India became one of the highest Foreign Direct Investment recipients in 2020. This makes India one of the most lucrative investment zones in the world. Government of India initiates a more favorable policy to attract FDI investment because FDI is the major driver of economic growth in India.
- Introduction of FDI in India
- Modes of FDI investment in India
- Differentiating Foreign investment, FDI & FPI
- Largest FDI investor in India
FDI was one of the important sources of investment in India just after independence. Foreign direct investment is often considered as the driver of Indian economy as FDI not just brings in fresh funds but also modern technology, personnel to manage that technology and also employment in the country. Therefore, FDI in India has multi-pronged benefits for Indian economy as a whole.
FDI is a form of foreign investment with the intention of having a “lasting interest” in the business/corporations of another country. For all the official purposes “Lasting interest” is determined when the foreign entity acquires a share of above 10% & voting right in the organization. Therefore, Foreign Direct Investment & Foreign portfolio investment can be differentiated on the basis of element of control.
Introduction of FDI in India
During early 1980’s, Government of India started liberalising norms of FDI in India under Foreign Exchange Management Act, which is popularly known as FEMA. Started from just $1 billion of investment in the year 1991 today has a much larger base to bank upon. FDI in India is regulated by the Reserve Bank of India as per the mandate provided under FEMA.
With Indian economy liberalization in 1991, FDI in India improved to the fullest. This improvement in FDI figures is the result of FDI reforms in India. To attract a huge chunk of investors from outside, Government of India (GOI) framed FDI policy in a more transparent & simplified manner.
Modes of FDI in India
There are different modes of foreign direct investment in India classified under various head.
1. On the basis of Investment
- Horizontal FDI: Business expansion in the same product or service to a foreign country is popularly known as Horizontal FDI.
For instance; a local manufacturer in Russia starts its manufacturing branch in India, then this is Horizontal FDI.
- Vertical FDI: Change in business operational activities while investing in host country as compared to your home country.
For instance; MacDonald’s opens up a beef/pork production in Australia to support their actual business in India.
2. On the basis of entry routes: Considering FDI in India, these are the two routes through which one can enter into Indian market.
- Automatic route: Under this type of FDI in India, an entity does not need to take prior approval of the GOI or Reserve Bank of India (RBI). FEMA Regulation 16 specifically mentions the 100% FDI in India through automatic route.
- Government route: Activities which are not covered under the automatic route of Foreign Direct Investment require prior approval of the Government of India/Reserve bank of India.
A single window for all government approval initiated by the government of India through Foreign Investment facilitation portal (FIFP) under Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
How to Differentiate Between Foreign Investments, FDI & FPI?
Most of the times people often use these three terms interchangeably ignoring the differences, these terms have in real sense, for instance Foreign investment is an umbrella term which contains both FDI & FPI in it. But FDI & FPI has a broad difference in terms of investment.
‘Foreign Investment’ means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of a LLP.
‘FDI’ or ‘Foreign Direct Investment’ means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
‘FPI’ or ‘Foreign Portfolio Investment’ means any investment made by a person resident outside India through capital instruments where such investment is less than ten percent of the post issue paid-up share capital on a fully diluted basis
Foreign direct investment (FDI) is an investment made by a firm or individual in home country into business located in another country whereas, foreign portfolio investment (FPI) instead refers to investments made in securities and other financial assets issued in another country.
Foreign direct investment (FDI) pertains to foreign investment in which the investor obtains a lasting interest in an enterprise in another country whereas foreign portfolio investment (FPI), on the other hand, looks for investing in the financial assets of a foreign country, for example stocks or financial bonds on the exchange.
Who is the Largest Investing Partner of FDI in India?
Recently India crossed $500 billion cumulative FDI reserves since April, 2000 till September, 2020. In a span of two decades, with the slow and gradual changes and bringing in ease of doing business in Indian business environment a lot of foreign entity started shifting their base in India.
Mauritius, island nation in the Indian Ocean is the biggest FDI contributor in India. Approximately 29% of the FDI came through the Mauritius route followed by Singapore (21%), USA, UK & Japan have an individual share of less than 7%.
FDI had shown a tremendous upsurge in the middle of this decade i.e. from 2015-16. With FDI growth rate of approximately 35% over previous year, India received a record breaking FDI of $40 billion dollar. Subsequently these figures kept on increasing to $43.5 billion (2016-17), $44.85 billion (2017-18) and lastly $50 billion (2019-20) in the years that followed.
The actual figures for the financial year 2020-21 are yet to be release but half yearly figures shows some favorable outcomes for Indian economy. India has already received $30 billion worth of FDI in India till September, 2020. This shows the increasing faith of foreign investors in the Indian economy. Therefore, we can conclude by saying that, in recent times India has a much favorable FDI environment as compared to the counterparts this can be justified by the fact that from April to September, 2020 India received $30 billion dollar even during the times of COVID-19 pandemic, whereas the half-yearly figures of 2019 for the same quarter is $26 billion.
India is going to be the most attractive emerging market for global partners (GP) investment for the coming 12 months as per a recent market attractiveness survey conducted by Emerging Market Private Equity Association (EMPEA).
Annual FDI inflow in the country is expected to rise to US$ 75 billion over the next five years as per the report by UBS. The Government of India is aiming to achieve US$ 100 billion worth of FDI inflow in the next two years.