its ‘Make in India’ drive to promote domestic manufacturing, India has deregulated FDI rules for several sectors over the past few years.