Foreign Direct Investment (FDI)

INTRODUCTION

Foreign Direct Investment (FDI), in addition to being a key driver of economic growth, has been a significant non-debt financial resource for India's economic development. Foreign corporations invest in India to benefit from the country's particular investment privileges such as tax breaks and comparatively lower salaries. This helps India develop technological know-how and create jobs as well as other benefits. These investments have been coming into India because of the government's supportive policy framework, vibrant business climate, rising global competitiveness and economic influence.

The government has recently made numerous efforts, including easing FDI regulations in various industries, PSUs, oil refineries, telecom and defence. India's FDI inflows reached record levels during 2020-21. The total FDI inflows stood at US$ 81,973 million, a 10% increase over the previous financial year. According to the World Investment Report 2022, India was ranked eighth among the world's major FDI recipients in 2020, up from ninth in 2019. Information and technology, telecommunication and automobile were the major receivers of FDI in FY22. With the help of significant transactions in the technology and health sectors, multinational companies (MNCs) have pursued strategic collaborations with top domestic business groupings, fuelling an increase in cross-border M&A of 83% to US$ 27 billion.

MARKET SIZE

India's FDI inflows have increased 20 times from 2000-01 to 2021-22. According to the Department for Promotion of Industry and Internal Trade (DPIIT), India's cumulative FDI inflow stood at US$ 871.01 billion between April 2000-June 2022; this was mainly due to the government's efforts to improve the ease of doing business and relax FDI norms. The total FDI inflow into India from January to March 2022 stood at US$ 22.03 billion, while the FDI equity inflow for the same period was US$ 15.59 billion. From April 2021-March 2022, India's computer software and hardware industry attracted the highest FDI equity inflow amounting to US$ 14.46 billion, followed by the automobile industry at US$ 6.99 billion, trading at US$ 4.53 billion and construction activities at US$ 3.37 billion. India also had major FDI flows coming from Singapore at US$ 15.87 billion, followed by the US (US$ 10.54 billion), Mauritius (US$ 9.39 billion) and the Netherlands (US$ 4.62 billion). The state that received the highest FDI during this period was Karnataka at US$ 22.07 billion, followed by Maharashtra (US$ 15.43 billion), Delhi (US$ 8.18 billion), Gujarat (US$ 2.70 billion) and Haryana (US$ 2.79 billion). In 2022 (until August 2022) India received 811 Industrial Investment Proposals which were valued at Rs. 352,697 crores (US$ 42.78 billion).

INVESTMENTS/DEVELOPMENTS

India has become an attractive destination for FDI in recent years, influenced by various factors which have boosted FDI. India ranked 68th in the Global Competitive Index; the economy showed significant resilience during the pandemic. India was also named as the 48th most innovative country among the top 50 countries. These factors have boosted FDI investments in India. Some of the recent investments are as follows:

• From April-June 2022, India’s Computer Software & Hardware industry received and FDI investments of US$ 3,427 million.
• In May 2022, India received FDI investments of Rs. 494 crore (US$ 61.91 million) in the defence manufacturing sector.
• In May 2022, Italian financial services major Generali completed the acquisition of a 25% stake in Future Generali India Insurance from Future Enterprises for Rs. 1,252.96 crore (US$ 161.92 million).
• In May 2022, GenWorks Health secured a second round of funding worth Rs. 135 crore (US$ 17.44 million) from a consortium of investors, including Somerset Indus Capital Partners, Morgan Stanley, through its funding arm Grand Vista, Evolvence and Wipro GE.
• In May 2022, Toplyne, a Software-as-a-Service (SaaS) start-up, raised US$ 15 million in a funding round led by Tiger Global and Sequoia Capital India.
• In May 2022, Kiranakart Technologies Pvt. Ltd, which runs the 10-minute grocery delivery platform Zepto, raised US$ 200 million in a Series D funding round led by Y Combinator's Continuity Fund, which valued it at US$ 900 million.
• In May 2022, KoinBasket, a thematic crypto investment star-tup, raised US$ 2 million in a pre-seed funding round.
• In May 2022, Invictus Insurance Broking Services Pvt. Ltd, which runs insurtech platform Turtlemint Insurance Services Pvt. Ltd, raised US$ 120 million in a Series E funding round led by Amansa Capital, Jungle Ventures and Nexus Venture Partners.
• In May 2022, Jaipur-based online furniture and home decor platform Woodenstreet.com raised around US$ 30 million in a Series B funding round led by WestBridge Capital.
• In May 2022, B2B cross-border tech platform Geniemode received US$ 28 million in a Series B funding round led by Tiger Global and Info Edge Ventures.
• In January 2022, Google announced a US$ 1 billion investment in Indian telecom Bharti Airtel, which includes an equity investment of US$ 700 million for a 1.28% stake in the company, and US$ 300 million for a potential future investment in areas such as smartphone access, networks and the cloud.
• In 2021, India received R&D investments of Rs. 343.64 million (US$ 4.35 million); this was 516% higher compared to the previous calendar year.
• Canada's pension fund investment board invested Rs. 1,200 crore (US$ 160.49 million) as an anchor investor in the IPO of multiple Indian companies: One97 Communications (Paytm), Zomato, FSN E-Commerce Ventures (Nykaa) and PB Fintech.
• The FDI in India's renewable energy sector stood at US$ 1.03 billion for the first half of FY2021-22.

GOVERNMENT INITIATIVES

In recent years, India has become an attractive destination for FDI because of favourable government policies. India has developed various schemes and policies that have helped boost India's FDI. These schemes have prompted India's FDI investment, especially in upcoming sectors such as defence manufacturing, real estate, and research and development. Some of the major government initiatives are:

• The Government of India increased FDI in the defence sector by increasing it to 74% through the automatic route and 100% through the government route.
• The government has amended rules of the Foreign Exchange Management Act (FEMA), allowing up to 20% FDI in insurance company LIC through the automatic route.
• The government is considering easing scrutiny on certain FDIs from countries that share a border with India.
• The implementation of measures such as PM Gati Shakti, single window clearance and GIS-mapped land bank are expected to push FDI inflows in 2022.
• The government is likely to introduce at least three policies as part of the Space Activity Bill in 2022. This bill is expected to clearly define the scope of FDI in the Indian space sector.
• In September 2021, India and the UK agreed for an investment boost to strengthen bilateral ties for an 'enhanced trade partnership'.
• In September 2021, the Union Cabinet announced that to boost the telecom sector, it will allow 100% FDI via the automatic route, up from the previous 49%.
• In August 2021, the government amended the Foreign Exchange Management (non-debt instruments) Rules, 2019, to allow the 74% increase in FDI limit in the insurance sector.

ROAD AHEAD

India has recently become a major global hub for FDIs. According to a survey, India was among the top three global FDI destinations; about 80% of the global respondents had plans to invest in India. Furthermore, in recent years, India has provided huge corporate tax cuts and simplified labour laws. The country has also reduced its restrictions on FDI; overall FDI restrictions have reduced from 0.42 to 0.21 in the last 16 years. India has remained an attractive market for international investors in terms of short- and long-term prospects. India's low-skill manufacturing is one of the most promising industries for FDI. India has also developed excellent government efficiency. Its developments in government efficiency are primarily due to relatively stable public finances (despite COVID-induced challenges) and optimistic sentiment among Indian business stakeholders concerning the funding and subsidies offered by the government to private firms. All these factors together may help India attract FDI worth US$ 120-160 billion per year by 2025.