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Foreign Direct Investment

April, 2016


Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.

The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.

Market size

According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments India received in FY 2015-16 (April 2015-March 2016) was US$ 40 billion, indicating that government's effort to improve ease of doing business and relaxation in FDI norms is yielding results.

Data for FY 2015-16 indicates that the services sector attracted the highest FDI equity inflow of US$ 6.9 billion, followed by the computer hardware and software sector (US$ 5.9 billion). Most recently, the total FDI equity inflows for the month of March 2016 touched US$ 2.47 billion as compared to US$ 2.12 billion in the same period last year.

During FY 2015-16, India received the maximum FDI equity inflows from Singapore at US$ 13.69 billion, followed by Mauritius (US$ 8.35 billion), USA (US$ 4.19 billion), Netherlands (US$ 2.64 billion) and Japan (US$ 2.61 billion). Healthy inflow of foreign investments into the country helped India’s balance of payments (BoP) situation and stabilised the value of rupee.

FDI in India witnessed an increase of 29 per cent and reached US$ 40 billion during April 2015-March, 2016 as compared to US$ 30.93 billion in the same period last year.

According to the data released by Grant Thornton India, the total merger and acquisitions (M&A) and private equity (PE) deals in the month of April 2016 were valued at US$ 5.5 billion (100 deals), which is 2.2 times higher as compared to April 2015.

India has also overtaken China as world's top foreign direct investment (FDI) destination with US$ 63 billion of FDI announced in 2015 including high-value project announcements across the coal, oil and natural gas, and renewable energy sectors.

Investments/ developments

Some of the recent significant FDI announcements are as follows:

  • Honeywell International Inc, the US-based technology and manufacturing solutions provider, has unveiled a new refining technology in Gurgaon, which will be dedicated to helping Indian refiners get more clean transportation fuel, reduce imports of crude oil and produce environmentally preferable diesel fuels.
  • Apple Inc has started its first development centre outside the US in Hyderabad, which will employ over 4,000 people and focus on Apple Maps, the company’s digital maps and navigation service.
  • Panasonic Corporation plans to set up a new manufacturing plant for refrigerators in India with an investment of Rs 250 crore (US$ 37.28 million), and also invest around Rs 20 crore (US$ 3 million) on an assembly unit for lithium ion batteries at its existing facility in Jhajjar in the next 8-10 months.
  • Vital Paper Products, one of the major supply chain players in the paper and paper products industry, plans to set up a packaging product unit in the special economic zone (SEZ) of Sri City, Andhra Pradesh, at an investment of Rs 60 crore (US$ 8.95 million), which will be operational from April 2017.
  • Vistra Group Ltd, a Hong Kong-based professional services provider, has acquired IL&FS Trust Company Ltd, India’s largest independent corporate trust services provider, which will enable Vistra to expand the platform to provide a broader suite of corporate and fiduciary services and thereby gain a foothold in the Indian corporate services market.
  • Banana Republic, an American fashion brand owned by GAP, plans to open its first store in India by early next year by entering into a partnership with Arvind Retail.
  • Silver Spring Capital Management, a Hong Kong-based equity hedge fund, plans to invest over 2,000 crore (US$ 298 million) in Hyderabad-based infrastructure developer Transstroy India Ltd, for construction of highways in the country.
  • E-commerce giant Amazon plans to set up its second largest global delivery centre outside the United States, in Hyderabad, which will be 2.9 million square feet in size and employ 13,500 people, compared to 1,000 Amazon employees across different offices currently.
  • Global beverage company Pepsi plans to invest Rs 500 crore (US$ 74.56 million) to set up another unit in Maharashtra to make mango, pomegranate and orange-based citrus juices, while biotechnology giant Monsanto plans to set up a seed plant in Buldhana district of Maharashtra.
  • Apple will build its first technology development centre outside the US in Hyderabad with an investment of US$25 million, likely employing about 4,500 people, a senior Telangana state government official said.
  • Japan has won the right to construct India’s first bullet train, while offering a loan of US$ 8.11 billion to India for the same
  • Chinese mobile handset maker Coolpad Group Limited has committed US$ 300 million for setting up a Research and Development (R&D) centre and its own assembly line in India by 2017.
  • Indian Railways has issued a Letter of Award (LoA) to US-based General Electric (GE) for a Rs 14,656 crore (US$ 2.19 billion) diesel locomotive factory project at Marhowra, and to French transport major Alstom for Rs 20,000 crore (US$ 2.98 billion) electric locomotive project in Madhepura, Bihar.
  • Foxconn has signed a Memorandum of Understanding (MoU) with Maharashtra state government to invest US$ 5 billion over the next three years for setting up a manufacturing unit between Mumbai and Pune.
  • Germany-based ThyssenKrupp group is aiming to double its revenue from India to US$ 1 billion in next three-four years while the group’s elevator unit, ThyssenKrupp Elevator, plans to invest EUR 44 million (US$ 50.5 million) to set up a manufacturing plant in Chakan, Pune.

Government Initiatives

Budget 2016-17 has proposed several reforms in FDI Policy in areas of insurance and pensions, asset reconstruction companies and stock exchanges, such as easier governing and fund raising norms, clarification of tax related matters and higher FDI limits.

In order to make India a more attractive foreign investment destination, the Ministry of Finance is planning to introduce the residency permit policy, which will allow key executives of foreign companies making investments worth US$ 2 billion or more in India, to avail various facilities such as special package on upscale housing, residency permits allowing long stay in the country, and cheap rates for utilities.

The Department of Industrial Policy and Promotion (DIPP) has allowed 100 per cent foreign direct investment (FDI) in asset reconstruction companies (ARC) under automatic route, which will help to tackle the issue of declining asset quality of banks.

Mr Shaktikanta Das, Secretary, Department of Economic Affairs, Ministry of Finance outlined Government of India's plans to liberalise FDI rules by putting more sectors under the automatic route, which will fast track FIPB process thereby making India an attractive investment destination.

The Government of India has amended the FDI policy regarding Construction Development Sector. The amended policy includes easing of area restriction norms, reduction of minimum capitalisation and easy exit from project. Further, in order to provide boost to low cost affordable housing, it has indicated that conditions of area restriction and minimum capitalisation will not apply to cases committing 30 per cent of the project cost towards affordable housing.

The Government of Karnataka has approved three investment proposals worth Rs 2,211 crore (US$ 329 million), which includes that of PepsiCo and Biocon for setting up their new production facilities in the state, and one expansion project proposal of Manyata Promoters Private Limited.

The Government of India has recently relaxed FDI policy in 15 sectors, such as raising the foreign investment limit for some sectors, easing the conditions for others and putting many on the automatic route for approval. The sectors that benefited from the relaxation include defence, real estate, private banking, defence, civil aviation, single brand retail and news broadcasting. The new rules provide for easier exit from investment in the construction sector while foreign investment limit in defence and airlines was allowed up to 49 per cent through the automatic route. Banks were allowed fungible FDI investment up to 74 per cent, which means that FII investment in private banks can rise to this limit.

The Government of India recently relaxed the FDI policy norms for Non-Resident Indians (NRIs). Under this, the non-repatriable investments made by the Persons of Indian Origin (PIOs), Overseas Citizens of India (OCI) and NRIs will be treated as domestic investments and will not be subject to FDI caps.

The government has also raised FDI cap in insurance from 26 per cent to 49 per cent through a notification issued by the DIPP. The limit is composite in nature as it includes foreign investment in the form of foreign portfolio investment, foreign institutional investment, qualified foreign investment, foreign venture capital investment, and non-resident investment.

India’s cabinet cleared a proposal which allows 100 per cent FDI in railway infrastructure, excluding operations. Though the initiative does not allow foreign firms to operate trains, it allows them to invest in areas such as creating the network and supplying trains for bullet trains.

India is likely to grant most favoured nation (MFN) treatment to 15 countries that are in talks regarding an agreement on the Regional Comprehensive Economic Partnership (RCEP), which would result in significant easing of investment rules for these countries.

The Government of India plans to further simplify rules for Foreign Direct Investment (FDI) such as increasing FDI investment limits in sectors and include more sectors in the automatic approval route, to attract more investments in the country.

Road ahead

According to United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2015, India acquired ninth slot in the top 10 countries attracting highest FDI in 2014 as compared to 15th position last year. The report also mentioned that the FDI inflows to India are likely to exhibit an upward trend in 2015 on account of economic recovery. India also jumped 16 notches to 55 among 140 countries in the World Economic Forum’s Global Competitiveness Index that ranks countries on the basis of parameters such as institutions, macroeconomic environment, education, market size and infrastructure among others.

India will require around US$ 1 trillion in the 12th Five-Year Plan (2012–17), to fund infrastructure growth covering sectors such as highways, ports and airways. This would require support from FDI flows. During 2014, foreign investment was witnessed in sectors such as services, telecommunications, computer software and hardware, construction development, power, trading, and automobile, among others.

Exchange Rate Used: INR 1 = US$ 0.0149 as on May 30, 2016

References: Media Reports, Press Releases, Press Information Bureau