Foreign Direct Investment

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Last updated: Jul, 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 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 inflows soared by 24.5 per cent to US$ 44.9 billion during FY2015, as compared to US$ 36.0 billion in FY2014. FDI into India through the Foreign Investment Promotion Board (FIPB) route shot up by 26 per cent to US$ 31.9 billion in the year FY2015 as against US$ 25.3 billion in the previous year, indicating that government's effort to improve ease of doing business and relaxation in FDI norms is yielding results.

Data for FY2015 indicates that the increase in the FDI inflows was primarily driven by investments in infrastructure and services sector. Within Infrastructure, Oil & Gas, Mining and Telecom witnessed higher FDI inflows, whereas IT services and trading (wholesale, cash & carry) drove the services inflows. Most recently, the total FDI inflows for the month of May 2015 touched US$ 3.85 billion as compared to US$ 3.6 billion in the same period last year.

During FY2015, India received the maximum FDI equity inflows from Mauritius at US$ 9.03 billion, followed by Singapore (US$ 6.74 billion), Netherlands (US$ 3.43 billion), Japan (US$ 2.08 billion) and the US (US$ 1.82 billion). Healthy inflow of foreign investments into the country helped India’s balance of payments (BoP) situation and stabilised the value of rupee.

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 May 2015 were valued at US$ 3.2 billion (115 deals), which is 21 per cent higher in volume as compared to May 2014.

Investments/ developments

Based on the recommendations of Foreign Investment Promotion Board (FIPB), the Government, in a meeting held on July 15, 2015, approved 10 proposals of FDI amounting to approximately Rs 1,675 crore (US$ 262 million).

Some of the recent significant FDI announcements are as follows

  • Google plans to invest Rs 1,500 crore (US$ 234.3 million) for a new campus in Hyderabad which will be focused on three key areas — Google Education, Google Fibre broadband services and Street view.

  • Taiwan based Foxconn Technology Group, world’s largest electronics manufacturer, will establish 10–12 facilities in India including data centres and factories by 2020.

  • Warburg Pincus, a US based Private Equity (PE) firm, has planned to invest Rs 850 crore (US$ 132.8 million) in Ecom Express – an India based logistics solutions provider.

  • Gap Inc., a US based retail chain, opened its first store in Delhi and plans to open 40 more stores in the next 4–5 years which will be spread across the top 10 cities in India.

  • Dalian Wanda Group, one of China’s largest real estate firms, has planned to invest US$ 10 billion in India in the next 10 years which will be used to construct retail properties and industrial townships.

  • Microsoft Corporation has planned to establish three data centres in India which will have the ability to scale up easily without much of physical expansion. These data centres will be used by the firm to equip itself better towards the sectors such as government and financial services.

  • Royal Dutch Shell PLC, a global oil and gas giant, is planning to expand its retail outlet network by utilizing its existing license to establish 2,000 fuel stations. Shell has already invested around US$ 1 billion in India and currently has 75 operational outlets.

  • Nando’s, a South African restaurant chain, has planned to open 12 more restaurants in India which will require an investment of Rs 75 crore (US$ 12 million) taking the total number to 20 by 2017.

  • US based BrightSKY has planned to establish a plant in Naya Raipur India to manufacture 4G devices, Light Emitting Diode (LED) bulbs and telecom products. The proposed plan will require an investment of Rs 500 crore (US$ 78.11 million) and would generate direct and indirect employment for over 600 citizens.

  • Carlyle Group, a US based PE firm, will be investing US$ 500 million in Magna Energy Ltd which is an India-focused upstream oil and gas company.

  • Germany based multinational engineering and electronics company Bosch will invest Rs 650 crore (US$ 101.54 million) in 2015 to expand its reach. The firm will establish a plant in Bidadi and convert its existing plant to a full-fledged technology centre and software development park.

  • Japan’s Softbank will form a Joint Venture (JV) together with Foxconn Technology Group and Bharti Enterprises to invest US$ 20 billion in the renewable energy sector of India with an aim to set up 20,000 MW of projects in the next ten years.

  • Wal-Mart India Pvt Ltd, a wholly owned subsidiary of Wal-Mart stores Inc, has planned to expand to 500 stores across India in the next 10 - 15 years, compared to 20 stores currently operating across eight states.

Government Initiatives

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.

Relaxation of FDI norms is expected to result in enhanced inflows in 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 renewed policy is also expected to encourage development of low cost affordable housing in the country and of smart cities.

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$ 469 million) from the present Rs 1,200 crore (US$ 187 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.

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 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$ 0.0156 as on June 22, 2015

References: Media Reports, Press Releases, Press Information Bureau

 

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