Foreign Direct Investment in India: Meaning, Impact, Examples, Advantages and Disadvantages

India, ranking 8th globally in FDI reception as of 2023, sees foreign direct investment as crucial to its economy. This article will explore foreign direct investment, examine the country's foreign direct investment policy, and learn about its types, impact, examples, advantages, and disadvantages.

What is Foreign Direct Investment

Foreign Direct Investment refers to the ownership stake in a foreign project or company by the government, business, or an investor from another country. In other words, FDI describes a business decision to acquire a considerable stake in a foreign company or buy it completely to expand operations in a new region. 

What is Foreign Direct Investment in India?

Foreign Direct Investment (FDI) has been a crucial source of capital in India since economic liberalisation in 1991. India now ranks first in greenfield FDI and offers an automatic investment route, with regulations under FEMA ensuring transparency.

Importance of Foreign Direct Investment

In the current global economy, foreign direct investment is essential because: 

• It helps to increase capital that funds new businesses and development projects that promote economic stability.
• For developing countries, FDI can facilitate overcoming challenges by providing the necessary resources and infrastructure to improve their economies.

Foreign Direct Investment Policy in India

To enhance FDI inflows into the country, the Indian government has enacted a variety of policies and initiatives:

• Make in India Initiative

Through the Make in India Initiative, the manufacturing sector has recorded a 57% growth in FDI equity inflow since 2014-2022 compared to 2006-2014.

• Bilateral Investment Treaty

The Union Cabinet approved a Bilateral Investment Treaty with the United Arab Emirates, which aligns with the Atmanirbhar Bharat vision of increasing domestic manufacturing and reducing import dependency.

• Space Sector Liberalisation

An amendment to the FDI policy in the Space Sector allows for 100% foreign direct investment in specified activities.

• PLI Scheme

For White Goods (Air Conditioners and LED lights), the PLI scheme with a budget of USD 752 million from FY 2021-22 to FY 2028-29 was approved. This initiative aims to improve air-conditioner manufacturing with committed investments of $816 million from sixty-four applicants.

Types of Foreign Direct Investment

There are three types of foreign direct investment:

• Horizontal FDI

In horizontal FDI, a company establishes the same business operation in a foreign country as in its home country.

• Vertical FDI

Vertical FDI happens when a company undertakes different activities in a foreign country that helps with its existing business.

• Conglomerate FDI

Conglomerate FDI involves a company investing in a foreign business unrelated to its core business.

• Platform

Platform FDI occurs when a company invests in a foreign country to produce goods and then sells those goods to a different country.

FDI Routes in India

India has two FDI routes designed to protect its security and national interests.

• Automatic route

The automatic route allows foreign investors to invest in different sectors in India without prior approval from the authorities. Instead, they only need to inform the Reserve Bank of India (RBI) within a set timeframe.

• Government Route

For any foreign investor wanting to invest in critical sectors that involve national security, strategic interest, or specific regulatory concerns, the government requires them first to seek approval from the Indian government or relevant ministry.

FDI Inflows in India Last 10 Years

Let's look at the Foreign Direct Investment (FDI) inflows in India over the last 10 years:

Source: data sourced from UNCTAD

FDI Allowed Sectors in India

Many sectors in India are allowed to accept foreign direct investment (FDI) to boost the economy and introduce technology. Some sectors that can receive FDI include agriculture and animal husbandry, banking (both public and private), biotechnology, civil aviation, construction development, pharmaceuticals, and telecommunications.

Sectors where FDI is not Allowed in India

The government of India does not allow foreign direct investment to take place in several areas to safeguard national security and promote local industries. These sectors include:

• Government and private lotteries
• Atomic energy or railway operations
• Transferable Development Rights business
• Manufacturing tobacco products
• Gambling activities
• Nidhi companies
• Real estate-businesses
• Chit Funds

Notable Foreign Investments in India

Many foreign investments have been made in India, and they are worth mentioning. In July 2023, Walt Disney sought to improve Star India's growth and reduce its costs, possibly through sales or joint ventures. Likewise, Blackstone Inc., BPEA EQT, CVC Capital Partners, and General Atlantic were among the important private equity investors who participated in the competitive bidding process for Indira IVF Hospital Pvt. Ltd., based in Mumbai, around the same period.

Foreign Direct Investment Example

A notable example of foreign direct investment is Google's acquisition of a 7.73% stake in Reliance's 'Jio Platform for USD 4.5 billion, which was a significant investment in India's tech sector.

Advantages of Foreign Direct Investment

There are several advantages associated with foreign direct investment. 

• It aids economic development through capital inflow into new ventures 
• Allows expansion of established ones, leading to job creation, especially in fields like technology and infrastructure. 
• FDI also introduces superior technologies and managerial competencies, enhances Indigenous labour skills via training, and backs up projects such as ports and power plants.

Disadvantages of Foreign Direct Investment

Disadvantages of foreign direct investment include:

• loss of control over domestic resources and industries  
• competition for local resources such as labour or raw materials. 
• Host nations relying heavily on FDI become prone to global economic uncertainties that may disrupt their economies.

In conclusion, foreign direct investment policy in India plays a crucial role in fostering economic growth by attracting capital, fostering innovation, and enhancing infrastructure. While it creates opportunities for job creation and industry diversification, careful management is essential.