Analysis of Foreign Direct Investment Policies in India

Introduction:

Elements like liberal policies, low wage rate, vast market, and robust banking are the reasons why our country is an attractive destination for Foreign Investors. One of the major factors that has driven India’s economic development is Foreign Direct Investment. Also, it is because of FDI that India’s low employment problem has increased and provided thousands of job opportunities for the people that have fostered the country’s development.

In this current generation which typically represents the trend of globalization, foreign direct investment plays an essential role in the growth of developing countries also developed countries by acting as a bridge and filling the lacuna between investments of resources and saving. It mainly aims to increase the efficiency in the rate of input as well as the rate of output.

What is FDI?

Foreign Direct Investment (FDI) is a process that provides the residents of one country to directly invest their funds in another country. Therefore, in other words, it is an investment process where the ownership in a business is controlled in one country by an entity that is based in other countries. By a notion of direct control, the foreign direct investment is different from foreign portfolio investment[1].

As seen in the balance of payments, the FDI is the sum of equity capital, short term capital, and long term capital and broadly includes mergers and acquisitions, to build new facilities, the profits that are owned from the overseas operations, and intra company loans to be reinvested. If an investor has the intention to invest in funds, then he should be aware of the different types of FDI like Horizontal FDI, Vertical FDI, Conglomerate FDI, and Platform FDI.

FDI in India

In India, economic liberalization started in the wake of the 1991 crisis and since then there has been a remarkable increase in the FDI. This improvement is attributed to the easing of FDI norms. At present, our country is at the top 100 club on Ease of doing business (EoDB) and also grabs the 1^st rank globally in the Greenfield FDI ranking.

• During 2014-15, the FDI inflows in India stood at $45.15 bn and then increased consistently.
• From 2008-14 to 2014-20 the FDI inflow grew by 55% and from 2008-14 to 2014-20 the FDI equity inflow increased by 57%.
• From 2015-16, the FDI inflow increased to $55.56 bn.
• From 2016-17, the inflow went up to $60.22 bn.
• From 2017-18, it became $60.97 bn.
• During 2018-19 our country registered the highest ever FDI inflow of $62.00 bn.
• Also during 2019-20, India attracted investments of more than $74 bn.
• India was among the top 10 receivers of FDI in 2019.
• Also during the initial period of 2020-21, the total FDI inflow received was $35.73 bn and was the highest in the first five months of the financial year. Even in the early 2020 period, the government had decided to sell a 100% stake in national airline Air India.

FDI Routes in India

For FDI in India, there are two routes. Those are:

1. Automatic Route FDI
2. Government Route FDI

Automatic Route

In this route, no prior authority or approval of the Government or the Reserve Bank of India is required by the foreign entity. Some examples are:-

• Thermal power: up to 100%
• Medical services: up to 100%
• Services of Civil Aviation like maintenance and repair organizations
• Ports and shipping
• Railway infrastructure
• Insurance: up to 49%
• Pension: up to 49%

Government Route

Under this route, the foreign investment must take the approval of the government or Reserve Bank of India. There is a process to be followed, that is firstly an application shall be filed by the company through Foreign Investment Facilitation Portal which provides single window clearance, then the application shall be forwarded to the concerned ministry who will accordingly approve or reject the application in consultation with the Department for promotion of Industry and Internal Trade (DPIIT), which falls under the Ministry of commerce. Under the existing FDI policy, the DPIIT will issue the Standard operation Procedure (SOP) for processing the applications. Some examples are:-

• Banking & Public Sector: 20%
• Broadcasting Content Services: 49%
• Mining and Minerals separations of titanium bearing minerals and ores: 100%
• Multi-Brand Retail Trading: 51%
• Satellite: 100%
• Food Products Retail Trading: 100%

Sectors where FDI are Restricted

Some sectors where the FDI is completely restricted are:-

• Gambling or betting business
• Lotteries
• Atomic Energy Generation
• Cigars, Cigarette’s or else any Tobacco industry
• Agricultural activities
• Trading in TDR’s
• Housing and Real Estate
• Investment in Chit Funds
• Nidhi Company

The FDI inflow is prohibited in sectors like defense and insurance in order to protect and safeguard the country.

Key Advantages and Disadvantages of FDI in India

Advantages of Foreign Direct Investment in India are:

1. A large scale of economic growth is stimulated in India by FDI. This large-scale employment helps in the betterment of the lives of the people and also increase their standard of living.
2. A number of employment opportunities increase due to FDI. As a result, our nation’s purchasing power increases because people spend their income.
3. The human resource development increases the human capital portion of the country. And the FDI helps in the development of human resources.
4. The procedure of FDI is robust. As time passes by, the introduction of enhanced technologies makes the fintech industry more efficient.

Disadvantages of Foreign Direct Investment in India are:

1. FDI creates the problem of pollution in the country.
2. One of the main reason for the exchange crisis is FDI
3. The domestic investment and companies are badly affected
4. The FDI has also crossed the line of corrupting the high officials and political bosses in many countries just to capture the foreign market.
5. FDI has also contributed to the inflation in the country.
6. The production of certain products have been restricted because of the introduction of TRIPs (Trade Related Intellectual Property Rights) and TRIMs (Trade Related Investment Measures)

A step in the Right Direction: E-Commerce Policy

The Government of India had introduced several new rules and changes regarding FDI policy for E-commerce which became effective from 1^st of February 2019. These rules were made for safeguarding the interest of offline retailers.

Also since the 2000s, the Indian Government has been making many attempts to regulate India’s E-Commerce Retail Market. On February 23, 2019, a draft national e-commerce policy was released by the Indian Government from the stakeholders. Six major issues were dealt with under this draft policy:-

• Data
• Development of Infrastructure
• E-commerce marketplaces
• Regulatory issues
• Stimulating domestic digital economy
• Exporting promotion through e-commerce

The online retail market constitutes a minuscule of just 3% of the total retail market in India even though our country has the 2^nd largest internet market and smartphone market in the world. The legal framework that regulates the retail market in India is one of the major reasons has to why there is limited penetration of the online market.

Conclusion

There is no doubt that India is receiving FDI inflows far beyond the potential level. Although the government of India has taken various steps to make simple and transparent FDI policies, increase the FDI limits in different sectors, and placing the sectors on approval route still India receives lesser FDI in relation to the developing economies of China and Brazil.

The Government of India should focus on attracting more equity investments. In India, the retailers can fight against the foreign retailers and last in the competition due to their own merits like local market, low price, credit facility, and personalized services.

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References:

[1] Grouping of assets like stocks, bonds and cash equivalents

Other Sources:

1. https://www.investindia.gov.in/foreign-direct-investment
2. https://www.fdi.finance/blog/what-is-the-automatic-route-of-fdi-in-india/
3. https://www.business-standard.com/about/what-is-fdi
4. Market study on e-commerce in India, Key Findings and Observations, Competition Commission of India, January 8, 2020