Dr. Kakali Majumdar
Foreign Direct Investment (FDI) plays an important role for long-term development of India, not only as a source of capital but also for improvement in the competitiveness of domestic economy by transmitting technology, strengthening infrastructure, enhancing productivity, generating new employment opportunities etc. Until 1991, India was primarily a closed economy. With the economic liberalization of 1991, India gradually opened up to FDI in a wide range of sectors under Foreign Exchange Management Act (FEMA), driven by the then finance minister Dr. Manmohan Singh. Initially the infrastructure sector welcomed foreign equity. FDI was especially encouraged in ports, highways, oil and gas industries, power generation and telecommunication. Consumer goods and service sector which was once completely inaccessible for foreign equity was also gradually opened up. The Reserve Bank of India (RBI) set up an automatic approval system which allowed investments in slabs of 50, 51 or 74% depending on the priority of the industry, as defined by the government. The foreign investment limits were slowly raised and for some sectors the limits were raised to 100%.
The Department of Industrial Policy & Promotion (DIPP) is the agency for formulation of the policy of Government with regard to Foreign Direct Investment. Except few small list of sectors, which are either prohibited for FDI, or are subject to restrictions in the nature of equity caps, entry route etc, 100 % FDI is allowed in India. The sectors where 100% FDI is allowed covers almost all manufacturing activities, non-banking financial services, software development, hospital, private oil refineries, electricity generation (non-atomic) / transmission / distribution, roads & highways, ports & harbors, hotel & tourism, research and development etc. Recently sectors like Telecom and Pharma were also opened up to 100% FDI. FDI up to 74% is allowed for private banks. Atomic energy, Railway operations etc. are the sector where FDI is totally prohibited.
The economic development witnessed during the past two decades in India owes its progress, to a great extent as an outcome of Foreign Direct Investment. FDI in India is done across wide range of industries and its continuous influx reflects tremendous scope, faith and trust that foreign investors repose in Indian economic growth. Since April 2000 to December 2014, total FDI into India, including equity inflows, reinvested earnings and other capital was US $ 355.42 billion. Total FDI inflows increased to US $ 44.9 billion during FY 2015 as compared to US $ 36.0 billion in FY 2014 which is around 24.5 increase in percentage term year on year basis. Mauritius is consistently the highest source of FDI in India. During FY2014-2015, India received the maximum FDI equity inflows from Mauritius at US$ 9.03 billion, followed by Singapore (US$ 6.74 billion), Netherlands (US$ 3.43 billion), Japan (US$ 2.08 billion) and the US (US$ 1.82 billion). Healthy inflow of foreign investments into the country helped India’s balance of payments situation and stabilized the value of rupee.
So far as trend of (FDI) inflows into India is concerned it has been steadily rising since 2000 until the global financial crisis swept the global economies. Global financial crisis resulted in sharp downward fall in FDI inflows to India. Policy changes on multiple fronts, helped to enhance the FDI inflow trend in India in a positive direction during post crisis period. ‘Make in India’ initiative by Government of India during September 2014 is basically a global promotional campaign to project India as an investment destination and potential manufacturing hub. The initiative is also aimed at attracting global companies to produce locally and to strengthen country’s manufacturing sector. The growth in FDI has increased significantly after the launch of ‘Make in India’ campaign. 48% increase in FDI equity inflows is observed during October 2014 to April 2015 over the corresponding period of last year. Total global FDI fell by 16% during 2014. However, much of Asia saw increased inflows and India was among the countries that showed the biggest increases.
For FY2015 the increase in the FDI inflows is primarily driven by investments in infrastructure and services sector. Within Infrastructure, Oil & Gas, Mining and Telecom witnessed higher FDI inflows, whereas IT services and trading (wholesale, cash & carry) drove the services inflows. Most recently, total FDI inflows for the month of May 2015 touched US $ 3.85 billion as compared to US $ 3.6 billion in the same period last year.
A notable amendment is observed in FDI policy regarding Construction Development Sector. It includes easing of area restriction norms, reduction of minimum capitalization and easy exit from project. In order to boost the low cost affordable housing, the area restriction and minimum capitalization will not apply to cases committing 30 per cent of the project cost towards affordable housing. The Government of India recently relaxed the FDI policy norms for Non-Resident Indians (NRIs). Under this scheme, the non-repairable investments made by the Persons of Indian Origin (PIOs), Overseas Citizens of India (OCI) and NRIs will be treated as domestic investments and will not be subject to FDI caps.
The government has also raised FDI cap in insurance from 26 per cent to 49 per cent through a notification issued by the DIPP. The limit is composite in nature as it includes foreign investment in the form of foreign portfolio investment, foreign institutional investment, qualified foreign investment, foreign venture capital investment, and non-resident investment.
India’s cabinet cleared a proposal which allows 100 per cent FDI in railway infrastructure, excluding operations. Though the initiative does not allow foreign firms to operate trains, it allows them to invest in areas such as creating the network and supplying coaches for bullet trains etc.
(The author is a faculty member, Department of Economics, Shri Mata Vaishno Devi University, Katra)
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