FOREIGN DIRECT INVESTMENT IN INDIA – RECENT TREND

[Mr. M. GOVINDARAJAN]

Introduction

The concept of foreign direct investment was introduced in the year 1991 by the then Finance Minister Dr. Manmohan Singh under the Foreign Exchange Management Act, 1999.  Foreign direct investment is a critical driver of economic growth of any country.  India is not an exception to this.  India attracts foreign direct investment because of the lower wages prevailing in the country, certain privileges such as income tax exemption etc.  By the process of foreign direct investment India has momentum in technical knowhow and also to increase the employment opportunities in India.  The foreign investment has been witnessing a continuous flow into India because of the favorable policy adopted by the Indian Government and the business environment.  The Government has undertaken many initiatives for the last years relaxing FDI norms in various sectors.

Total FDI inflows

As per the fact sheet on foreign direct investment (‘FDI’ for short)  from April 2000 to March 2020 the cumulative amount of FDI inflows (equity inflows +‘Re-invested earnings’ +‘Other capital’) is US$680,919 million.  The cumulative amount of FDI equity inflows from April 2000 to March 2020 is US $ 469,998 million.            

Equity inflows for the financial year 2019 – 20

The equity inflows from the month April 2019 to March 2020 have been given in the following Table-

Table - 1

FDI EQUITY INFLOWS (MONTH-WISE) DURING THE FINANCIAL YEAR 2019-20

Financial Year 2019-20 ( April - March)		Amount of FDI Equity inflows
		(In Rs. Crore)	(In US$ mn)
1	April 2019	36,463	5,252
2	May 2019	26,481	3,795
3	June 2019	50,567	7,282
4	July 2019	30,774	4,472
5	August 2019	18,164	2,553
6	September 2019	19,551	2,741
7	October 2019	22,808	3,211
8	November 2019	20,036	2,804
9	December 2019	33,166	4,659
10	January 2020	39,719	5,570
11	February 2020	24,025	3,361
12	March 2020	31,804	4,278
2019-20 (form April, 2019 to March, 2020) #		353,558	49,977
2018-19 (form April, 2018 to March, 2019) #		309,867	44,366
%age growth over last year		(+) 14%	(+) 13%

Source: https://dipp.gov.in/sites/default/files/FDI_Factsheet_March20_28May_2020.pdf 

# Figures are provisional, subject to reconciliation with RBI, Mumbai.

The financial year 2019-20 witnessed a higher growth of 13% in FDI inflow than the year 2018 – 19 by US$ 5,611 million.   January 2020 witnessed the highest inflow to the tune of US$  5,570 million followed by April 2019 FDI inflow to the tune of US$ 5,252 million.  The trend in increase of FDI equity inflows witnessed the Government’s effort to improve ease of doing business and relaxing FDI norms.

Sectoral FDI equity inflow

Nearly 63 sectors have been benefited by FDI equity inflow.  In the following table the sectors attracting highest FDI equity inflows are given-

Table - 2

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

Sl. No.	Sector	2019-20 (April – March) (Rs. in crores)	Cumulative Inflows (April, 00 - March, 20) (Rs. in crores)	% age to total Inflows (In terms of US$)
1	Services Sector **	55,429	471,730	17%
2	Computer Software and hardware	54,250	276,006	10%
3	Telecommunications	30,940	219,180	8%
4	Trading	32,406	176,005	6%
5	Construction Development: Townships, housing, built-up infrastructure and construction development project	4,350	129,964	5%
6	Automobile Industry	19,753	143,742	5%
7	Chemicals (Other than Fertilizers)	7,492	98,554	4%
8	Construction (Infrastructure) activities	14,510	108,383	4%
9	Drugs & Pharmaceuticals	3,650	87,814	4%
10	Hotel & Tourism	21,060	91,779	3%

Source: https://dipp.gov.in/sites/default/files/FDI_Factsheet_March20_28May_2020.pdf

Notes:

• ** Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis
• FDI Sectoral data has been revalidated / reconciled in line with the RBI, which reflects minor changes in the FDI figures (increase/decrease) as compared to the earlier published sectoral data.
• Figures are provisional.

Among the 63 sectors the highest FDI attracted sectors are services sector, computer software and hardware, telecommunications, trading, construction and development, automobile industry, chemicals (other than fertilizers), construction (infrastructure activities), drugs and pharmaceuticals and hotel & tourism.   The automobile industry, chemicals (other than fertilizers) and hotel & tourism sectors have received considerable FDI equity inflows in the financial year 2019 – 20.

Highest States attracting FDI equity inflows

In the following table the States which attracted highest FDI equity inflow in India is given-

Table - 3

STATES/UTs ATTRACTING HIGHEST FDI EQUITY INFLOWS FROM OCTOBER 2019 TO MARCH 2020

Sl. No.	State/Union Territory	Cumulative Inflows (October, 19 - March, 20) (in US $ million)	%age to total Inflows (in terms of US$)
1	MAHARASHTRA	7,263	30%
2	KARNATAKA	4,289	18%
3	DELHI	3,973	17%
4	GUJARAT	2,591	11%
5	JHARKHAND	1,852	8%
6	TAMIL NADU	1,006	4%
7	HARYANA	726	3%
8	TELANGANA	680	3%
9	UTTAR PRADESH	243	1%
10	ANDHRA PRADESH	206	0.9%

Source: https://dipp.gov.in/sites/default/files/FDI_Factsheet_March20_28May_2020.pdf

From the above table it can be inferred that the Maharashtra is holding rank 1 of the States attracting highest FDI equity inflow to the tune of US$ 7,263 million.  The share of Maharashtra in FDI equity inflow in India is 30%.  Next follows the States of Karnataka, Delhi and Gujarat.

Top 10 investing countries

FDI inflows into India are coming from nearly 175 countries in the world.  The following table will show the top 10 countries contributing highest FDI equity inflow into India-

Table - 4

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS

In US $ million

Ranks	Country	2019-20 (April – March)	Cumulative Inflows (April, 00 - March,20)	%age to total Inflows (in terms of US $)
1	MAURITIUS	8,241	142,710	30%
2	SINGAPORE	14,671	97,670	21%
3	NETHERLANDS	6500	33,852	7%
4	JAPAN	3,226	33,499	7%
5	U.S.A.	4,223	29,799	6%
6	U.K.	1,422	28,211	6%
7	GERMANY	488	12,196	3%
8	CYPRUS	879	10,748	2%
9	FRANCE	1,896	8,549	2%
10	CAYMAN ISLANDS	3,702	7,536	2%

Source: https://dipp.gov.in/sites/default/files/FDI_Factsheet_March20_28May_2020.pdf

The above table shows that in the financial year 2019 – 20 India received the maximum FDI equity inflow from Singapore (US$ 14.67 billion), followed by Mauritius (US$ 8.24 billion), Netherlands (US$ 6.50 billion), USA (US$ 4.22 billion) and Japan (US$ 3.22 billion).

Steps taken by Government

The Government of India has taken steps to increase the FDI flow into India continuously.  The following steps are taken in the recent past for attracting FDI inflow-

• 100% FDI was allowed to the marketplace based model of E-Commerce operators in December 2018.  Further the sales of any vendor through E-Commerce entity or its group companies were limited to 25% of the total sales of such vendor.
• 100% FDI in insurance intermediaries in India has been planned by the Government of India to give a boost to the insurance sector and attract more funds.
• The Government released the Draft National E-Commerce Policy for the encouragement of FDI in the marketplace model of E-commerce during February 2019.
• The Government has been working on a road map to achieve its goal of US$ 100 billion worth of FDI inflow.
• Union Budget 2019-20 the 100% FDI is permitted in insurance intermediaries.
• Union Budge 2019 – 20 proposed opening FDI in aviation, media animation and AVGC.
• The Government of India allowed 100% FDI under the automatic route in coal mining for opening sale during August 2019.
• During December 2019 the Government permitted 26% FDI in digital sectors.
• Non resident Indians have been permitted to acquire up to 100% stake in Air India by the Government during March 2020.
• The Government of India amended the existing consolidated FDI policy to restrict opportunistic takeovers or acquisition of Indian companies from neighboring nations during April 2020.
• The FDI limit is increased from 49% to 74% in defence manufacturing under the automatic route in May 2020.

Recent developments

• Reliance Industries announced biggest FDI deals with Saudi Aramco to buy a 20% stake in Reliance’s Oil-to-Chemicals business at an enterprise value of US$ 75 billion, in August 2019.
• French and Oil and gas, Total S.A. acquired 37.4% stake in Adani Gas Limited for US $ 810 million, during October 2019.  This is the largest FDI in India’s city gas distribution sector, in October 2019.
• Mastercard planned to invest up to US$ 1 billion in India over the next 5 years to double the research and development effort in the Indian market, during January 2020.
• Amazon India announced an investment of US$ 1 billion for digitalizing small and medium businesses in January 2020.  By this investment nearly one million jobs will be created in India by the year 2025.
• Jio Platforms Limited sold 22.38% stake of US$ 14.75 billion to 10 global investors such as Facebook, Silver Lake, Vista, General Atlantic, Mubadala, Abu Dhabi Investment Authority, TPG Captail and L. Catterton during June 2020 which will be taken up within 8 weeks.  This is considered as the largest continuous fund raise by any company in the world.

Covid 19 impact

Due to Korana the Government announced lock down from March 26, 2020 and still it is continuing almost in all States.  The business is entirely affected and there are many job losses in the country.  Because of Covid 19 there may be a sharp decline in the FDI inflow into India in the current year. 

‘In South Asia, FDI is also expected to contract sharply. In India, the biggest FDI host in the sub-region, with more than 70% of inward stock, the number of green field investment announcements declined by 4% in the first quarter, and mergers and amalgamations  contracted by 58%’, the United Nations Conference on Trade and Development (UNCTAD) report said.

However, the United Nations Conference on Trade and Development has said that India’s economy could prove the most resilient in South Asia and its large market will continue to attract market-seeking investments to the country even as it expects a dramatic fall in global foreign direct investment.

Even in the Covid period, 17 investors from Germany, Finland, Raiwan, France, South Korea, Japan, China, USA, UK and Australia invested a sum of ₹ 15,128 crores in Tamil Nadu. It is expected that these projects will create 47,150 jobs in Tamil Nadu. 

Conclusion

India will be one of the countries attracting highest FDI inflow in the coming years.  Though there is a setback due to Covid 19 it is hoped that the economy of India will be revived in the next year and attained its economic goal.  Annual FDI inflow in the country is expected to rise to US$ 75 billion over the next five years as per the report by UBS.  The Government of India is also aiming to achieve US$ 100 billion worth of FDI inflow in the next two years.

References:

1. https://www.deccanchronicle.com/
2. www.economictimes.indiatimes.com
3. www.dipp.gov.in
4. www.ibef.org.