Foreign Direct Investment

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Last updated: Apr, 2016

Introduction

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 April-December period of 2015 was US$ 40.82 million, indicating that government's effort to improve ease of doing business and relaxation in FDI norms is yielding results.

Data for April-December 2015 indicates computer hardware and software segment attracted the highest FDI equity inflow of US$ 5.31 billion, followed by services sector – US$ 4.26 and trading business – US$ 2.72 billion.

Most recently, the total FDI equity inflows for the month of December 2015 touched US$ 4.64 billion as compared to US$ 2.16 billion in the same period last year.

During FY2015, India received the maximum FDI equity inflows from Singapore at US$ 10.99 billion, followed by Mauritius (US$ 6.12 billion), USA (US$ 3.51 billion), Netherlands (US$ 2.15 billion) and Japan (US$ 1.08 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 40 per cent and reached US$ 29.44 billion during April-December, 2015 as compared to US$ 21.04 billion in the same period last year.

Investments/ developments

Based on the recommendations of Foreign Investment Promotion Board (FIPB) in its 231st meeting held on January 22, 2016, the Government has approved ten FDI proposals involving FDI of Rs 607 crore (US$ 89.06 million), and recommended one proposal for approval of Cabinet Committee on Economic Affairs (CCEA) involving FDI of Rs 5,856.51 crore (US$ 859 million).

Some of the recent significant FDI announcements are as follows

  • 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$ 72.84 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 $25 million, likely employing about 4,500 people, as per a senior Telangana state government official.
  • Japan has won the right to construct India’s first bullet train, while offering a loan of US$ 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.
  • Amazon India expanded its logistics footprint three times to more than 2,100 cities and towns in 2015, as Amazon.com invested more than US$ 700 million in its India operations since July 2014.
  • Indian Railways has issued a Letter of Award (LoA) to US-based General Electric (GE) for a Rs 14,656 crore (US$ 2.15 billion) diesel locomotive factory project at Marhowra, and to French transport major Alstom for Rs 20,000 crore (US$ 2.93 billion) electric locomotive project in Madhepura, Bihar.
  • Kellogg Co, world's largest cereal maker, is making large investments in manufacturing and plans to set up its first Research and Development (R&D) facility in India at Taloja, near Mumbai.
  • The Government of Karnataka has signed an agreement with the Taiwan Electrical and Electronic Manufacturers Association for the purpose of creating a Taiwanese electronic manufacturing cluster near the Bengaluru airport, with an investment expectation of Rs 3,200 crore (US$ 469.5 million).
  • Posco Korea, the multinational Korean steel company, has signed an agreement with Shree Uttam Steel and Power (part of Uttam Galva Group) to set up a steel plant at Satarda in Maharashtra. 
  • 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.
  • Global giants such as Bombardier, Hyundai-ROTEM, TALGO and CAF have queued up to manufacture semi high-speed train sets in India, which will be used for faster inter-city travel.
  • 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.
  • Swedish home furnishing brand Ikea has made a long-term plan of opening 25 stores in India by making an investment worth Rs 12,500 crore (US$ 1.83 billion).
  • Google plans to invest Rs 1,500 crore (US$ 220 million) for a new campus in Hyderabad which will be focused on three key areas — Google Education, Google Fibre broadband services and Street view.
  • Warburg Pincus, a US based Private Equity (PE) firm, has planned to invest Rs 850 crore (US$ 124 million) in Ecom Express – an India based logistics solutions provider.

Government Initiatives

Budget 2016-17 has proposed several reforms in Foreign Direct Investment (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 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 india has recently relaxed foreign direct investment (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.

The Cabinet Committee on Economic Affairs (CCEA) has raised the threshold for foreign direct investment requiring its approval to Rs 3,000 crore (US$ 440.15 million) from the present Rs 1,200 crore (US$ 176.06 million). This decision is expected to expedite the approval process and result in increased foreign investment inflow.

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 etc.

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 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$ 0.0147 as on March 01, 2016

References: Media Reports, Press Releases, Press Information Bureau