18 Dec India’s FDI Journey: Milestone Achievement of $1 Trillion
Syllabus mapping:
GS-3: Indian Economy: Liberalization of the Indian economy and its impacts on the various sectors of the economy.
For Prelims:
What is FDI its types and current data on FDI in India?
For Mains:
What are the various initiatives of the government of India to boost the FDI in India?
Why in the News?
India has reached a significant milestone, with gross foreign direct investment (FDI) inflows crossing $1 trillion since April 2000. This achievement is further highlighted by a 26% year-on-year increase in FDI inflows, amounting to $42.1 billion in the first half of FY 2024-25. The growth reflects India’s rising appeal as a global investment hub, supported by proactive policies like “Make in India,” liberalized sectoral reforms, and strategic incentives fostering a dynamic and competitive business environment.
Key highlights of Recent Data:
Year-on-year growth of the FDI:
Major Source Countries for FDI (April 2000 – June 2024)
Mauritius: FDI Inflows: US$ 175.05 billion. Share: 25%
Singapore: FDI Inflows: US$ 163.85 billion. Share: 24%
USA: FDI Inflows: US$ 66.70 billion. Share: 10%
Netherlands: FDI Inflows: US$ 51.13 billion. Share: 7%
Japan: FDI Inflows: US$ 42.54 billion. Share: 6%
Services Sector Attracts Highest FDI
The services sector, which includes financial services, IT, and consultancy, has been the leading recipient of FDI in India. Between April 2000 and September 2024, it received $115.19 billion, accounting for 16% of India’s total foreign direct investment. This highlights the sector’s significant role in driving FDI inflows into the country.
Sectors and FDI in India:
1. 100% FDI under Automatic Route: Most sectors in India allow 100% FDI under the automatic route, which means foreign investors can invest freely without requiring prior government approval. Such sectors require Only a post-investment notification to the Reserve Bank of India (RBI) is required. Examples are Infrastructure, Electronics System Design and Manufacturing (ESDM), Automotive, Railways (except operations), Chemicals, Textiles, and Airlines.
2. Sectors Requiring Government Approval: Certain sectors like telecommunications, media, and insurance require government approval before foreign investments can be made.
3. Prohibited Sectors: Gambling and lotteries, real estate businesses, and tobacco manufacturing are prohibited for FDI, reflecting India’s focus on ethical and strategic investments.
Top FDI Recipient States:
1. Maharashtra, 2.Gujarat,3.Delhi, 4. Tamil Nadu, 5. Telangana, 6.Karnataka, 7.Uttar Pradesh, 8. Andhra Pradesh, 9. West Bengal, and 10. Madhya Pradesh.
Foreign Direct Investment (FDI)
Definition: Foreign Direct Investment (FDI) refers to an investment made by an entity based in one country into a business in another country, involving a controlling ownership stake. It is distinct from foreign portfolio investment, which does not entail direct control.
FDI Definition In India: The Indian government defines Foreign Direct Investment (FDI) as an investment made by a non-resident in an Indian company, meeting the following criteria:
1. Unlisted Companies: The investor holds equity in an unlisted Indian company.
2. Listed Companies: The investor holds at least 10% of the paid-up equity capital of a listed Indian company.
Regulation of FDI in India: The Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry regulates Foreign Direct Investment (FDI). The DPIIT formulates the FDI Policy. While RBI and respective ministries are also involved in the Approval process. The Cabinet Committee on Economic Affairs approves the FDI above certain limits.
Key Features:
Forms of FDI: Mergers and acquisitions. Establishing new facilities. Reinvesting profits from overseas operations. Intra-company loans.
Components: Equity capital. Long-term capital, Short-term capital (as reflected in the balance of payments).
Scope: Participation in management. Joint ventures. Transfer of technology and expertise.
Stock of FDI: Net cumulative FDI over a given period, calculated as outward FDI minus inward FDI.
Exclusions: Investments via share purchases where the investor owns less than 10% of the company’s shares, as it does not constitute direct control.
Types of FDI
Horizontal FDI: A business expands its operations to another country, performing the same activities abroad as in its home country. Example: A car manufacturer establishing production facilities in another country.
Vertical FDI: A business expands to another country by operating at a different stage of the supply chain. Activities overseas are related but distinct from the core business—for example, A clothing retailer acquiring a textile manufacturing plant in another country.
Conglomerate FDI: A business undertakes unrelated activities in a foreign country, entering an entirely new market. This type is rare due to the challenges of entering both a new country and a new industry. Example: A tech company investing in a foreign real estate venture.
Platform FDI: A business expands into one country but exports the output to a third country. Example: A company establishing a manufacturing unit in Country A to supply goods to Country B.
Greenfield vs. Brownfield Investments:
1. Greenfield Investment: A company starts a new venture in another country by building new facilities, such as production plants, offices, and distribution centers. The company does not buy an existing facility but creates everything from scratch. Example: A car manufacturer from Germany builds a new factory in India to produce vehicles, complete with offices and distribution centers.
2. Brownfield Investment: A company buys or leases an existing facility to start new production. This option saves time and money since there’s no need to build new structures. Example: A technology company from the USA purchases an existing office space and factory in China to start assembling smartphones.
Factors Driving the FDI in India
India’s achievement of attracting $1 trillion in FDI can be credited to several key factors:
1. Competitiveness and Innovation: World Competitive Index 2024: Improved ranking from 43rd in 2021 to 40th. Global Innovation Index 2023: Ranked 40th among 132 economies, up from 81st in 2015, reflecting significant progress in innovation and competitiveness.
2. Global Investment Standing: Greenfield Projects: India ranked 3rd globally, with 1,008 greenfield project announcements (World Investment Report 2023). International Project Finance Deals: Recorded a 64% increase, ranking 2nd globally for the number of such deals, highlighting India’s appeal to international investors.
3. Improved Business Environment: Ease of Doing Business: Improved ranking from 142nd in 2014 to 63rd in the World Bank’s Doing Business Report 2020, showcasing efforts to simplify regulations and reduce bureaucratic barriers. Enhanced investor confidence through streamlined processes and business-friendly initiatives.
4. Policy Reforms: Liberalised FDI Policies: 100% FDI permitted under the automatic route in most sectors, excluding strategically important ones.
5. Tax Reforms: Abolished angel tax to boost startup investments. Reduced income tax rates for foreign companies through amendments in the Income Tax Act, 1961 (2024).
Key Initiatives to Promote Investment
Make in India: Encourages manufacturing and investment in diverse sectors.
Startup India: Boosts entrepreneurship and innovation, attracting FDI in startups.
Production Linked Incentive (PLI) Scheme: Provides sector-specific incentives to enhance manufacturing capabilities.
PM GatiShakti: Focuses on multimodal connectivity to improve infrastructure and logistics.
National Industrial Corridor Programme: Develops world-class industrial corridors to support investment.
Project Development Cells (PDCs): Established in all Ministries to fast-track investments and facilitate approvals.
India Industrial Land Bank: Provides real-time information on available industrial land to aid investors.
Project Monitoring Group (PMG): Resolves bottlenecks for large-scale projects.
Indian Footwear and Leather Development Programme (IFLDP): Promotes investments in the leather industry.
FDI in Strategic Sectors: Allowed increased FDI in sectors like space and defense to attract global investors.
Significance of FDI
Helps the Economy: FDI creates new job opportunities across various sectors, from manufacturing to operations. As companies expand their operations, they generate more employment, positively impacting the Indian economy.
Increases Exports: FDI boosts exports by allowing companies to explore new markets. Indian companies can leverage foreign investments to serve international businesses, increasing revenue and supporting India’s tax earnings, which strengthens the economy.
Improves Exchange Rates: Foreign investments lead to an inflow of foreign currency, helping the Reserve Bank of India (RBI) maintain foreign reserves. This contributes to stabilizing the Indian rupee’s exchange rate.
Creates a Competitive Market: The entry of foreign entities raises industry standards, forcing domestic competitors to enhance their practices to maintain market share. This healthy competition benefits consumers by improving product quality and service.
Promotes Technological Advancements: FDI often brings advanced technologies and expertise to India. This knowledge transfer helps improve local industries’ efficiency and innovation, contributing to economic growth and development.
Infrastructure Development: Foreign investments often lead to the development of critical infrastructure, such as transportation networks, logistics facilities, and manufacturing plants.
Enhances Capital Availability: FDI brings in much-needed capital, which is essential for funding development projects and businesses. This helps bridge the gap in domestic savings and promotes economic growth.
Conclusion
India’s $1 trillion FDI milestone, supported by $42.1 billion inflows in the first half of FY 2024-25, reflects its enhanced competitiveness, innovation, and business-friendly reforms. Initiatives like “Make in India,” sectoral liberalization and space sector reforms highlight its proactive approach. Aligned with global trends, India is set to strengthen its global economic role, driving sustainable growth.
Download Plutus IAS Current Affairs (ENG) 18th Dec 2024
Prelims questions:
Q. Consider the following Pairs:
| Column 1 | Column 2 | |
| 1 | Horizontal FDI | Showing interest in the supply chain of own product in a foreign country |
| 2 | Vertical FDI | The same type of business but in another country |
| 3 | Conglomerate FDI | A company starting a completely new business from the existing one in another country. |
How many of the above pairs are correctly matched?
A. Only one
B. Only two
C. All three
D. None
ANSWER: A
Mains question:
“India’s milestone achievement of reaching $1 trillion in foreign direct investment (FDI) reflects strong government support and favorable economic conditions.” comment.
(Answer in 150 words)
No Comments