What Economic Reforms are Shaping the Future of FDI in India

India has been one of the most attractive destinations for foreign direct investment (FDI) in the past two decades with net FDI inflows reaching US$ 1.03 trillion from April 2000 to June 2024. The Indian government’s series of economic reforms and policies aimed at liberalising the economy, enhancing ease of doing business and improving infrastructure have played a significant role in attracting FDI.

Source: DPIIT

The chart depicts India’s FDI inflows from FY14 to FY24, demonstrating growth up to FY21 reached US$ 59.63 billion. In the subsequent years, however, inflows decreased. The decrease is subject to global issues like geopolitical wars, high key interest rates, and political and economic uncertainty which made the investors inactive and more cautious about their investments. Expectations for 2025 seem rather optimistic bearing in mind the possibilities of improvement given that India is likely to remain an investment hub. 

Overall, long-term perspectives of FDI inflow into India still seem optimistic taking into consideration that Indian GDP growth is expected to be around 6.7% p.a. during the period of 2024-2031.

Economic reforms

• Liberalisation of FDI policies
  Liberalisation of the FDI policy stands out as one of the most important government initiatives that have had a profound impact on attracting foreign investment. Over the past several years, the Indian government has progressively eased FDI norms across various sectors.
   
  • Defence: The ceiling for FDI in India's defence sector was revised upward in 2020 from 49% to 74% under the automatic route. In cases where FDI is likely to lead to advanced technology transfer into India, the limit extends to over 100%. The objective is to reduce dependence on imports by encouraging foreign firms to establish domestic production facilities, thus boosting technology transfers.
  • Insurance: To improve insurance penetration in India, which remains low as per global standards, the limit of FDI in the Indian insurance sector was raised from 49% to 74% in 2021. Increased awareness and digital adoption boosted insurance penetration from 3.76% in 2020 to 4-5% in 2023.
  • Telecom: In 2022, the FDI limit in telecom was raised to 100% from 49% under the automatic route. It is expected that this will attract more foreign investment to meet the increasing demand of 5G requirements.
  • Healthcare: The healthcare sector has seen increased FDI inflows, especially in telemedicine, pharmaceuticals and medical devices, driven by the need for better post-pandemic healthcare infrastructure.
  • Green energy initiatives (2022-2023): India has set its target for renewable energy at an unprecedented 500 GW by 2030. This is projected to draw huge investment from foreign investors. The government has made efforts to draw FDI in to the renewables sector, particularly, solar, wind and hydrogen energy. Measures include promoting green hydrogen production, lowering custom duties on renewable energy equipment imports and facilitating public private partnership in renewable energy activities. The sector attracted US$ 10 billion in FDI between 2014 and 2021.
     
• Ease of doing business initiatives
  India has made notable improvement in the ease of doing business Index in the World Bank rankings by moving up from position 142nd in 2014 to 63rd in 2020. There have been changes in the governance systems of the country that seek to enhance the business environment.
   
  • Simplification of procedures: Business processes have benefitted greatly from the adoption of procedures such as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC). Moreover, in 2019, Indian jurisdiction lowered the corporate tax for currently existing companies from 30% to 22% and for new organizations tax rate was lowered to 15%. After this tax incentive, India has recorded massive investments by international companies.
  • Start-up ecosystem: On the domestic front, the number of recognised startups as of 2023 was recorded as 70,000 establishing it as one of the largest growing ecosystems for startups across the globe. Entrepreneurship has been accompanied by new regulation to promote venture capital and private equity in the country which indicates the enabling environment for the young professionals and easy access to the funds.
  • Digital India: Digital India programme is one of the initiatives by the Government of India to digitally facilitate services related to the people through improved infrastructure and better Internet penetration. Further, establishment of clearing houses and international options for regulatory registration of offerings are lowering the cost of doing business in India. The plan also includes activities to deploy broadband connections in rural regions. These developments are anticipated to have the Indian digital economy growing to US$ 1 trillion by 2025 and thus making it an area of focus for investors.
     
• Infrastructure development and Gati Shakti plan
  Infrastructural development has always been accompanied by FDI. The Indian government has executed several infrastructure projects geared towards connectivity and logistics enhancement.
   
  • Gati Shakti master plan: The objective of this site planning and development strategy is to establish and develop a multimodal transportation system to reduce transport costs as well as improve the efficiency of the supply chain. The strategy reduces logistics costs from the existing 13-14% of the GDP to below 10%. This is done through the convergence of different modes of transportation such as roads, rails, and waterways. The strategy cuts down on the time taken in getting approvals for projects because of coordination in real time. This also enhances infrastructure in core industrial sectors making India more favourable for FDI by making it cost-effective and enhancing connectivity.
  • Smart cities mission: The scheme aims to develop 100 smart cities that attract foreign capital into urban infrastructure, technologies and services in various Indian cities. The Indian government has allocated over US$ 1.4 trillion to infrastructure development under the National Infrastructure Pipeline (NIP) for the period 2019-2025.
     
• Focus on manufacturing through “Make in India”
  The ‘Make in India’ initiative was started by the Government of India in 2014 with an objective of making India the most attractive destination for manufacturing by encouraging both foreign as well as local investment. The program can considerably enhance the economy and employ a vast part of the young population of the country. It is clearly quite appealing for large companies to set up production facilities in India. In the last few years Apple has extended both its procurement activities and production presence in India where it has joined forces with such assemblers as Foxconn and Wistron to partially assemble the iPhone. This shift is an effort by Apple to relocate part of its factories from China and wear the same hat as India in aspirations of being a manufacturing hub for complex global companies.
   
• PLI scheme expansion
  The Production Linked Incentive (PLI) scheme was initially launched targeting specific sectors in 2020. It has now brought in additional areas of investment such as textile, auto components and advanced chemistry cell (ACC) batteries.
  The scheme is expected to attract US$ 520 billion of investment and likely to create millions of job prospects by 2030.

Conclusion

India’s economic reforms have positioned it as a favourable destination for FDI, with policies aimed at liberalisation, ease of doing business, infrastructure development and sector-specific incentives driving growth. As India continues to implement reforms, it is expected to see sustained FDI inflows, contributing to economic development and job creation. The future of FDI in India looks promising, with the potential to make India a global hub for manufacturing, innovation and investment.