Foreign Direct Investment in India

Introduction

India opened its gates to foreign direct investments in the year 1991 and since then the foreign investments have been a critical driver of economic growth and a major non-debt financial resource for the economic development of India. The government of India has been making regulations in the foreign policies in order to make the FDI process liberal and more streamlined in-order to attract more foreign investments in various sectors of India.

The factors that attract foreign investors to India are the low wage rate, skilled human resources, an abundance of natural resources, and liberal policies. India has gradually made its place in the international market and as a key investment destination that provides promising returns. The position of India has also improved in the global club of Ease of Doing Business and tops the Greenfield FDI ranking.

The Indian Government’s favourable policy regime and robust business environment has ensured that foreign capital keeps flowing into the country. Prime Minister Narendra Modi does not leave any stone unturned in order to promote India in various global platforms and also bring major reforms in the business environment of India. 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 for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflow in India stood at US$ 469.99 billion during April 2000 and March 2020, indicating that Government's effort to improve ease of doing business and relaxing FDI norms has yield results.

FDI equity inflow in India stood at US$ 49.97 billion in 2019-20. Data for 2019-20 indicates that service sector attracted the highest FDI equity inflow of US$ 7.85 billion, followed by computer software and hardware at US$ 7.67 billion, telecommunications sector at US$ 4.44 billion, and trading at US$ 4.57 billion.

During 2019-20, India received the maximum FDI equity inflow from Singapore (US$ 14.67 billion), followed by Mauritius (US$ 8.24 billion), Netherlands (US$ 6.50 billion), USA (US$ 4.22 billion) and Japan (US$ 3.22 billion).

Investments/ Developments

Some of the significant FDI announcements made recently are as follows:

  • On September 08, 2020, Byju’s (an Indian education technology firm) raised US$ 500 million in a new round of funding led by Silver Lake, a US-based private equity company; this move pushed the company’s valuation to US$ 10.8 billion.

  • In September 2020, Cashaa, a London-based neobank, raised US$ 5 million (Rs 360 million) in funds from O1ex, a Dubai-based blockchain investment and advisory firm, for its worldwide expansion, including India, Africa and Caribbean markets. In India, the company plans to tap the growing crypto user market by launching a neobank for crypto banking system.

  • In September 2020, Unacademy, an Edtech platform, raised US$ 150 million from SoftBank Group (a Japanese conglomerate), boosting its valuation to US$ 1.45 billion.

  • On 21 August 2020, the Government of Singapore announced investment of Rs 4.5 billion (US$ 63.84 million) in the qualified institutional placement (QIP) offering of mall developer Phoenix Mills Ltd.

  • On 14 August 2020, Israel-based Coralogix, provider of machine-learning based log analytics and monitoring solution, announced a strategic expansion into India with a commitment to invest over US$ 30 million in the next five years.

  • From January 2020 to July 2020, US FDI in India crossed US$ 40 billion, reflecting the high level of confidence of American corporations on the country. India witnessed an 18% increase in FDI from April 2020 to June 2020 (during COVID-19 pandemic). In mid-July 2020, FDI by the technology firms amounted to ~US$ 17 billion, driven by Google’s investments worth US$ 10 billion and the other key investors included firms such as Foxconn, Amazon and Facebook.

  • India Inc’s outward foreign direct investment (OFDI) dropped to US$ 5.724 billion in the first four months (April 2020–July 2020) of 2020–2021 against US$ 11.130 billion for the corresponding period in 2019–2020.

  • Due to the halt in operations amid the ongoing pandemic, the OFDI was slow in the first three months (April 2020: US$1.018 billon; May 2020: US$ 1.294 billion; and June 2020: US$ 893.18 million), while a substantial growth was recorded in July 2020, when the OFDI reached US$ 2.518 billion, as economies worldwide began to unlock and the COVID-19 lockdown restrictions started to soften on the operations.

Government Initiatives

In August 2020, the Indian government amended Foreign Direct Investment Policy, 2017 on commercial coal mining policy making it approved only under the Government route. In 2019, the Central Government, amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities.

In May 2020, Government increased FDI in defence manufacturing under the automatic route from 49% to 74%.

In April 2020, Government amended existing consolidated FDI policy for restricting opportunistic takeovers or acquisition of Indian companies from neighbouring nations.

In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100% stake in Air India.

Road ahead

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.

Note: Conversion rate used for October 2020 is Rs 1 = US$ 0.01370

References: Media Reports, Press Releases, Press Information Bureau, Press Trust of India, RBI, Department for Promotion of Industry and Internal Trade (DPIIT)