Last Updated: May 27, 2015
Last updated: Apr, 2015
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 cheaper wages, special investment privileges like tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generation of employment.
The continuous inflow of FDI in India, which is now allowed across several industries, clearly shows the faith that overseas investors have in the country's economy.
The Indian government’s policy regime and a robust business environment have ensured that foreign capital keep flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defense, PSU oil refineries, telecom, power exchanges and stock exchanges, among others.
FDI into India through the approval route shot up 162 per cent to US$ 1.91 billion in the first ten months of the ongoing fiscal year, indicating that government's effort to improve ease of doing business and relaxation in FDI norms may be yielding results.
FDI to India doubled to US$ 4.48 billion in January 2015, the highest inflow in last 29 months, from US$ 2.18 billion in January 2014.
The foreign inflows have grown to touch US$ 25.52 billion during the April-January 2014-15, up 36 per cent year-on-year (y-o-y), from US$ 18.74 billion in the corresponding period last fiscal, according to Department of Industrial Policy and Promotion (DIPP) data. The top 10 sectors receiving FDI include telecommunication which received the maximum FDI worth US$ 2.83 billion in the 10 month period, followed by services (US$ 2.64 billion), automobiles (US$ 2.04 billion), computer software and hardware (US$ 1.30 billion) and pharmaceuticals sector (US$ 1.25 billion).
India received the maximum FDI from Mauritius at US$ 7.66 billion, followed by Singapore (US$ 5.26 billion), the Netherlands (US$ 3.13 billion), Japan (US$ 1.61 billion) and the US (US$ 1.58 billion) during April-January 2014-15 period. Healthy inflow of foreign investments into the country helped India’s balance of payments (BoP) situation and stabilised the value of rupee.
Also, deals worth US$ 3.4 billion across 118 transactions were struck in January in India, compared with US$ 1.6 billion across 87 transactions in January last year and US$ 1.2 billion across 74 deals in the same month a year before that, according to a Grant Thornton report on merger and acquisition (M&A) and private equity (PE) activity.
Inbound deals have more than tripled in value, led by the Herman-Symphony transaction worth US$ 780 million and three other deals worth more than US$ 100 million each.
Based on the recommendations of Foreign Investment Promotion Board (FIPB) in its meeting held on February 17, 2015, the Government has approved ten proposals of FDI amounting to Rs. 2,857.83 crore (US$ 452.72 million) approximately.
The Government 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 give boost to low cost affordable housing, it has been provided that conditions of area restriction and minimum capitalisation will not apply to cases committing 30 per cent of the project cost towards affordable housing.
Relaxation of FDI norms are expected to result in enhanced inflows into the Construction Development sector consequent to easing of sectoral conditions and clarification of terms used in the Policy. It is likely to attract investments in new areas and encourage development of plots for serviced housing given the shortage of land in and around urban agglomerations as well as the high cost of land. The measure is also expected to result in creation of much needed low cost affordable housing in the country and development of smart cities.
The government has also raised FDI cap in insurance to 49 per cent from 26 per cent through a notification issued by the DIPP. The limit is composite in nature as it includes foreign investment in forms of foreign portfolio investment, foreign institutional investment, qualified foreign investment, foreign venture capital investment and non-resident investment.
Also, India’s cabinet has 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 do other things such as create the network and supply trains for bullet trains etc.
Foreign investment inflows are expected to increase by more than two times and cross the US$ 60 billion mark in FY15 as foreign investors start gaining confidence in India’s new government, as per an industry study. "Riding on huge expectations from the incoming Modi government, global investors are gung ho on the Indian economy which is expected to witness over 100 per cent increase in foreign investment inflows – both FDI and FIIs – to above US$ 60 billion in the current financial year, as against US$ 29 billion during 2013-14," according to the study.
India will require around US $1 trillion in the 12th Five-Year Plan (2012–17), to fund infrastructure growth covering sectors such as highways, ports and airways. This requires support in terms of FDI. The year 2013 saw foreign investment pour into sectors such as automobiles, computer software and hardware, construction development, power, services, and telecommunications, among others.
Exchange Rate Used: INR 1 = US$ 0.0157 as on April 28, 2015
References: Media Reports, Press Releases, Press Information Bureau