India's FDI Story

 A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. FDI equity is pure investment as capital into companies. FDI can also be in other debt forms which is not a capital, but in borrowing status for the companies and they will remain as debt in the books, to be paid back (or converted into equity) based on the arrangement. FDI is crucial for economic development, modernization, and employment generation; it contributes to technology transfer, human capital formation, entrepreneurship, and efficiency of resource management. Cumulative amount of FDI equity inflow between April 2000 - March 2020 is ₹2.73 lakh crore (roughly US$ 470 billion in current FX rate) based on the DPIIT (Department for Promotion of Industry and Internal Trade) data. Cumulative amount of FDI inflow is US$ 680.92 billion. This is a major improvement considering the total FDI inflow between August 1991 (since Economic Liberalization) to March 2000 is US$ 15.48 billion

or ₹58471 crore. Among the country wise FDI equity inflows from the above time period is -.

1. Mauritius - 30.36% (US$ 142 billion)

2. Singapore - 20.78%

3. Netherlands - 7.20%

4. Japan - 7.13%

5. USA - 6.34%

18. China - 0.51%

The main reason Mauritius dominates investment inflows into India is because of its status as a tax haven. India-Mauritius Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an important role in facilitating foreign investment in India via Mauritius. For years companies have been setting up a shell or holding companies in Mauritius where no economic activity exists so that money made elsewhere can be channeled into their Mauritius entity for tax avoidance. Although Mauritius has a corporate tax rate of 15 per cent, the effective tax rate is three per cent. This is coupled with no withholding tax and no capital gains tax on dividends makes it a good destination for companies to set-up entities to do business in India. The single largest Chinese investment in India is the $1.1 billion acquisition of Gland Pharma by Fosun in 2018.

The FDI equity inflows was US$ 2.46 billion back in FY01 (2000-01) which rose to US$ 25.83 billion in FY10 and US$ 24.29 billion in FY14. The FDI equity inflows for last the financial years are -

FY 18 - US$ 44.58 billion (Total FDI - US$ 60.97 billion)

FY 19 - US$ 44.36 billion (Total FDI - US$ 62.00 billion)

FY 20 - US$ 49.97 billion (Total FDI - US$ 73.45 billion)

FY 21 - US$ 59.64 billion (Total FDI - US$ 59.64 billion)

                                                                                                                                    

Sector wise FDI equity inflows in the time period are -

1. Services Sector - US$ 82.00 billion

2. Computer Software and Hardware - US$ 44.91 billion

3. Telecommunications - US$ 27.59 billion

4. Trading - US$ 25.66 billion

5. Construction Development - US$ 24.21 billion

Total FDI inflow grew from US$ 231.37 billion (2008-14) to US$ 358.29 billion (2014-20). One of the main reason behind the 155% rise of FDI inflows post FY 14 is Modi Govt. liberalize FDI in sectors like Defense, Civil Aviation, Railways, Coal, Mining, E-Commerce etc. In Apr-Aug 2020, total FDI inflow is US$ 35.73 billion (total equity FDI -US$ 27.1 billion). This is highest inflow for first 5 months in any financial year since Apr 2000. Greenfield and brownfield investments are two types of foreign direct investment. With greenfield investing, a company will build its own, brand new facilities from the ground up. Brownfield investment happens when a company purchases or leases an existing facility. There are two ways FDI inflows can happen in India. They are - 

Automatic Route - Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

Government Route - Under the Government Route, prior to investment, approval from the Government of India is required. Proposals for foreign direct investment under Government route, are considered by respective Administrative Ministry/ Department.

As per Indian FDI policy, to setup a manufacturing unit in the country, it has to source 30% of components locally. State-wise highest FDI equity inflows are - Maharashtra, Karnataka, Delhi, Tamil Nadu and Gujarat. Ease of Doing Business (EoDB) conditions should be improved to attract more FDI into the regions. For Indian states, a study estimates that a one-percent increase in the EoDB score leads to a 6.32-percent increase in FDI inflow.

India's FDI inward stock back in 2004 was US$ 42 billion that rose to US$ 427 billion in 2019. China's stock of inward FDI in same period rose from US$ 544 billion (2004) to US$ 1.77 trillion (2019).

According to the data provided by Reserve Bank of India (RBI), India's outward Foreign Direct Investment (OFDI) in equity, loan and guaranteed issue stood at US$ 12.91 billion in 2019-20.

Based on UNCTAD World Investment Report 2020 report, Asia accounts US$ 474 billion of FDI inflows in 2019. Out of US$ 57 billion FDI inflows in South Asia, US$ 51 billion (~ 90%) accounts for India. China leads Asia with US$ 141 billion of FDI inflows followed by Singapore (US$ 92 billion) and Hong Kong (US$ 68 billion).