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Indian Economy

Foreign Direct Investment

Why The Need For Foreign Investment?

  • In most developing countries like ours, domestic capital is inadequate to meet the purpose of economic growth.
  • The inflow of foreign capital helps in removing the balance of payment over time.
  • By taxing the profits of foreign enterprise, the developing countries mobilize funds for development projects.
  • Foreign capital contributes to the generation of employment.
  • Foreign investment fills the gaps in management, entrepreneurship, technology and skill.

Forms of Foreign Investment

  • It includes foreign direct investment (FDI) and foreign portfolio investment (FPI)
  • Foreign direct investment is the investment in physical assets by foreign individuals, companies or financial institutions.
  • Foreign portfolio investment in the investment made in financial assets. It includes investments made by foreign institutional investors.

Why FDI Preferred?

  • It is of non-debt creating nature.
  • It is also less prone to quick reversals. South-east Asian crisis emanated due to the reversals of short-term capital inflows.

Forms of FDI

There are two types of FDI
  • Greenfield Investment : It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries.
  • Mergers and Acquisition : It occurs when a transfer of existing assets from local firms takes place.

Forbidden Territories

FDI is not permitted in the following industrial sectors:
  • Arms and ammunition
  • Atomic Energy
  • Railway Transport
  • Coal and lignite
  • Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc
  • Retail trading, except single brand product retailing
  • Gambling & Betting
  • Lottery

FDI In India

  • The World Investment Report 2011, released by the United Nations Conference on Trade and Development (UNCTAD) shows that in 2010, FDI inflows into India were below pre-crisis levels by nearly 42 percent. Even in the first two quarters of 2011- 12, foreign direct investment had been slow.
  • As a result of major global acquisitions by Indian companies, India is the fifth largest source of funds (FDI outflow) in developing Asia.
  • In FDI equity investments, Mauritius tops the list of first ten investing countries followed by the US, the UK, Singapore, Netherland, Japan, Germany, France, Cyprus and Switzerland.
  • Among the sectors attracting highest FDI are services, telecommunications, computer software and hardware, housing and real estate and construction.

Invest India To Promote FDI

Invest India has been constituted to promote foreign direct investment. The company with Rs 10,000 million will have 49 percent share from government and 51 percent from FICCI. The principles of the company are to promote FDI in the country, to provide processing facilities to foreign investors and act as coordinator among various ministries and also to provide feedback to the government on industrial policy.

Foreign Investment Promotion Board (FIPB)

  • It offers a single window clearance for foreign direct investment proposals in India that are not allowed access through the automatic route.
  • It comprises Secretaries from Department of Commerce, Department of Industrial Policy & Promotion and Ministry of External Affairs as members, with Secretary in Department of Economic Affairs in the Ministry of Finance as the chairperson.
  • To expedite flow of foreign investment into the country, the Union government has allowed the FIPB to clear proposals from overseas entities worth up to Rs. 1,200 crore. Earlier the limit was Rs. 600 crore.