Foreign Direct Investment

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Last updated: Jan, 2015

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 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.

Market Size

According to a recent report by global credit rating agency Moody’s, FDI inflows have increased significantly in India in the current fiscal. This, according to Moody’s, is due to India’s current pro-growth policies. Net FDI inflows totalled US$ 14.1 billion in the first five months of 2014-15, representing a 33.5 per cent increase from the same period in 2013-14.

Total FDI inflows into India in the period April 2000–November 2014 touched US$ 350,963 million. Total FDI inflows into India during the period April–November FY15 was US$ 18,884 million.

Mauritius is again emerging as the largest source of FDI in India, accounting for an inflow of US$ 83,730 million in the April 2000-November 2014 period. According to official data, the inflow of foreign investment from Singapore amounted to US$ 29,193 million, followed by the UK at US$ 21,761 million and Japan at US$ 17,557 million during April 2000-November 2014.

Investments

The government has announced that foreign investors can put in as much as Rs 90,300 crore (US$ 14.65 billion) in India’s rail infrastructure through the FDI route, according to a list of projects released by the Ministry of Railways. The Rs 63,000 crore (US$ 10.22 billion) Mumbai-Ahmedabad high-speed corridor project is the single largest. The other big ones include the Rs 14,000 crore (US$ 2.27 billion) CSTM-Panvel suburban corridor, to be implemented in public-private partnership (PPP), and the Rs 1,200 crore (US$ 194.79 million) Kachrapara rail coach factory, besides multiple freight line, electrification and signalling projects.

Israel-based world's seventh largest agrochemicals firm ADAMA Agrochemicals, formerly known as Makhteshim Agan Industries, plans to invest at least US$ 50 million over the next three years. ADAMA's global president and Chief Executive Chen Lichtenstein said the idea was to expand both manufacturing and research and development facilities in India aimed at growing better than the average industry growth.

Apple - world's most admired electronics brand - that sells devices such as the iPhone, iPad tablet and iPod media player – is planning to open 500 'iOS' stores in India in its first major push that will include moving into smaller towns and cities.

The Department of Industrial Policy and Promotion (DIPP) has moved a Cabinet note to allow 100 per cent FDI in medical devices as part of a strategy to not only reduce imports but also promote local manufacturing for the global market, which will be worth over US$ 400 billion next year.

Real estate private equity FDI is set to double after the Indian government ended the three-year lock-in and has introduced 100 per cent FDI for completed assets, according to JLL India. With India now allowing 100 per cent FDI in the construction sector, real estate private equity investment could double – and boost demand from overseas property buyers, according to sector experts.

FDI real estate private equity, which is currently estimated at around US$ 1billion - US$ 1.5 billion per annum, could reach to up to US$ 3 billion in the next few years, according to leading agency, JLL India.

The Ministry of Finance has announced that it has cleared 15 FDI applications, including that of Panacea Biotech and Sanofi-Synthelabo (India), and recommended HDFC Bank's proposal to hike foreign holding to the Cabinet for consideration.

Government Initiatives

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.

The government has notified easier FDI rules for construction sector, where 100 per cent overseas investment is permitted, which will allow overseas investors to exit a project even before its completion. It also said that 100 per cent FDI will be permitted under automatic route in completed projects for operation and management of townships, malls and business centres.

With the objective of encouraging foreign firms to transfer state-of-the-art technology in defence production, the government may increase the FDI cap for the sector to 74 per cent from 49 per cent at present. India is expected to spend US$ 40 billion on defence purchases over the next 4-5 years, mostly from abroad.

The Union Cabinet has cleared a bill to raise the foreign investment ceiling in private insurance companies from 26 per cent to 49 per cent, with the proviso that the management and control of the companies must be with Indians.

The Reserve Bank of India (RBI) has allowed a number of foreign investors to invest, on repatriation basis, in non-convertible/ redeemable preference shares or debentures which are issued by Indian companies and are listed on established stock exchanges in the country.
In an effort to bring in more investments into debt and equity markets, the RBI has established a framework for investments which allows foreign portfolio investors (FPIs) to take part in open offers, buyback of securities and disinvestment of shares by the Central or state governments.

Road Ahead

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.

Download PDF FDI statistics for the month of January 2015 (Size: 570 KB)

Exchange Rate Used: INR 1 = US$ 0.0162 as on January 21, 2015

References:  Media Reports, Press Releases, Press Information Bureau

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