In the fiscal year ending March 2023, the inflow of Foreign Direct Investment (FDI) into India faced a considerable decrease. Standing at USD 71 billion for FY23, this represents a 16% drop compared to the previous financial year. This marked the first downturn in a decade. The implications of this decline for the Indian economy, potential challenges and measures for improvement are discussed below.
Understanding Foreign Direct Investment
Foreign direct investment (FDI) is a type of international investment where an investor from one country develops a lasting interest in a company in another country. Various forms of FDI include buying shares, establishing a subsidiary or a joint venture, providing loans or transferring technology. It is deemed a catalyst for economic growth as it brings capital, technology, skills, market access and job opportunities to the recipient country.
Trends and Patterns of FDI Inflows in India
India has been an attractive destination for FDI thanks to its growing domestic market, favourable demographics, political stability, liberal policy framework and improved ease of doing business. Between April 2000 and June 2022, India’s cumulative FDI inflow was USD 871.01 billion, according to the Department for Promotion of Industry and Internal Trade (DPIIT). The World Investment Report 2022 ranked India seventh among the top 20 host economies for 2021. FY22 saw a record FDI inflow of $84.8 billion into India, including $7.1 billion FDI equity inflows in the services sector. Singapore, USA, Mauritius, Netherlands and Switzerland were the top five countries for FDI equity inflows to India in FY-2021-22.
Challenges Related to FDI inflows in India
Despite its attractiveness, India faces major hurdles in maintaining consistent FDI inflows. The Indian tax regime, despite undergoing several reforms, is still complex and uncertain. Frequent amendments in tax laws, multiple levels of taxation, and disputes over tax assessments pose daunting challenges for foreign investors.
India also finds competition in other emerging markets like China, Vietnam, and Indonesia. These nations offer competitive benefits including lower production costs, better infrastructure, and more investor-friendly policies.
Infrastructure deficits in areas such as transport, logistics, power, and telecommunications still exist, raising operational costs for foreign investors.
Boosting FDI Inflows: Potential Steps
Several measures can be implemented to enhance FDI inflows. Simplifying and streamlining regulatory processes – for instance, implementing a single-window clearance system or a digital platform for regulatory compliance – can decrease bureaucracy and make doing business easier.
Improvements in infrastructure across sectors like transportation, logistics, power, and digital connectivity are equally essential. World-class infrastructure facilities and industrial clusters can attract foreign investors looking for efficient and well-connected business environments.
Strengthening investor protection mechanisms, including robust Intellectual Property Rights (IPR) enforcement, contract enforcement, and effective dispute resolution mechanisms, will build confidence among foreign investors.
Formulating sector-specific investment policies and incentives for key sectors like manufacturing, renewable energy, healthcare, technology, and e-commerce can further promote FDI. Tailored policies addressing the specific needs of each sector can encourage foreign investors to invest in these areas.
FDI and UPSC Civil Services Examination: Previous Year Questions
The UPSC Civil Services Examination included FDI-related questions in previous years. The major characteristic of FDI was discussed in 2020 with the correct option being ‘It is a largely non-debt creating capital flow.’ Questions related to components of FDI were also asked in 2021, with options like foreign currency convertible bonds, foreign institutional investment under certain conditions, global depository receipts, and non-resident external deposits. The correct answer for both was the combination of the first three options.