In the Fiscal Year of 2020-21, India witnessed a groundbreaking growth of 10%, amounting to $82 billion in Foreign Direct Investment (FDI). This remarkable growth is an increase from the $74.39 billion received as FDI in the previous financial year, 2019-20. In particular, FDI equity investments rose significantly by 19%, totaling at $60 billion, up from the almost $50 billion gained in 2019-20.
Key Contributors to The FDI Surge: Top Investors
Singapore emerged as the top investor, contributing nearly one-third of all foreign investments. The United States (U.S.) closely followed with providing 23% of the total FDI, and Mauritius facilitated 9% of the foreign capital flows.
Exceptional Growth from Saudi Arabia
Among the top 10 countries for FDI origin, Saudi Arabia exhibited the highest growth. Investments saw a substantial jump from merely $90 million in the financial year 2019-20 to an impressive $2.8 billion in 2020-21.
FDI Equity: US and UK Investments
FDI equity flows from the United States more than doubled in comparison to 2019-20. Additionally, investments originating from the United Kingdom experienced a surge of 44%.
Top Destinations for FDI in India
Gujarat emerged as the top destination for FDI in 2020-21, attracting 37% of foreign equity inflows. Maharashtra follows next, garnering 27% of the equity inflows, while Karnataka accounted for another 13%.
Dominant Sectors Receiving FDI
Computer software and hardware surfaced as the dominant sector, accounting for approximately 44% of the total FDI equity inflow in 2020-21. This was followed by construction (specifically infrastructure) activities at 13% and service sectors at 8%.
Understanding Foreign Direct Investment (FDI)
FDI is a process wherein residents of one country acquire the ownership of assets to control the production, distribution, and other activities of a firm in another country. This differs from Foreign Portfolio Investment where the foreign entity only purchases stocks and bonds of a company without gaining control over the business.
Three Components of FDI
FDI comprises equity capital, reinvested earnings, and intra-company loans or debt transactions. Equity capital is a foreign direct investor’s acquisition of shares in an enterprise in a country other than its own. Reinvested earnings include profits retained by affiliates that are reinvested. Intra-company loans or debt transactions refer to borrowing and lending of funds between direct investors and affiliate enterprises.
Routes of FDI to India
India receives FDI through two main routes: Automatic Route and Government Route. Foreign entities do not require prior approval from the government or Reserve Bank of India under the automatic route. In contrast, the government route requires foreign entities to obtain government approval.
Government Measures to Boost FDI
In 2020, several factors contributed to attracting investments, such as rapid response to the Covid crisis, favourable demographics, widespread mobile and internet penetration, vast consumption, and technology uptake. The government launched schemes like National technical Textile Mission, Production Linked Incentive Scheme, and Pradhan Mantri Kisan SAMPADA Yojana. Initiatives under Atmanirbhar Bharat were elaborated to encourage investments across various sectors. Furthermore, the Indian government deregulated FDI rules for several sectors as a part of the Make in India initiative promoting domestic manufacturing.