Foreign Direct Investment: Importance, Indicators, Routes

Introduction

Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy. Ownership of 10 percent or more of the voting power in an enterprise in one economy by an investor in another economy is evidence of such a relationship (OECD).

Importance and Indicators of Foreign Direct Investment

• Foreign Direct Investment (FDI) is a crucial element in fostering international economic integration because it creates stable and long-lasting links between economies. 
• Foreign Direct Investment (FDI) is an important channel for the transfer of technology between countries.
• Foreign Direct Investment (FDI) promotes international trade through access to foreign markets and can be an important vehicle for economic development. 
• The indicators covered in this group are inward and outward values for stocks, flows and income, by partner country and by industry and FDI restrictiveness.

Types of Foreign Investment

Factors Affecting Foreign Direct Investment (FDI) Inflows

• Understanding the factors that influence Foreign Direct Investment (FDI) inflows is crucial for any nation aiming to attract and maximize foreign capital. 
• In India, significant determinants impacting the influx of foreign investments include:
  • Economic stability
  • Regulatory environment
  • Sectoral policies
  • Political stability
  • Infrastructure

Foreign Direct Investment (FDI) Routes in India

• There are two routes for FDI 
  • Automatic Route: A foreign investor or an Indian company does not require any approval from RBI or the Government of India for the investment.
    • Investors are only required to notify the Reserve Bank of India (RBI) within a specified time frame.
    • This route is designed to promote ease of doing business and attract foreign capital, making it particularly attractive for sectors open to higher FDI limits or do not have specific security concerns.
  • Government Route: With government approval
• Investment is permitted through the government route only in the following cases
• • An entity situated in a country that shares a land border with India.
  • Where the owner of investment into India is situated in or is a citizen of any such country.
  • Any transfer of ownership of any FDI in an entity in India leading in beneficial ownership falling within the purview of the above restrictions.
• Foreign Investment Facilitation Portal (FIFP): administered by the Department for Promotion of Industry and Internal Trade (DPIIT) Under Ministry of Commerce facilitates the single window clearance of applications which are through approval route.

Foreign Direct Investment (FDI) Route in India

• There are two routes for FDI 
  • Automatic route: FDI is allowed without prior approval by Government/ RBI.
  • Government route: with Government approval
• Investment is permitted through government route only in the following cases
  • An entity situated in a country which shares a land border with India.
  • Where the owner of investment into India is situated in or is a citizen of any such country.
  • Any transfer of ownership of any FDI in an entity in India leading in beneficial ownership falling within the purview of the above restrictions.
• Foreign Investment Facilitation Portal (FIFP): administered by the Department for Promotion of Industry and Internal Trade (DPIIT) Under Ministry of Commerce facilitates the single window clearance of applications which are through approval route.

FDI Prohibited In: 

• Retail Trading (except single brand product retailing)
• Atomic Energy
• Lottery Gambling and Betting including casinos etc.;
• Chit fund;  Nidhi Company; 
• Agriculture and Plantations (Other than Tea Plantations);
• Real estate/construction of farm houses;
• Manufacturing of Cigars/tobacco. Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA).

Qualified Foreign Investor: 

• An individual, group or association which is a resident in a foreign country, making portfolio investment in India.
• The QFI should comply with the Financial Action Task Force standard and should be a signatory to the International Organization of Securities Commission.

Registered Foreign Portfolio Investor

• The portfolio investor registered in accordance with the SEBI guidelines.
• The existing portfolio investor class → Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) registered with SEBI shall be subsumed under it.

Recent Status of FDI in India

• As per Recent data (Make In India), India has attracted total FDI inflow of USD 70.97 bn during the financial year 2022-23.
  • Total FDI inflows in the country in the last 23 years (April 2000 – March 2023) are USD 919 bn 
    • while the total FDI inflows received in the last 9 years (April 2014- March 2023) was USD 595.25 bn which amounts to nearly 65% of total FDI inflow in last 23 years.
• Top 5 sectors receiving highest FDI Equity Inflow during FY 2022-23.
  • Services Sector (Fin., Banking, Insurance, Non Fin/ Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (16%), 
  • Computer Software & Hardware (15%), 
  • Trading (6%), 
  • Telecommunications (6%).
  • Automobile Industry (5%).
• Top 5 countries for FDI equity inflows into India FY 2022-23.
  • Mauritius (26%), 
  • Singapore (23%), 
  • USA (9%), 
  • Netherland (7%) 
  • Japan (6%) 
• Top 5 States receiving highest FDI Equity Inflow during FY 2022-23 are 
  • Maharashtra (29%), 
  • Karnataka (24%), 
  • Gujarat (17%), 
  • Delhi (13%), 
  • Tamil Nadu (5%).

Conclusion

• Foreign Direct Investment (FDI) and foreign investment play pivotal roles in fostering economic growth and development globally.
• Foreign Investments provide opportunities for countries to attract foreign capital, stimulate domestic industries, create employment, and enhance competitiveness in the global market. 
• Overall, FDI and foreign investment are essential drivers of economic progress, innovation, and fostering mutually beneficial relationships between nations.