Ease of doing business

FDI in India is permitted either through the Automatic Route or Government Route

AUTOMATIC ROUTE: Under this route, the non-resident investor or the Indian company does not require any prior approval from the Government of India for investments in the country.

GOVERNMENT ROUTE: Under this route, an approval from the Government of India is required before making an investment. Proposals for foreign investments coming under the Government route are considered by respective Administrative ministry/ Department.

According to figures released by the Department for Promotion of Industry and Internal Trade (DPIIT), Foreign Direct Investment equity inflows in India stood at 44.37 billion US dollars in 2018-19. This number is an indication of the governments many initiatives towards relaxing FDI norms and policies and its efforts to improve Ease of Doing Business.

Recent data for the year 2018-19 indicates that the services sector attracted the highest FDI equity inflow with US $ 9.16 billion. This figure was followed by computer software and hardware with US $ 6.42 billion, trading – US $ 4.46 billion and telecommunications – US $ 2.67 billion. Most recently, the total FDI equity inflows for the month of March 2019 touched US $ 3.60 billion.

During the period of 2018-19, India received the maximum FDI equity inflows from Singapore (US $ 16.23 billion), followed by Mauritius (US $ 8.08 billion), Netherlands (US $ 3.87 billion), USA (US $ 3.14 billion), and Japan (US $ 2.97 billion). 

According to a trade review released by The Commonwealth in 2018, India has emerged as the top recipient of greenfield FDI inflows.

Significant announcements reflecting recent developments in FDI India:

• VMware, a leading software innovating enterprise based in the United States had announced an investment of US $ 2 billion in October 2018 in India by 2023.
• In August 2018, Bharti Airtel received an approval of the Government of India for the sale of 20 per cent stake in its DTH arm to an America based private equity firm, Warburg Pincus, for around $350 million.
• In June 2018, in accordance with Idea’s appeal, 100 per cent FDI was approved by the Department of Telecommunication (DoT) followed by its Indian merger with Vodafone. This merger resulted in Vodafone Idea the largest telecom operator in India.
• In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a figure of US $ 16 billion.
• In February 2018, Ikea- the Swedish- founded multinational group declared its plans to capitalize up to Rs. 4,000 crore (US $ 612 million) in the state of Maharashtra by seting up its multi-format stores and experience centres.
• By 2020, CG Group- a Kathmandu based conglomerate, is looking to invest Rs 1,000 crore (US $ 155.97 million) in India in its food and beverage business, stated Mr Varun Choudhary, Executive Director, CG Corp Global.
• The investment arm of the World Bank Group- International Finance Corporation (IFC), is planning to invest about US $ 6 billion through 2022 in several sustainable and renewable energy programmes in India.

The Government of India works within a policy framework pertaining to foreign investments in the country. The government has regularly eased FDI norms across sectors in the economy, with the aim of promoting FDI in India. Some recent initiatives by the Government of India are:

• In January 2018, the Government of India permitted 100 per cent FDI in single brand retail through the automatic route.
• The government plans to further ease foreign direct investment policies in the defence sector under the automatic route. It is in talks with stakeholders to increase FDI to 51 per cent from the current 49 per cent, in order to give a boost to the Make in India initiative and to generate employment.
• The Ministry of Commerce and Industry, along with the Government of India have made the approval procedures for foreign direct investment (FDI) proposals easy. This has been done by eliminating the approval of Department of Revenue and authorizing approval of all proposals requiring permission within 10 weeks after the receipt of application.
• In January 2018, Government of India allowed foreign airlines to make an investment up to 49 per cent in Air India with an approval from the government. The investment cannot exceed 49 per cent directly or indirectly.
• In September 2018, the Government released the National Digital Communications Policy, which predicts increasing FDI equity inflows in the telecommunications sector to US $ 100 billion by 2022.
• In December 2018, the Government of India revised rules for Foreign Direct Investments related to e-commerce. According to the rules 100 per cent FDI is allowed in the marketplace based model of e-commerce. Also, any sales of any vendor through an e-commerce marketplace entity or its group companies have been limited to a 25 per cent of the total sales of such vendor.
• In order to give a boost to the Insurance sector, the government of India is considering 100 per cent FDI in Insurance Intermediaries.

• In February 2019, a Draft National e-Commerce Policy was introduced by the Government of India. This policy encourages foreign investments in the marketplace model of e-commerce. It also states that the FDI policy for e-commerce sector has been developed to ensure a level playing field for all participants.

Prior approval by the government will not be required for foreign investments up to an extent of 100 per cent in real estate broking services.

Foreign direct investment is the sum of equity capital, long term capital, and short term capital as reflected in the balance of payments. FDI is characterized by a participation in management, joint-venture, transfer of technology and expertise.

Stock of foreign direct investment is the net (i.e., the outward FDI minus inward FDI) cumulative FDI for any given duration. 

Foreign direct investment (FDI) in India was introduced in the 1991 under the Foreign Exchange Management Act (FEMA) implemented by the then finance minister, Dr. Manmohan Sign. It commenced with the baseline of 1 billion dollars in 1990.

India, today is considered as an important destination for foreign direct investment. The major sectors that attract overseas investment are telecommunications, construction activities, and computer software and hardware.

1. Horizontal FDI: this type of FDI arises when a firm replicates its home country based business activities in the same value chain in the country where the investment is being made.
2. Vertical FDI: this type arises when a company through foreign direct investment moves upstream or downstream in varied value chains.
3. Platform FDI: this type arises when FDI from a source country into a destination country is carried out with the purpose of exporting to a third country.

The foreign direct investor may obtain voting power of an enterprise in an economy through any of the following methods:

• By the means of including a fully owned subsidiary or firm anywhere
• By obtaining shares in an associated company
• Via a merger or an acquisition of a firm that is not related
• By taking part in an equity joint venture with another investor or company

Foreign direct equity inflows are the sum of inward direct investments into a country by non-resident or foreign investors. A foreign direct investment is an investment made by an entity not residing in the country the investment is being made in.

This investment is characterized by a controlling ownership in a business. FDI is, therefore, different from foreign portfolio investment (FPI) by the notion of direct control.

Foreign direct investment typically includes “mergers and acquisitions, building new facilities, reinventing profits earned from overseas operations, and intra company loans”. This overseas investment generally involves participation in management, joint-ventures, transfer of technology, and expertise.