What is Foreign Direct Investment (FDI)?

 A foreign direct investment (FDI) is a financial investment made by a

party from one country into a business or corporation in another
country with the intention of establishing a long-term partnership.
 Foreign direct investment can take the form of obtaining a long-term
interest or expanding one's business into a foreign country.
 Foreign Direct Investment (FDI) is common in open economies with a
skilled workforce and good growth prospects.
 Foreign direct investment (FDI) brings more than simply money; it also
brings skills, technology, and knowledge.
 Foreign companies invest in India to benefit from reduced salaries and
other unique investment benefits such as tax breaks.
 Foreign enterprises participating in FDI are closely involved in the other
country's day-to-day operations.
 For instance,

Components of Foreign Direct Investment (FDI)

There are Three Components of FDI:

 Equity capital is the purchase of shares in a firm in a country other than

one's own by a foreign direct investor.
 Reinvested earnings are the portion of a direct investor's earnings that
are not paid as dividends by affiliates or returned to the direct investor.
The residual profits of affiliates are re-invested.
 Short and long-term borrowing and lending operations between direct
investors and linked enterprises are known as intra-company loans.

Advantages of Foreign Direct Investment (FDI)

 Foreign direct investment can help boost the economy of the

country where it is produced, boosting local businesses while also creating a
more favorable environment for the investor. Foreign direct
investment helps emerging economies.
 Foreign direct investment helps with technology spillovers, human capital
creation, and international commerce integration.
 Foreign knowledge may be a critical component in improving a country's
current technical processes, and technological and process advancements
boost a country's domestic competitiveness.
  It also contributes to the development of a more competitive business
environment and the expansion of small firms.
 All of these variables contribute to improved economic growth, which is
the most efficient way to reduce poverty in developing countries.

Disadvantages of Foreign Direct Investment (FDI)

 Foreign direct investment and exchange rate limitations may be harmful to

the country that is investing.
 By moving resources elsewhere, it can sometimes impede local
investment.
 Exchange rates are occasionally manipulated as a result of foreign direct
investment, to one country's benefit and the other's detriment.
 Foreign direct investment can be capital-intensive from the investor's
standpoint, making it high-risk or economically viable at times.

India and Foreign Direct Investment (FDI)

 For India's economic development, foreign direct investment (FDI) is an

important source of finances.
 Following the 1991 financial crisis, India began to liberalize its economy,
and foreign direct investment (FDI) has steadily increased in the country
since then.
 India is presently the world's top greenfield FDI destination and one
among the top 100 countries for ease of doing business (EoDB).
 The most recent FDI aggregate data is available till November 2021. While
net FDI inflows decreased to US$ 24.7 billion, gross FDI inflows declined to
US$ 54.1 billion from April to November 2021, owing to weaker equity
investment.
 In terms of FDI inflows per sector, computer software and
hardware received the most FDI equity inflows of US$ 7.1 billion from
April to September 2021.
 Singapore remains the top investment country in terms of FDI equity
inflow, with the United States coming in second. India's Foreign Direct
Investment (FDI) Routes

Category 1 Category 2 Category 3

100% FDI through Up to 100% FDI through Up to 100% FDI through
Automatic Route Government Route Automatic + Government Route
Automatic Route

 A non-resident or Indian firm does not need the RBI's or the Indian
government's prior approval for FDI.
 Some of the sectors where FDI through automatic route is permitted are
o Medical devices: up to 100%
o Thermal power: up to 100%
o Insurance: up to 49%
o Infrastructure company in the securities market: up to 49%
o Pension: up to 49%
o Power exchanges: up to 49%
o Petroleum Refining (By PSUs): up to 49%
o Civil Aviation
 Airports both greenfield and brownfield projects: up to 100%
 Ground handling and maintenance and repair firms: up to 49%
 Scheduled Air Transport Service/ Domestic Scheduled
Passenger Airline and Regional Air Transport Service: up to
49%
o Ports and harbor construction: up to 100%
o Railway infrastructure: up to 100%

Government Route

 To invest in this way, one will need the government's permission.

 The corporation must submit an application through the Foreign Investment
Facilitation Portal, which provides a one-stop for clearance.
 The application is then sent to the appropriate ministry, which, in
collaboration with the Ministry of Commerce's Department for Promotion of
Industry and Internal Trade (DPIIT), will accept or reject it.
 Under the existing policy, the DPIIT will issue a Standard Operating
Procedure (SOP) for processing FDI applications.
 Some of the sectors where FDI through government approval route is
permitted are
o Core Investment Company: 100%
o Multi-Brand Retail Trading: 51%
o Mining & Minerals separations of titanium bearing minerals and ores:
100%
o Print Media (publications/printing of scientific and technical
magazines/specialty journals/periodicals and a facsimile edition of
foreign newspapers): 100%
 o Satellite (Establishment and operations): 100%
o Print Media (publishing of newspaper, periodicals, and Indian editions
of foreign magazines dealing with news & current affairs): 26%

Prohibition of Foreign Direct Investment (FDI)

FDI is prohibited in the following sectors:

 The lottery industry includes both government and private lotteries, as well
as internet lotteries.
 Gambling and betting, including casinos.
 Nidhi corporation and chit funds.
 Transferable Development Rights (TDRs).
 Tobacco or tobacco substitutes for cigars, cheroots, cigarillos, and cigarettes.
 Two activities/sectors that are not open to private sector investment
are atomic energy and railway operations.

Impact of the Foreign Direct Investment (FDI) on the Economy

 Foreign Direct Investment (FDI) helps the economy expand in the long
run. MNCs transmit technology to domestic firms, resulting in the organic
growth or expansion of businesses and the creation of jobs.
 By boosting a company's assets, FDI improves its financial statement.
Profits increase for businesses, and worker productivity increases as well.
 Consumption rises in tandem with per capita income. As tax revenues rise,
so does government spending.
 The rupee strengthens versus the dollar as exports increase and the
balance of payments displays a surplus.
 As a result of FDI, technology transfer, or the migration of technical know-
how, takes place, resulting in skill development, which, when combined
with increased capital, boosts productivity and profitability.
 Furthermore, investments have a gestation period, and returns increase
after a few years.
 FDI also acts as a major supplement to India's domestic investment
stock, which is low due to weak savings.

Measures to promote FDI

 To entice foreign investment, government initiatives such as

the production-linked incentive (PLI) scheme for electronics
manufacturing in 2020 have been announced.
  In 2019, the government amended its FDI Policy 2017 to allow 100% FDI
under the automatic method in coal mining activities, which increased
FDI inflow.
 In addition, the government has allowed 26% FDI in the digital sector. In
India, the sector has particularly high return prospects, thanks to favorable
demographics, strong mobile and internet penetration, large consumption,
and rapid technological adoption, all of which provide a significant market
opportunity for foreign investment.
 The Foreign Investment Facilitation Portal (FIFP) is the government of
India's online single point of contact with investors to facilitate FDI. It is
managed by the Ministry of Commerce and Industry's Department for
Promotion of Industry and Internal Trade.
 Foreign investors have expressed interest in the government's plans to
allow private train operations and auction off airports, which is expected
to boost FDI inflow.
 In addition, valuable sectors such as defence manufacturing, which the
government increased the automatic route FDI ceiling from 49% to 74%
in May 2020, are projected to draw big investments in the future.

Reforms to FDI policy in 2020-2021

 Insurance Sector: Under the automatic method, the government increased

the permitted FDI ceiling in insurance companies from 49 percent to 74
percent, allowing foreign ownership and control with protections. This
would help India's insurance sector flourish by facilitating the flow of long-
term capital, a global technology, processes, and international best practices.
 Foreign investment up to 100% using the automatic route in circumstances
where the government has given an "in-principle" clearance for strategic
disinvestment of a PSU involved in the petroleum and natural gas sector.
 Telecom sector: Foreign investment in the telecom services sector is allowed
up to 100% under the automatic route.

New FDI Policy

 According to the new FDI policy, an entity from a nation that shares a land
border with India, or if the beneficial owner of investment in India is based
in or a citizen of such a country, can only invest through the government
route.
 Government permission is also required for a transfer of ownership in an
FDI agreement that benefits any country that shares a border with India.
  Rather than requesting prior authorization from the relevant government
department, investors from countries not covered by the new policy must
simply notify the RBI after a transaction.
 In all industries, the previous FDI policy only allowed Bangladesh and
Pakistan to invest through the government method. Companies from China
are now subject to the government's route filter as a result of the amended
rule.

Conclusion

The economy gains immensely from FDI, and the proper FDI process identifies
vital economic areas that deliver the best return on investment. By bringing
superior products and services to market, this investment increases firm
competitiveness, stimulates innovation and efficiency, and raises the level of living