Foreign Direct Investment (FDI)The Foreign Investors In The Indian Market
The Indian government has taken steps to improve the growth of FDI in the country. World class investors from different sectors have utilized the opportunities available in the India retail market by injecting monetary and technical resources into the market.
With a minimum amount of 100 million dollars, an investor can enter the thriving Indian market. The policies made by the government is to the mutual benefit of the Indian populace and the Investor. Such a policy is that stores can only be sited at locations with a minimum of 1 million residents. The state government in such locations must approve before such a business is sited.
WHAT IS FDI?
The International Monetary Fund (IMF) classifies Foreign Direct Investment (FDI) as one that is made to generate lasting interest in the business that is established outside the investor’s economy.
Foreign Direct Investment (FDI) can be referred to as an investment that an individual or a company makes in another country. When an investor establishes or acquires foreign business, assets and securities it is called Foreign Direct Investment (FDI).
It should be noted that FDI is different from portfolio investments which is based on the purchase of equities of foreign companies.
GOVERNMENT INITIATIVES IN FDI
- The government of India in September 2017 mandated states to strengthen and increase their clearance and approval systems to attract and increase the presence of Japanese investments in India.
- The approval time for FDI proposals has been reduced to a minimum of 10 weeks through the Ministry of Commerce and Industry. In response to this, the Department of Revenue is no longer required to offer FDI’s approvals.
- There has been a renewed collaboration between Japan and India for infrastructural development in the North East.
- The government and the stakeholders have met to increase the Foreign Direct Investment in defense to 51 percent to increase local manufacturing and employment level.
- Under the Finance Act 2017, the employees of stock options have been exempted from direct taxes.
- There is a huge possibility that the Indian government will permit a 100 percent FDI in cash management and ATM companies.
SECTORS OF FOREIGN DIRECT INVESTMENT IN INDIA
From 2014 to 2015, the US, Mauritius, Netherlands, Japan, and Singapore have been the greatest investors in Indian economy. The make in India policy launched in 2014 outlined 25 sectors that will witness a rejuvenating FDI. Here are the major sectors for FDI.
- Infrastructure: India has recorded a 10 percent GDP growth on construction activity. Between 2012 – 2017 the government has injected about 1 trillion dollars on infrastructure and has approved a 100 percent FDI in construction under automatic route for towns and cities.
- Automotive: the FDI in automotive sector of the economy between 2014 and 2015 was increased by 89 percent. India is ranked as the 7th producer of cars in the world. The automobile industry has a 7 percent share of total GDP of India.
- Manufacturing: currently, India stands as one of the largest manufacturers in the world. This sector has generated numerous jobs with the view of having a GDP share of 22 percent by 2022. Electronics stands as the most manufactured product.
- Pharmaceuticals: this industry has gotten a place in the world scene. It is expected to rise at 20 percent growth rate by 2010. A 100 percent FDI is approved for this sector.
- Service: from 2014 – 2015, the FDI in the service sector has appreciated by 45 percent. This includes banking, outsourcing, insurance, research and development services.
- Railway: exception of operations, railway electrification, and mass rapid transport systems; the is permission for a 100 percent FDI in railway sector under the automatic route.
- Chemicals: in 2013, the chemical industry generated revenues to the tune of 160 billion dollars. The government allows a 100 percent FDI in this sector subject to the automatic route. The production of all chemicals exception of Phosgene, Hydrocyanic acid and isoynates is de-licensed in India.
- Textile: about 11 percent of India’s exports is textile products. Textile has contributed greatly to India’s exports. The revenue received from this sector amounts into millions of dollars from 2000 to 2015. It is predicted that this industry will generate up to 141 billion dollars by 2021.
- Airlines: a 100 percent FDI is permitted for regional and domestic passenger air services.
- Power: 49 percent FDI permission under automatic route is given to the power sector based on the regulations contained in the 2010 Power Market Act.
- Defense: this is one of the major sectors in which the FDI regulations has been eased. Under the automatic route, 49 percent flow in FDI has been permitted and 100 percent FDI is allowed in the approval route. The ambiguity surrounding the requirements for having ‘state of the arts’ technological proposals on FDI has been cleared through the understanding that proposals that encourage access to technology will be given favorable consideration. This will allow major players who in times past had neglected this sector to invest as the government’s policies become favorable.
- Broadcasting and Carriage Services: under the automatic route 100 percent FDI has been permitted for this sector. This includes teleport, cable networks, Direct to Home, Mobile TV, and sky broadcasting service. This liberalization will permit more cash inflow into the sector to speed up its digitization program. The potential for growth in this sector is very high as the subscriber base keeps increasing amidst large infrastructural requirements.
- E-commerce Activities: the government of India has divided this sector into two categories which namely inventory based and market-based. The inventory contains goods and services owned by the E-commerce companies while market based only provides the platform for buyers and sellers to meet.
- Food Products: under the approval route, 100 percent FDI is permitted for trading in food produced in India products. The agro-allied industries have been excluded from the restrictions placed on it in the single and multi-brand retail trading.
- Pension and Insurance: through the automatic routes, the pension and Insurance sectors have been allowed to receive FDI inflows to a maximum limit of 49 percent. However, investments in these sectors are subject to regulations that govern the industry.
METHODS OF FOREIGN DIRECT INVESTMENT
Foreign Direct Investment can be practiced in many ways which include the establishment of a subsidiary company in each country and getting a controlling share in a foreign company.
Another way of initiating foreign direct investment is by means of a joint venture or merger with a foreign company.
A controlling interest in FDI can be established with a minimum of 10 percent ownership shares in a foreign company. However, this can be altered by the existing laws of the company.
TYPES OF FOREIGN DIRECT INVESTMENT
Foreign Direct Investment is often classed into two groups namely: horizontal, conglomerate and vertical.
Horizontal: when the investor establishes the same type of business that operates in his native country in a foreign nation, it is called a horizontal direct investment. An example of this can be seen if a telecommunication service provider whose home country is the US establishes the same business in India.
Vertical: a vertical investment is the one that the investor establishes a business in a foreign country that is different but related to the type he owns in his home country. This can be seen when a manufacturing company decides to acquire an interest in a foreign company to supply parts which would be needed for the manufacturing of products in his home company.
Conglomerate: when an investor makes a foreign direct investment in a company that is different from his existing business in the home country, it is called a conglomerate. The best way to approach a conglomerate is by entering into a joint venture with the foreign company because the investor may not have any experience on the proposed line of business.
IMPACT OF FOREIGN DIRECT INVESTMENT IN INDIAN MARKET
- FDI has been a major driver of growth in the economy.
- It is a source of non-debt financial resource for the development of the country.
- As at April 2017 the total FDI in India stood at 35.94 billion dollars.
- The government has eased her regulations on FDI which has yielded positive results.
- The telecommunication sector got the highest FDI with an inflow of 6.14 billion dollars in 2017.
- The computer software and hardware got a market share of 5.16 billion dollars between April to December of 2017.
- Services had a market share of 4.2 billion dollars as at December 2017.
WHY DOES INDIA ATTRACT A GREAT SHARE IN THE WORLD’S FOREIGN DIRECT INVESTMENTS?
As opportunities abound, India has the largest young population in the world and must attract investors around the world through her favorable policy and commitment to job creation and sustainability. The investors are attracted based on the following reasons.
- The control of foreign exchange has been relaxed to favor trade relations
- companies are permitted to funds abroad to expand global operations
- foreign investors can make remittance to home country from funds earned in India.
- Export-based sectors are allowed foreign investments of 100 percent.
- Tax exemptions especially in export units.
- Investment incentives are offered to the businesses by the state and central government.
- India has tax agreements with over 40 countries to bolter her FDI.
ADVANTAGES OF FDI IN INDIA
- There is the possibility for consumers to save about 5 – 10 percent of their earnings because products and services will be available at a better quality and cheap price.
- Farmers will get more encouragement and better offers for their produce.
- About 4 million jobs are expected to be generated through FDI.
- In logistics, FDI will generate about 6 million jobs.
- Millions of dollars are expected to be added to the national treasury annually.
India has become the most conducive and favorable hub for Foreign Direct Investment. It is expected that FDI impact on the market may double its present mark by the year 2021. The foreign investors have shown much interest in the present government’s ‘make in India initiative’. More should be done especially in infrastructure and other sectors so investors can be encouraged to invest into the Indian economy.
The terms of the government’s policies on FDI must be clarified to the investors to the greater extent. The approval route is only kept in critical sectors only while others have been liberalized for investments in the automatic routes. The compliance processes have been automated to reduce government’s unnecessary interventions and delay.