Foreign Direct Investment or FDI is an investment done by a foreign entity in a country by a foreign investor. An individual or a business can be an investor.

In 1991, India’s economy was opened up, and the government implemented several FDI reforms to attract more foreign investors into domestic enterprises.

Due to the COVID-19 pandemic, the Indian government altered its foreign direct investment policy on 17 April 2020 to protect Indian enterprises against opportunistic takeovers. The latest FDI policy also assures that now, all FDI will fall under the jurisdiction of the MOC.

Routes through which India gets FDI

FDI by an individual or a company is regulated through the Automatic Route and the Government route.

Automatic Route

Foreign direct investment is permitted without previous clearance from the Government of India or the Reserve Bank of India under the automatic method. These sectors have fewer restrictions on investment.

The following sectors come under the automatic route.

100% Automatic Route

  • White label ATM operations
  • Agriculture and animal husbandry
  • Tourism and hospitality
  • Air transport services
  • Thermal power
  • Airports (greenfield + brownfield)
  • Textiles and garments
  • Asset reconstruction companies
  • Single brand retail trading
  • Auto-components
  • Roads and highways
  • Automobiles
  • Food processing
  • Renewable energy
  • Biotechnology (greenfield)
  • Railway infrastructure
  • Broadcast content services
  • Ports and shipping
  • Broadcasting carriage services
  • Plantation sector
  • Capital goods
  • Pharmaceuticals
  • Cash and carry wholesale trading
  • Petroleum and natural gas
  • Chemicals
  • Services under Civil Aviation Services, such as the maintenance and repair organisations
  • Coal and lignite
  • Other financial services
  • Mining and exploration
  • Construction development
  • Manufacturing
  • Construction of hospitals
  • Leather
  • Credit information companies
  • IT and BPM
  • Duty-free shops
  • Industrial parks
  • Healthcare
  • E-commerce activities
  • Gems and jewellery
  • Electronic systems

Up to 100% Automatic Route

  • Pension (49%)
  • Infrastructure company in the securities market (49%)
  • Power exchanges (49%)
  • Insurance (Up to 49%)
  • Petroleum refining (49%)
  • Medical devices (Up to 100%)

Government Route 

The permission route is a restricted path since it requires prior clearance from the Indian government before investing. The investor must apply for this through the Foreign Investment Facilitation Portal. Following that, the relevant Administrative Ministry or Department considers these ideas.

The sectors which come under the Government route up to 100% are as follows:

  • Satellite (establishment and operations) (100%)
  • Banking and public sector (20%)
  • Food products retail trading (100%)
  • Print Media: Foreign magazines dealing with news, current affairs (26%)
  • Broadcasting Content services (49%)
  • Print Media: Publications or printing of scientific and technical magazines or specialty journals or periodicals and facsimile editions of foreign newspapers (100%)
  • Core investment company (100%)
  • Multi-brand retail trading (51%)
  • Mining and minerals separations of titanium bearing minerals and ores (100%)

FDI prohibition

There are a few industrial sectors where FDI is strictly prohibited. These industries are:

  • Atomic energy generation
  • Any gambling or betting businesses
  • Lotteries (online, private, government, etc.)
  • Investment in chit funds
  • Nidhi company
  • Agricultural or plantation activities
  • Housing and real estate (except townships, commercial projects, etc.)
  • Trading in TDRs
  • Cigars, cigarettes or any tobacco-related industry

Difference between FDI and FPI

Foreign portfolio investment (FPI) is a method of investing in foreign economies through securities and financial assets held by investors in another nation rather than directly owning a company’s assets.

Individual investors interested in prospects beyond their own country engage in Securities, such as stocks or American Depositary Receipts (ADRs), bonds, mutual funds, or exchange-traded funds, through the Foreign Portfolio Investment Corporation (FPI).

The following are some key distinctions between FDI and FPI:

Parameters

FDI

FPI

Concept

The direct investment is made by the foreign investor.

The investment has been made into financial assets like stocks or bonds, etc.

Type of investment

Direct investment

Indirect investment

Investor Type

Active

Passive

Time of investment

Long-term investment

Short-term investment

Control over investment

High control

Low control

Assets type

Physical assets

Financial assets

Risk factor

Low risk

High risk

Advantages of FDI

  • Economic growth: Boost in the manufacturing and services sector results in the creation of jobs, and Increased employment strengthens the economic growth.
  • Increase in exports: Increased production by FDI boosts exports of the country.
  • Human capital development: Human capital involved in a workforce gains through training and experience, boosting education and human capital.
  • Technology: With FDI, a country gets access to the latest technologies and practices worldwide.
  • Exchange rate stability: With FDI into a country, exchanges continuous flow of foreign exchange.

Conclusion

Foreign direct investment (FDI), or investment made by a person from another country, is critical to a country’s development. For both companies and investors, it produces a more productive atmosphere. New jobs and opportunities are created as a result of FDI, resulting in a rise in income and purchasing power. The national income rises as a result of additional jobs, resulting in economic expansion. FDI also contributes to the creation of a competitive environment by dismantling domestic monopolies, resulting in increased country exports. As a result, we can conclude that the higher the FDI inflow, the more prosperous the country.