Foreign direct investment in India-recent trend in the FDI in different sectors in India

INTRODUCTION

Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India.Foreign companies invest directly in fast growing private Indian businesses to take the benefits of cheaper wages and changing business environment of India. India allows FDI in most sectors through the Automatic route, but in certain segments that are considered sensitive for the economy and security, the proposals have to be first cleared by Foreign Investment Promotion Board (FIPB).

In India, FDI inflows have risen rapidly, from $24 billion in 2012 to $44.2 billion in 2015 — a seven-year high. This increase is also fairly broad-based. It is not just the e-commerce (trading) sector that has received more inflows; other sectors such as computer software and hardware, construction, services, autos and the telecom sectors also account for a large share of the increase.

COMPARATIVE ANALYSIS WITH FDI INFLOW IN CHINA

Even though China continues to attract larger FDI inflows than India in absolute terms, India has started to close the gap, when FDI is measured as a share of GDP. FDI inflows into China have moderated to 2.3 per cent of GDP in 2015, from 2.6 per cent in 2014. During the same period, FDI inflows into India rose to 2.1 per cent from 1.7 per cent.

Additionally, one could also argue that the quality of FDI inflow into India is much better. Over the last decade or more, China has accumulated a large stock of FDI. As a result, almost half of the FDI inflow into China includes retained earnings. In contrast, almost three-quarters of FDI inflows into India are fresh equity infusions.

FDI IN DIFFERENT SECTORS IN INDIA & GOVERNMENT MEASURES - AT A GLANCE

The Government eased FDI norms in November, 2015 in 15 major sectors, raising the Foreign Investment Promotion Board (FIPB) approval limit from Rs 3,000 crore to Rs 5,000 crore. In defence, the government has allowed foreign investment up to 49 per cent under the automatic route, earlier it was under the government approval route. Investments over 49 per cent will now be cleared by the FIPB instead of the Cabinet Committee on Security. Portfolio investors and foreign venture capital firms can also invest up to 49 per cent as against 24 per cent earlier. In banking, the government has introduced full fungibility, meaning FIIs/ FPIs/ QFIs can now invest up to the sectoral limit of 74 per cent subject to the condition that there is no change in control and management of the private bank. Manufacturers have been allowed to sell their products through e-commerce without government approval. Recently, 100% Foreign Direct Investment (FDI) is permissible in online retails through automatic Route in India.

Apart from this, the government is currently working on a proposal to completely ban foreign direct investment (FDI) in the tobacco sector. At present, FDI is permitted in technology collaboration in any form, including licensing for franchise, trademark, brand name and management contract in the tobacco sector. The Commerce and Industry Ministry is proposing to even ban FDI in licensing for franchise, trademark, brand name and management contract in the sector which would eventually mean that FDI would be totally banned in tobacco segment in any form. India in Early May, 2016 signed the protocol amending the Double Taxation Avoidance Agreement (DTAA) with Mauritius. The DTAA was a major reason for a large number of foreign portfolio investors (FPI) and foreign entities to route their investments in India through Mauritius. FIPB will also take up 12 FDI proposals on May 20th 2016. Besides this, NRI investments in real estate have been simplified to encourage the inflow of funds. The Government of India has put in place a liberal and transparent policy for investment from overseas Indians. Most of the sectors are open to Foreign Direct Investment (FDI) under the automatic route. Indian holding Indian passports and PIOs can also buy residential and commercial properties in India.

SECTORS WHERE FDI IS NOT ALLOWED IN INDIA UNDER THE AUTOMATIC ROUTE AS WELL AS THE GOVERNMENT ROUTE

FDI is prohibited under Government as well as Automatic Route for the following sectors:

1. Retail Trading
2. Atomic Energy
3. Lottery Business
4. Gambling and Betting
5. Housing and Real Estate business
6. Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors).
7. Plantations (Other than Tea plantations).