Investments in India

Why in News

• India has attracted a total FDI inflow of US$ 72.12 billion during April to January 2021. It is the highest ever for the first ten months of a financial year and 15% higher as compared to the first ten months of 2019-20 (US$ 62.72 billion).
• Japan has been leading the list of investor countries to invest in India with 29.09% of the total FDI Equity inflows during January 2021, followed by Singapore (25.46%) and the U.S.A. (12.06%).
• In terms of top investor countries, ‘Singapore’ is at the apex with 30.28% of the total FDI Equity inflow followed by the U.S.A (24.28%) and UAE (7.31%) for the first ten months of the financial year 2020-21.
• The services sector in India received the highest share in FDIs amounting to over 554 billion Indian rupees in the fiscal year 2020. This sector included finance, banking, insurance and other non-financial sectors like research and development, testing, analysis and outsourcing.
• The top five countries that attract the most Foreign Direct Investment France, India, Germany, Singapore, Brazil, and Ireland.
• The top five countries that attract the most Foreign Portfolio Investment United States Of America, Mauritius, Singapore, Luxembourg, United Kingdom.

Sectors attracting maximum FDI in India

• Service sector.
• Auto and auto components sector.
• Telecommunications sector.
• Construction development sector.

States attracting maximum FDI:

• Destination-wise, economically advanced states have attracted the lion’s share of FDI flows to India.
• The top six Indian states, viz., Maharashtra, Delhi, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh together accounted for over 70 per cent of FDI equity flows reflecting distinct signs of FDI concentration at the state level.

• Gujarat(36%) is highest followed by Maharashtra(20%), Karnataka(15%), Delhi(12%), Jharkhand(5%), Tamil Nadu(4%), Haryana(3%) and Telangana(3%).

Effect of Pandemic

• India recorded a 13% growth in Foreign Direct Investment (FDI) in 2020 at a time when fund flows declined most strongly in major economies such as the UK, the US and Russia.
• Amidst global collapse, China is the only other country that has shown remarkably high FDI growth.
• United Nations Conference on Trade and Development (UNCTAD) on Sunday further pointed out, that global FDI collapsed in 2020 by 42%.

For more info, visit DPIIT website.

Download FDI Policy, 2020

What resulted in increased FDI inflows?

• FDI policy reforms,
• Investment facilitation and
• Ease of doing business

Key Points

India Foreign Direct Investment (FDI) registered a growth equal to 2.7 % of the country's Nominal GDP in Dec 2020, compared with a growth equal to 4.3 % in the previous quarter

The Computer Software & Hardware has emerged as the top sector during the first ten months of F.Y. 2020-21 with 45.81% of the total FDI Equity inflow followed by Construction (Infrastructure) Activities (13.37%) and Services Sector (7.80%) respectively.

As per the trends shown during the month of January 2021, consultancy services emerged as the top sector with 21.80% of the total FDI Equity inflow followed by Computer Software & Hardware (15.96%) and Service Sector (13.64%).

According to the World Investment Report 2020 by UNCTAD, India was the 9th largest recipient of FDI in 2019.

Government Measures to increase FDI:

• In 2020, schemes like the production-linked incentive (PLI) scheme for electronics manufacturing, have been notified to attract foreign investments.
• In 2019, the Central Government amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities.
• Further, the government permitted 26% FDI in digital sectors. The sector has particularly high return capabilities in India as favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.
• FDI in manufacturing was already under the 100% automatic route, however in 2019, the government clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.
• Contract Manufacturing: Production of goods by one firm, under the label or brand of another firm.
• It is administered by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.

Increase in FDI Inflows is further Expected:

• As foreign investors have indicated interest in the government’s moves to allow private train operations and bid out airports.
• In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100% stake in Air India.
• Valuable sectors such as defence manufacturing where the government enhanced the FDI limit under the automatic route from 49% to 74% in May 2020, could also attract large investments going forward.

Foreign Direct Investment

• FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).
• Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise

Foreign Portfolio Investment

• FPI is the process where the foreign entity merely buys stocks and bonds of a company. FPI does not provide the investor with control over the business. Foreign institutional investors (FII) are a single investor of a group of investors that brings in foreign portfolio investments.

FDI has three components, viz., equity capital, reinvested earnings and intra-company loans.

• Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
• Reinvested earnings comprise the direct investors’ share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
• Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.

Routes through which India gets FDI:

• Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
• Government route: In this, the foreign entity has to take the approval of the government.
• The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through the approval route. Administered by DPIIT, Ministry of Commerce and Industry.

External Commercial Borrowing

• ECBs are in simple words commercial loans taken for a commercial purpose, by non-resident lenders in foreign currency to Indian borrowers.
• Its in form of bank loans, suppliers' credit, buyers' credit or securitized instruments, sought from foreign lenders.
• The ECBs can be obtained through an automatic route or approval route or by a combination of both routes.
• Sahoo Committee was set up for developing a framework for access to the domestic and overseas capital market.
• The debt includes money owed to private commercial banks, foreign governments, or international financial institutions such as IMF and World Bank.
• For the telecom sector, infrastructure and Greenfield projects, funding up to 50% (through ECB) is allowed.
• Recently, RBI issued a guideline stating that all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route (earlier it was applicable only to corporate companies).
• The Department of Economic Affairs, Ministry of Finance, along with RBI, monitors and regulates ECB guidelines and policies.
• U.S. dollar-denominated debt remains largest component of the external debt.

For more information about ECB, visit Aspire Website

Current Account

• The current account measures the flow of goods, services, and investments into and out of the country.
• It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
• A nation’s current account maintains a record of the country’s transactions with other nations that includes net income, including interest and dividends, and transfers, like foreign aid.
• It comprises of following components -

1. Visible trade - Export and import of goods,
2. Invisible trade - Export and import of services
3. Unilateral transfers
4. Investment - Income from factors such as land or foreign shares

Current Account Deficit

• There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
• It is measured as a percentage of GDP, the formulae for calculating CAD is as follows
• Current Account = Trade gap + Net current transfers + Net income abroad
• Trade gap = Exports – Imports
• A country with rising CAD shows that it has become uncompetitive, and investors may not be willing to invest there.
• Current Account Deficit and Fiscal Deficit are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.
• For the fiscal year 2019-20, the current account deficit narrowed to 0.9% of the GDP, compared with 2.1% in FY2018-19.

Way Forward

Foreign Direct Investment (FDI) is a major driver of economic growth and an important source of non-debt finance for the economic development of India. A robust and easily accessible FDI regime, thus, should be ensured.

• Economic growth in the post-pandemic period and India’s large market shall continue to attract market-seeking investments to the country.

Investments in India

• A continued rise in private investments in the third quarter (Q3) of 2020-21, led by a 102% surge in manufacturing investments, helped India register a healthy 10.3% increase in fresh project spending in Q3 over the previous quarter.
• However, new capital expenditure proposals from the government collapsed between October and December 2020, as funding constraints began to pinch the States, dragging their new project investments down nearly 25% from the previous quarter.

• The Q3 project investment numbers suggest a reversal from recent years’ trend of government capital expenditure propping up the economy while the private sector remained reluctant to invest due to flat consumer demand and weak balance sheets, said Projects Today, an independent firm that tracks investment projects.
• “The fall in state-promoted investment in Q3 is not a good sign. We hope this will be a short-term phenomenon,” said Shashikant Hegde, director and CEO of Projects Today. This has raised the private sector’s share in new projects from 40% in the previous quarter to 49.5% in Q3, he added.
• Mr. Hegde said the sequential increase registered in fresh projects by the private sector of 102.5% in the second quarter, and 36.5% in the third quarter, indicates the willingness of private promoters to undertake capacity building in the future.