Foreign Direct Investment (FDI) is a crucial driver of economic growth and a significant non-debt financial resource for India’s economic development. It differs from Foreign Portfolio Investment (FPI), where the foreign entity merely buys stocks and bonds of a company without gaining control over the business.
The importance of FDI to the Indian economy became evident as the nation received an annual FDI inflow of USD 84,835 million in FY 21-22, surpassing the previous year’s FDI by USD 2.87 billion. The UNCTAD World Investment Report (WIR) 2022 ranked India at 7th among the top 20 host economies for 2021 in terms of FDI.
Top Recipients & Sectors of FDI in India
India witnessed the highest annual FDI inflows in the fiscal year 21-22, which overtook the previous fiscal’s FDI by a significant USD 2.87 billion. The top five countries sourcing FDI to India include Singapore, USA, Mauritius, Netherland, and Switzerland.
Key sectors attracting FDI include computer software and hardware, services sector, automobile industry, trading, and construction (infrastructure) activities. Karnataka, Maharashtra, Delhi, Tamil Nadu, and Haryana are the top destinations receiving these investments. The manufacturing sector saw a considerable increase in FDI equity inflow by 76% in FY 2021-22.
Understanding Foreign Direct Investment
FDI entails investing in a business interest in a foreign country, such as establishing a subsidiary, acquiring or merging with a foreign company, or starting a joint venture with a foreign enterprise. The FDI comes in various components like equity capital, reinvested earnings, and intra-company loans.
In India, FDIs follow two routes – Automatic Route and Government Route. The former doesn’t require prior government or RBI approval for non-critical sectors. In contrast, the latter requires government approval through the Foreign Investment Facilitation Portal (FIFP) for investments in sensitive sectors.
Government Initiatives to Boost FDI
The Indian government has implemented various initiatives to stimulate FDI inflows, including relaxing FDI norms across several sectors and launching campaigns like ‘Make in India’ and ‘Atmanirbhar Bharat’. Policies like the National Technical Textile Mission, Production Linked Incentive Scheme, Pradhan Mantri Kisan SAMPADA Yojana have also been designed to attract investments.
These initiatives, along with other factors like a good business climate and reduced regulatory framework, have triggered a shift in many companies from China to India. This includes companies like Lava International, which significantly contributed to higher FDI inflows in India.
Retaining Growth in FDI
With appropriate government policies and conducive global investor environment, India can retain and enhance its FDI growth. The opportunities brought about by the pandemic disruptions have allowed India to expand its global footprint. For continuous foreign investment, it’s essential to provide a level-playing field and avoid sneaking loyalty towards local players.
A sound trade policy complementing policy initiatives and reforms can further boost exports, encourage inclusive development, and incentivise R&D to make the industry globally competitive. As FDI has more potential to facilitate the growth of the Indian economy than FPI, it’s crucial that India remains an attractive, safe, predictable destination for serious, long-term investors.
Examining UPSC Civil Services Examination Previous Year Questions
Analysing previous year questions from the UPSC Civil Services Examination provides insights into the relevance of FDI in India. One such question from 2021 explores the different forms of foreign investments that can be included in FDI. The correct answer includes options, such as Foreign Currency Convertible Bonds, Foreign Institutional Investment with specific conditions, and Global Depository Receipts.
