This article was last updated on April 16, 2022
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The resource requirement in a developing economy for investment usually exceeds the availability of resources that could be domestically generated. In India, the Gross Domestic Investment have historically been short of the Gross Domestic Savings by around 1.2 to 1.3 per cent of GDP on an annual basis. Countries, therefore, encourage the inflow of capital from abroad to supplement the domestic savings for a higher investment and a larger increase in production capacities. Foreign Direct Investment is considered as the most preferred route of supplementing the domestic savings as it brings along with the investment new management practices and technologies. Besides enlarging the productive capacity they also contribute to enhancement of export potential/earning of the country.
The economic liberalization, which was initiated in 1991, therefore, attempted to significantly liberalise the FDI policy regime. Over the years, India has emerged as a preferred destination for foreign investment. Besides the sustained GDP growth of economy, which has expanded market in India, the enabling environment and a transparent open policy regime has significantly contributed to the emergence of India as a preferred location. India FDI policy regime operates in a dynamic setting and has been undergoing a process of continuous review in line with requirement and investors’ perception. As a part of this process, the FDI policy is being liberalized progressively on an ongoing basis in order to allow FDI in more industries under the automatic route. In the year 2000, the Government allowed FDI up to 100 per cent under automatic route for most of the activities and a small negative list was notified where either the automatic route was not available or there were limits on FDI. Since then, the policy has been gradually simplified and rationalized and more sectors have been opened up for foreign investment.
Recent changes in FDI Policy
Significant changes have been made in the FDI policy regime in the recent time to ensure that India remains increasingly attractive and investor-friendly. In February 2009, the twin concepts of ‘ownership’ and ‘control’ as a central principle in India’s FDI regime were recognized for calculation of direct and indirect foreign investment (Press Notes 2 & 4). This ensured application of simple, homogeneous and uniform norms for obtaining Government/FIPB approval (or otherwise) for foreign investment into Indian companies and for such Indian companies in the eventuality of their making downstream investments. Press Note 3 of 2009 also brought in increased Government oversight over the transfer of ownership or control in sensitive sectors to non-resident entities. Press Note 6 of 2009 liberalized the induction of FDI in Micro and Small Enterprises by clarifying that FDI in MSE was now permitted, subject only to the sectoral equity caps, entry routes and other relevant sectoral regulations. Press Note 8 of 2009 brought all payments for royalty, lump sum fee for transfer of technology and use of trademarks/ brand names under the automatic route, without the need for the Government approval. The Government in 2010, decided through Press Note 1 of 2010, that recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of CCEA, as against the earlier limit of cases with a total investment of Rs. 600 crore. It also exempted a number of other categories of cases from the requirement of obtaining prior approval of the Government. Other than liberalization of the policy, simplification and rationalization of the FDI policy has also been an important component of these reforms.
Consolidation of FDI Policy
One of the major steps taken by Government on 31st March, 2010 was consolidation and release of all existing regulations on FDI as one consolidated document. This is expected to ensure that all information on FDI policy is available at one place. This is further expected to result in greater clarity and understanding of foreign investment rules among foreign investors and sectoral regulators, as also predictability of policy. The document is updated every six months. The updated second edition of the document was released on 30th September, 2010.
Stakeholder Consultations on FDI Policy
The Government has now initiated stakeholder consultations, by inviting suggestions on various aspects of FDI policy, including sectoral policies. Discussion papers on FDI in the retail and defence sectors, as also on approval of foreign/ technical collaborations in case of existing ventures/ tie-ups in India, issue of shares for considerations other than cash and FDI in Limited Liability Partnerships (LLPs) have been released for stakeholder comments. The Department of Industrial Policy and Promotion is also implementing a Plan Scheme for promotion of investment by holding Joint Commission Meetings, Organisation of Business and Investment Promotion Events, Project Management, Capacity Building, Establishment of G2B Portal/e-Biz Pilot Project, Setting up of Country focus Desks for Promoting Investment, Multi-media-audio-visual Campaign, Creation of a dedicated Investment Promotion Agency etc. The dedicated Investment Promotion Agency i.e. ‘Invest India’ has since been launched on 23rd December 2009 to promote foreign investments in India in a focussed, comprehensive and structured manner.
India’s Global Position
The outcome of the government initiatives and liberalization measures undertaken have resulted in tremendous response and growth in the FDI equity inflows to India since 2003-04, which have increased nearly thirteen-fold until the last financial year (i.e. 2009-10). In terms of international practices of calculating FDI (i.e. by taking into account re-invested earnings and other capital), the FDI inflows into India were nearly US $ 37.18 billion during 2009-10. While the FDI inflows have somewhat flattened out over the course of the last three years, the pace of inflows has been stable, including during 2009-10, at the height of the global economic slowdown. This is despite the fact that the UNCTAD World Investment Report, 2009, had noted a fall of global FDI inflows, from a historic high of 1.979 trillion in 2007 to 1.697 trillion in 2008, a decline of 14%. It may be noted that UNCTAD had subsequently predicted a fall in global FDI investment flows by 30%, from US $ 1.7 trillion in 2008 to US $ 1.2 trillion in 2009. While India was ranked 32nd in the world on FDI inflows in 2001(as per UNCTAD data), its ranking improved to the 9th position in 2009. India’s ranking, in terms of FDI inflows among developing countries (as per UNCTAD data), has jumped from 13th in 2005 to 4th (in 2009). Its share of world FDI inflows has jumped from 0.78% in 2005 to 3.11 per cent in 2009.
India is today rated as one of the most attractive investment destinations across the globe. The UNCTAD World Investment Report (WIR) 2010, in its analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, has reported India to be the second most attractive location for FDI for 2010-2012. According to the WIR 2010 report, the top five most attractive locations for FDI for 2009-11 are China, India, Brazil, United States and the Russian Federation. Similarly, the 2009 survey of the Japan Bank for International Cooperation, conducted among Japanese investors, continues to rank India as the second most promising country for overseas business operations.
For India to maintain its momentum of GDP growth, it is vital to ensure that the robustness of its FDI inflow is also maintained. (PIB Features)
R.P. Singh was Secretary, Department of Industrial Policy & Promotion
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