FDI-Still Going Strong

Aimed at making it easy for the foreign investors to understand the rules of investing in India, The Ministry of Commerce and Industry recently released the consolidated Foreign Direct Investment (FDI) policy of India. The government updates the FDI policy every year and this document is a compilation of all those policy amendments so that the investors wouldn’t have to go through various press notes issued by the department and RBI regulations to understand the policy changes. It doesn’t introduce any new policy on its own; it’s just a compilation of all sector-specific policy changes made in the past one year. During the past one year, government has liberalized FDI policy in a lot of sectors like Defence, news broadcasting, construction and development, civil aviation etc. to attract more and more foreign investors, which in turns brings more FDI and boosts economic growth and creates more job opportunities.

FDI can be defined as a direct capital investment or other economic activity made by an enterprise located in some country, called the host country to some other country, called the home country. Country receiving the FDI sees an inflow of equipment and technology, competitive advantage and innovation, new jobs, contribution to exports growth, competitive advantage and innovation. But every coin has two sides. The extra competition creates crowding of the local industry, negative impact on the local culture and natural environment, and creates a conflict of laws.

FDI inflows in last four fiscals:

2016-17: $60.08 billion

2015-16: $55.6 billion

2014-15: $45.15 billion

2013-14: $36.05 billion

FDI inflows in last fiscal, 2016-17 were an all-time high. This trend is majorly attributed to the bold policy reforms undertook by the government, in the last three years, where 21 sectors covering 87 areas of FDI policy have undergone reforms. All of this started in the year 2014 itself when the government liberalized the conservative sectors like Rail infrastructure and Defence and policy reforms in some other sectors like Medical Devices and Construction Development. To provide the ease of business, licensed and non-sensitive activities were placed under the automatic route (allowed without government’s approval) and the investment caps were raised the following year. Overhauling of the FDI policies in some other sectors like Broadcasting, Retail Trading, Air Transport, and Insurance etc. was done. In the last fiscal, the government allowed 100% FDI in retail trading of food products with an unconditional provision that food products have to be manufactured and/or produced in India.

FDI inflow grew at an astounding rate of 37% in the period April-June 2017 at $10.4 billion compared to the same period last year when it was $7.59 billion. The FDI in India have almost doubled in past decade, reaching 1.9% of the GDP in 2016-17. According to a report submitted by UBS Securities India, FDI inflows to India are likely to rise to 2.5% of the GDP in the next five years, thanks to the economic growth and ongoing structural reforms. It also pointed out that unlike China, who has phased-out FDI favoured policies; India is going to be a bright spot as overseas investors look to invest in this promising market. Historically these inflows used to be more focused towards the service sector, but these reports indicate there was a record foreign investment in the manufacturing sector over the last couple of years. Nevertheless India needs FDI inflows to reduce its trade deficit as the report also suggested that country should focus on attracting stable FDI inflows to make its manufacturing sector more competitive and make itself an integral part of the global chain.