A Simple Note on Why FDI is Needed in India

Foreign Direct Investment (FDI) is an essential tool for a country’s economy. FDI in India is when a person residing outside India invests through capital investment in a company in India. FDIs are a crucial factor in economic growth in a country since they allow inflow of funds and greater access to global markets, technological trade, etc.

A person residing outside India can invest in an unlisted Indian business using equity instruments if they own 10% or more of the company or in a listed Indian company’s post-issue paid-up equity capital on a fully diluted basis if they own 10% or more of the company. The term ‘completely diluted basis’ refers to the total number of shares that would be issued if all available sources of conversion were employed.

The investment will continue to be classified as FDI if it is less than 10% of the fully diluted post-issue paid-up equity capital of a listed Indian firm by a person residing outside India.

FDI in India

Foreign Direct Investment (FDI) is a significant source of non-debt financing for economic development. A non-resident entity can invest in India except in restricted industries or activities.

A person residing outside of India can make foreign investments in any Indian firm as either Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI).

• Since 1991, when the government opened up the economy and implemented LPG initiatives, the investment climate in India has vastly improved.

• The loosening of FDI regulations is often credited for the development in this area.
• Since the country’s economic liberalisation, several industries have opened up to international investment, either partially or entirely.
• India is now ranked in the top 100 nations in terms of ease of doing business.
• According to a UN study, India was among the top 10 recipients of FDI in 2019, with inflows worth $49 billion. It is a 16% increase over the previous year.
• The DPIIT (Department for promotion of industries and internal trade )  announced a policy to enable 100 percent FDI in insurance intermediaries in February 2020.

Routes of FDI in India

Foreign investment in India is mostly made through two channels:

• The Automatic Route 

The Automatic Route eliminates the need for a non-resident investor or an Indian corporation to seek Government of India clearance for their investment. The Automatic Route is managed by the Reserve Bank of India.

• Government Consent Route

The Government Approval Route necessitates approval from the Indian government prior to investing. The administrative ministry/department in question reviews proposals for foreign direct investment through the government channel.

Importance of FDI in India

India can expand without FDI; it developed without or with very little FDI until the 1980s. Nevertheless, the pattern and pace of growth in the post-1990 years have been considerably different. Since the GDP growth rate is currently declining, export growth is slowing, and the Index of Industrial Production (IIP) is at an all-time low, the economy requires a major boost. If the local investment is unable to offer that boost, foreign investment can fill the void. For both the host and the home countries, FDI is a win-win situation. Both countries have a direct interest in attracting FDI because they stand to gain a lot from it.

The ‘home’ countries seek to take advantage of the large markets that have opened up as a result of industrialisation. The ‘host’ countries, on the other hand, aim to improve their technological and managerial capabilities as well as supplement their domestic savings and foreign exchange.

Impact of FDI in India

• Foreign Direct Investment (FDI) contributes to the economy’s long-term growth. MNCs facilitate technology transfer to domestic firms. In businesses, organic development or expansion takes place. Employment is also on the rise.
• FDI boosts a company’s balance sheet by increasing its assets. Businesses’ profits and labour productivity rise as well.
• As per capita income rises, so does consumption. Government expenditure rises as tax revenues rise. GDP rises, and there is a lag effect, in which succeeding years’ GDP rises as well.
• Furthermore, investments have a gestation time, and after a few years, returns increase.
• Companies and, as a result, the economic benefit from FDI, and the appropriate FDI process is the identification of important sectors in the economy that yield the highest return on investment.
• FDI also serves as a strong supplement to India’s domestic stock of investment, which is low (about 32 percent) due to poor savings. This investment improves corporate competitiveness, fosters innovation and efficiency, and boosts the standard of living by bringing better products and services to the market.

Example of FDI in India

• Unacademy, an Edtech platform, received US$ 150 million from SoftBank Group in 2020. 

FDI in 2021

Despite the pandemic, there is still a lot of interest in investing in India. According to the Ministry of Commerce’s most recent Foreign Direct Investment (FDI) data, India received a record $81.72 billion in FDI in the fiscal year 2020-21, up from $74.39 billion in the fiscal year 2019-20. On the other hand, FDI stock inflows increased by 19% during the same period, rising from $59.64 billion to $49.98 billion. According to CII and EY analysis, India is expected to receive FDI worth US$ 120-160 billion per year by 2025.

Conclusion

Foreign Direct Investment (FDI) is primarily when an individual or a company acquires control of a business in another country. Foreign companies participate in the day-to-day operations of the recipient company through FDI. This means that FDI brings money to the country and knowledge, skills, advanced technology, and other benefits. As a result, FDI plays an important role in national development. Because of liberalised norms, easy policies, and subsidised rates, India has become one of the most appealing destinations for foreign direct investments. Foreign investors are also eager to invest in the country because of lower labour costs, market diversification, subsidies, and preferential tariffs.