FDI in Indian Industry

Over the past two decades, foreign capital inflows have emerged as key channels of global
economic integration all across the world. While FDI (foreign direct investment) flows have been
undertaken by the MNEs (multinational enterprises) in the course of their overseas expansion, FPIs
(foreign portfolio investments) representing equity and debt flows are unaccompanied by management
control. The FPIs have become increasingly visible in the recent years due to the rise of the FIIs (foreign
institutional investors) and the sovereign wealth funds, which mainly aim at making quick returns through
short-term speculative activities across borders.

In the developing countries, FDIs are considered as catalysts of development – This is because FDI
inflows are accompanied with the inflow of entrepreneurship, technology and managerial know-how, and
sometimes even market access. Thus, the developing countries actively seek to attract FDI flows with
different policy instruments.

Rise in the FDI and FPI inflows in India in the recent years – India have increasingly become an attractive
destination for MNEs and FIIs due to the following reasons:
• Substantial liberalization of India’s police regime since 1991;
• The Indian economy was placed on the robust growth trajectory in the new millennium.
• A large and prospective market, with a relatively young population.

Emergence of India as a Source of outward FDI flows in the past decade (in the new millennium) – Indian
enterprises have begun to use outward FDI as a strategic tool for strengthening their international
competitiveness.

Hence, FDI flows have increasingly become bi-directional in the context of the Indian economy.

Change in India’s Policy Regime towards Increasing International Integration

• After pursuing a restrictive policy towards FDI over the three decades (1950s – 1970s), the
attitude towards FDI began to change in the 1980s;
• A strategy of modernization of Industry was adopted, with liberalized imports of capital goods and
technology, thus exposing the Indian industry to foreign competition;
• In the 1980s, a greater role was assigned to the MNEs in the promotion of manufactured exports;
• The policy changes that were adopted in the 1980s included :
1. liberalization of industrial licensing (approval) rules;
2. exemption from the foreign equity restrictions under FERA Act of 1973, for the 100 per cent
export-oriented units; and
3. greater flexibility concerning foreign ownership.
• In the 1990s, India started off on a broader process of reforms that were designed to increase her
integration with the global economy;
 • With the abolition of the industrial licensing system (except where it is required for strategic or
environmental grounds), the New Industrial Policy (NIP) since July 1991, marked a major
departure with respect to the FDI policy;
• New sectors were opened to foreign-owned companies, subject to certain sectoral caps, such as
mining, banking, insurance, telecommunications, construction and management of ports, harbours,
roads and highways, airlines and defense equipments;
• There was a creation of a system of automatic clearance of FDI proposals, fulfilling the conditions
that were laid down, such as the ownership levels of 50 per cent, 51 per cent, 74 per cent and 100
per cent;
• Foreign ownership up to 100 per cent was permitted in most manufacturing sectors ( even on the
basis of automatic approval in some sectors), except for defense equipment (limited to 26 per cent)
and items reserved for production by small-scale industries (limited to 24 per cent);
• In September 2012, India allowed FDI in multi-brand retail and in civil aviation;
• In July 2014, sectoral caps were revised upwards in some sectors like telecom (to 100 percent),
insurance (to 49 per cent), and in defense equipment (beyond 26 per cent on a case-by-case basis).

Trends in the Sectoral Composition of FDI inflows in India

• Since 1991, there has been a shift in India’s FDI inflows from manufacturing towards services;
• Prior to 1991, the bulk of FDI inflows used to be directed to manufacturing, particularly the high
technology industries, whereas after the liberalization, a substantial proportion of FDI inflows has
been directed to services;
• Manufacturing has accounted for only about 40 per cent of inflows in 1991 period, with services
accounting for about 35 per cent share;
• In the post-1991 period, FDI inflows have been more evenly distributed amongst the
manufacturing sectors, like food and beverages, transport equipments, metals and metal products,
electrical and electronics, chemicals and allied products, and miscellaneous manufacturing;
• This is in sharp contrast to the situation prior to 1991, when there was very heavy concentration in
relatively technology-intensive sectors, viz., machinery, chemicals, electrical and transport
equipment;
• Unlike the East Asian countries, India has not been able to exploit the potential of FDI for export-
oriented production;
• The bulk of FDI inflows in India are market-seeking intended to tap the domestic market, with the
share of foreign affiliates in exports around 10 per cent;
• India has not imposed export obligations on MNE affiliates except for those entering the products
reserved for SMEs;
• However, indirect export obligations in the form of dividend balancing had been imposed for
enterprises primarily producing consumer goods (phased out since 2000);
• A condition of foreign exchange neutrality is also a form of indirect export obligation, in which a
foreign enterprise is required to earn foreign exchange enough to even cover the outgo on account
of imports;
 • An evidence can be seen in the Indian auto industry, in which the foreign enterprises, in order to
comply with their export commitments in relation to foreign exchange neutrality condition,
foreign automakers have undertaken exports of auto components from India;
• This has not only opened new opportunities for Indian auto-component manufacturers but also
found profitable opportunities abroad, eventually leading to rapid growth in exports of auto-
components from India;

Recent Updates

• India has recently experienced a rise in FDI inflows since 2006, reflecting an improving
investment climate in India with an acceleration of growth rate since 2003.

• Two important causes for this rise could be identified as a rise of a sizeable middle class with
purchasing power, and with the recognition of India’s comparative advantage in knowledge-based
industries.

• In the FDI Confidence Index published by AT Kearney, a global consultancy organization,

covering 25 top destinations for FDI, India has moved up to the 2nd position in 2012, whereas it
moved down to the 5th position in 2013 (US occupying the 1st position and Brazil and Canada
moving up to the 3rd and 4th positions).

• Among the Asian developing economies, India continues to remain in 2nd position, after China.

• India attracted highest ever total FDI inflow of US$ 81.72 billion during 2020-21, 10% more than
the last financial year. (Ministry of Commerce & Industry, PIB, 24 May 2021).

• Measures taken by the Government on the fronts of Foreign Direct Investment (FDI) policy
reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows
into the country.
• India has attracted highest ever total FDI inflow of US$ 81.72 billion during the financial year
2020-21 and it is 10% higher as compared to the last financial year 2019-20 (US$ 74.39 billion).

• The cumulative total FDI inflows from April, 2000 to March, 2021 had been US $ 763.57 billion.

• FDI equity inflows grew by 19% in the F.Y. 2020-21 (US$ 59.64 billion) compared to the
previous year F.Y. 2019-20 (US$ 49.98 billion).

• In terms of top investor countries, ‘Singapore’ is at the apex with 29%, followed by the U.S.A
(23%) and Mauritius (9%) for the F.Y. 2020-21.

• ‘Computer Software & Hardware’ has emerged as the top sector during F.Y. 2020-21 with around
44% share of the total FDI Equity inflow followed by Construction (Infrastructure) Activities
(13%) and Services Sector (8%) respectively.
 • In case of the cumulative FDI equity inflows from April, 2000 to March, 2021, the top sectors are
as roughly as follows:
CumulativeInflows % age to total
Ranks Sector (April, 00 - Inflows (In
December, 20)
terms of US$)

1. SERVICES SECTOR ** 500,505

(85,860) 16%
COMPUTER SOFTWARE & 457,476
2. 13%
HARDWARE (69,296)
3 TELECOMMUNICATIONS 221,816
(37,628) 7%

4. TRADING 191,945
(29,736) 6%
CONSTRUCTION DEVELOPMENT:
Townships, housing, built-up 125,990
5. 5%
infrastructure and construction- (25,935)
development projects

6. AUTOMOBILE INDUSTRY 152,553

(25,395) 5%
CONSTRUCTION 161,337
7. 5%
(INFRASTRUCTURE) ACTIVITIES (23,995)
CHEMICALS (OTHER THAN 104,065
8. 4%
FERTILIZERS) (18,378)
9. DRUGS & PHARMACEUTICALS 97,048
(17,746) 3%

10. 94,224
HOTEL & TOURISM (15,615) 3%

Source : QUATERLY FACT SHEET FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) FROM APRIL, 2000 to MARCH, 2021

• Under the sector `Computer Software & Hardware’, the major recipient states are Gujarat (78%),
Karnataka (9%) and Delhi (5%) in F.Y. 2020-21.

• Gujarat is the top recipient state during the F.Y. 2020-21 with 37% share of the total FDI Equity
inflows followed by Maharashtra (27%) and Karnataka (13%).

• Majority of the equity inflow of Gujarat has been reported in the sectors `Computer Software &
Hardware’ (94%) and `Construction (Infrastructure) Activities’ (2%) during the F.Y. 2020-21.

• The major sectors, namely Construction (Infrastructure) Activities, Computer Software &
Hardware, Rubber Goods, Retail Trading, Drugs & Pharmaceuticals and Electrical Equipment
have recorded more than 100% jump in equity during the F.Y. 2020-21 as compared to the
previous year.

References

• Uma Kapila (ed), “Indian Economy since Independence”, Relevant articles.

• QUATERLY FACT SHEET FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) FROM APRIL, 2000 to
MARCH, 2021.