What Is Foreign Direct Investment?

Foreign direct investment (FDI) in India refers to the infusion of capital in India by an entity based in a foreign location through controlling ownership. It means a foreign company is investing in India. Foreign Direct Investment in India can be anything like reinvesting profits back in India, building new facilities, mergers, or acquiring domestic entities.

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An investment is said to be FDI only when the asset is 10% or more of the company’s total shares. To protect the Indian companies from the imbalance in the economic cycle caused to Covid-19, the FDI policy was changed in April 2020.

As per World Investment Report 2020, India ranks 9th as the global FDI recipient.

How is FDI Important for India?

We need money for development. The government collects taxes and allocates the inflow as per budget. Still, the Government may run into a budget deficit. Money printing is not the solution since it increases inflation within the country.

Another option is foreign borrowings. If the government borrows from outside India, the debt to GDP ratio rises, which is not good for sovereign credit rating. Thus, foreign direct investment is a vital source of non-debt monetary inflow.

The funds from FDI can be used for economic development in India. FDI also increase the foreign reserves for India. The labor is still cheap in India, ergo the input cost is way lower for foreign entities. Therefore, it increases the employment rate in India.

How Does FDI Benefit India?

Foreign Direct Investment in India will boost the economic activities in India. It creates jobs and increases ample opportunities for businesses in India. A new chain of business activities can be created.

It further leads to an increase in the per capita income of Indians. Thus, purchasing power increases, and this leads to an increase in disposable income. An increase in disposable income has an impact on the increased spending capacity. Thus, the cycle continues.

FDI also increases the healthy competition between industries in India. The consumer gets a higher quality of goods and services at a reasonable cost. It also stimulates the local economy.

Foreign investors enjoy tax incentives. It increases their disposable income and motivates such investors not to repatriate the funds outside India. Due to favorable taxation policies, many internally generated profits are reinvested in India.

FDI also upgrades the knowledge scale, new technology is implemented, and wider skills are imparted to the labor in India.

Foreign Direct Investment in India also provides a long term and stable lending option. The investment money is cumbersome and, thus, long-lasting after that, and footprints on the development path of an economy.

What are FDI Routes in India?

There are two primary routes, namely, automatic route and government route. There is also a third category wherein automatic and government routes are permitted.

The automatic route allows 100% FDI in India without approval from the Government of India.

The government route allows up to 100% FDI in India but with the mandatory consent of the Government.

An application needs to be made through Foreign Investment Facilitation Portal. It provides a single-window clearance. The respective ministry overviews the application, deciding consultation with the Ministry of Commerce.

In the third category, the automatic route is allowed up to a certain percentage, and after that, permission from the government is required.

Sectors Prohibited from Receiving FDI in India

FDI is a facility by which foreign entities can invest and help raise economic activities. However, few activities would turn dangerous if not regulated.

Here are some of the sectors prohibited from receiving FDI to eliminate ill-effects of no-cap FDI:

Manufacture of Cigarettes and other tobacco-related products
Real estate business excluding commercial and residential premises, town shops, REITs, construction of roads and bridges
Investment in Chit funds and Nidhi Company
Dealing in the lottery business, including licensing for trademark or brand name or management contract
Buy and sell of TDS (Transferable Development Rights)
Specific sectors which are not open for private players in India, such as railways

FDI Limits Under Each Route Option

Automatic Route Entry

Automatic route entry is allowed in sectors such as Agriculture, Air Transport, Asset reconstruction companies, Automobiles, Chemicals, Construction of hospitals and many others listed in the FDI policy. Typically, the FDI limit is 100%.

Sector	FDI % allowed
Infrastructure Company in the Securities Market	49%
Insurance	Up to 49%
Medical Devices	Up to 100%
Pension	49%
Petroleum Refining (By PSUs)	49%
Power Exchanges	49%

Government Route Entry

The FDI limit under the Government route is up to 100%. The list is as follows:

Sector	FDI % allowed
Banking (Public sector)	20%
Broadcasting Content Services	49%
Uploading/Streaming of ‘News & Current affairs’ through digital media	26%
Investment by Foreign airlines	49%
Core Investment Company	100%
Food Products Retail Trading	100%
Mining & Minerals separations of titanium bearing minerals and ores, Its value addition and integrated activities	100%
Multi-Brand Retail Trading	51%
Print Media	up to 100%
Satellite (Establishment and operations)	100%

Automatic & Government Route Entry

The automatic route is permitted up to a certain extent. After that, permission from the government is essential to invest further. The allowed limits under this route are as follows:

Sectors	Automatic	Government
Specific air transport services	up to 49%	up to 74%
Banking (Private sector)	up to 49%	up to 74%
Biotechnology (brownfield)	up to 74%	above 74%
Defence	up to 74%	above 74%
Healthcare (Brownfield)	up to 74%	above 74%
Pharmaceuticals (Brownfield)	up to 74%	above 74%
Private Security Agencies	up to 74%	above 74%
Telecom Services	up to 74%	above 74%

Significant Developments in FDI

The Indian economy has seen some significant developments in the recent past in foreign direct investments. Here are some of them:

In August 2021, the renewable energy market in India got an FDI boost after Copenhagen Infrastructure Partners announced an investment of US $ 100 million.
As per the news on business standard dated August 28, 2021, the total FDI equity inflows rose by 168% in just the three months of April 2021 to June 2021 compared to a similar period in the year 2020, the total FDI inflows received are the US $ 17.57 billion.
Further, during the period April 2021 to July 2021, the FDI equity inflows stood at US $ 27.37 billion.
In September 2021, India agreed with the UK for an enhanced trade partnership. In June 2021, the finance ministries of G-7 countries decided on the historic move of the minimum global tax rate to be 15% for multinational companies. This move is expected to provide enough boost for FDI in India.

In Conclusion

As per the CII and EY report, there is an expectation of the US $ 120 to 160 billion per annum FDI receipts by 2025. As per a report by Economic Times, India ranks at number 3 since at least 80% of investors want to invest in the next three years.

Besides, India ranks 43 in World Competitiveness Index 2021. This is due to an increase in public finance stability and an increase in optimistic sentiments among the businesses in India.

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).