Benefits of Foreign Direct Investment in India

author Garv Sood

calender October 21, 2020

Benefits of Foreign Direct Investment in India

The economic fallout of the COVID-19 pandemic is making the valuation of businesses attractive, especially in India. India has not been in the forefront of raising capital as much as China in the past, but the current pattern of economic shift and government policies has taken a turn and made India a favourable market for the investment of foreign capital.

The reason for this change is catered through the Foreign direct investment (“FDI”) regime of India which is described as the most liberal in the World. For instance, the FDI regime has focussed on inviting foreign investors from around the globe to invest in India by assuring that deep structural reforms shall be undertaken by the Government to support such investments, however, on the other hand, the FDI regime is now scanning the investments from China. Let's see the benefits of Foreign Direct Investment in detail.

Recent Growth of FDI in India

India has continued to attract huge investments, even during the COVID-19 pandemic, which is evident from the 22 billion worth of direct investments routed in India, out of which almost 98% is from the automatic route, which indicates ease of restrictions in the FDI movement. The ease of investing in India has resulted in a jump of about 79 positions in the World Bank’s- ease of doing business and is expected to get up to the top 50 by the end of this year.

India shall prove to be a robust nation in the whole of South Asia in respect to the flow of investments in India through foreign investors, as per the United Nations Conference on Trade and Development (UNCTAD), wherein India has jumped to the 9th position in the list of countries with top FDI investments in the year 2019 from its 12th position in the year 2018.

Why FDI Growth is Important for India?

India needs FDI as it is a critical trigger for economic growth and further accounts for a major non-debt financial resource for an economic boost for any developing nation like India. Foreign companies that invest in India take advantage of the relatively lower wages, achieving technical know-how, which further helps the nation in generating employment for its commonwealth.

The Indian Government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The Government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among many others.

What Makes India Attractive for Investments?

The following are the key advantages of Foreign Direct Investment in India

Market size: India with the largest population in the world is one of the biggest markets in the world as its consumer base is huge and diversified. The massive middle-class population of the country makes it a great consumer base for foreign companies and their products. Market size is the most important benefit of FDI in India.

Rationalisation of Policies: The Government of India has rationalised the economic policies in such ways as to make it a very attractive destination for foreign companies to invest.

Good demographics and quality companies: India is a very talented and entrepreneurial society with a young and highly educated population. Out of the diverse market of more than 6,000 companies listed on the stock market, there are a lot of quality businesses with excellent accounting practices in which one can invest.

Manufacturing and outsourcing hub: India is a relatively cheaper place to conduct business as compared to other countries due to various reasons which include huge labour availability and access to markets around Asia. Therefore, it plays a major role in attracting foreign institutions to set up their facilities in India.

Strong Economic Growth: India has realized strong historical growth rates over the past few years, particularly in the sector of Information Technology and business process outsourcing. These extend to be among the substantial sectors of the global economy as a whole.

FDI Increase in 2020

  • The FDI equity inflow in India stood at US$ 469.99 billion between April 2000 and March 2020- the Department for Promotion of Industry and Internal Trade (DPIIT).
  • FDI equity inflow in India stood at US$ 49.97 billion in 2019-20, wherein the service sector attracted the highest FDI equity inflow of US$ 7.85 billion, followed by computer software and hardware at US$ 7.67 billion, telecommunications sector at US$ 4.44 billion, and trading at US$ 4.57 billion.
  • During 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).

Significant FDI Announcements Recently Made in India

  • On September 08, 2020, Byju’s (an Indian education technology firm) raised US$ 500 million in a new round of funding led by Silver Lake, a US-based private equity company; this move pushed the company’s valuation to US$ 10.8 billion.
  • The Government of Singapore announced an investment of INR 450 crore (US$ 63.84 million) in the qualified institutional placement offering of mall developer Phoenix Mills Ltd in August 2020.
  • Israel-based Coralogix, a provider of machine-learning-based log analytics and monitoring solutions on 14th August 2020 announced a strategic expansion into India with a commitment to invest over US$ 30 million in the next five years.
  • Between April 23 and July 16, 2020, Jio Platforms Ltd. sold a 25.24 per cent stake worth Rs 1.52 trillion (US$ 21.57 billion) to various global investors from separate deals involving Facebook, Silver Lake, Vista, General Atlantic, Mubadala, Abu Dhabi Investment Authority (ADIA), TPG Capital, L. Catterton, Public Investment Fund (PIF), Qualcomm Ventures, Intel Capital and Google. This is the largest continuous fundraise by any company in the world.
  • In May 2020, Philips, a Dutch health tech and consumer electronics company, announced its plan to invest Rs 250-300 crore (US$ 35.47-42.56 million) to boost its manufacturing and R&D facilities in India.
  • Amazon India announced an investment of US$ 1 billion in January 2020 for digitising small and medium businesses and creating one million jobs by 2025.
  • Mastercard also in January 2020 announced its plans to invest up to US$ 1 billion in India over the next five years to double its research and development effort in the Indian market.
  • In October 2019, French oil and gas giant, Total S.A., acquired a 37.4 per cent stake in Adani Gas Ltd for Rs 5,662 crore (US$ 810 million), making it the largest FDI in India’s city gas distribution (CGD) sector.
  • In 2019, Reliance Industries (RIL) declared one of India's biggest FDI deals with Saudi Aramco to buy a 20 per cent stake in Reliance's oil-to-chemicals (OTC) business at an enterprise value of US$ 75 billion.

Conclusion: The preeminent significance of the FDI regime and the constant Governmental reforms brought in at regular intervals in support thereof are essential for a developing nation like India as the domestic sources and investment are not enough and therefore the need for foreign investment help in filling the gaps between domestic savings and investment requirements of the country. Hence, to boost the flow of FDI in India, the Government is further liberalising by easing the restrictions, with minimal supervision and thereby maximizing the utilization of the automatic route.

Frequently Asked Questions

1. What is FDI in India for example?

Foreign direct investment (FDI) is a key source of funds for India's economic development.
To take advantage of India's evolving economic climate and lower labour, foreign firms engage directly in fast-growing private Indian enterprises.

2. What is the advantage of Foreign Direct Investment?

Benefits of Foreign Direct Investment

  1. Economic Development Stimulation
  2. Ease of International Trade
  3. Job Creation and Economic Growth
  4. Human Capital Development
  5. Tax Incentives
  6. Resource Transfer

3. Is FDI good or bad?

FDI has a positive influence on developing host nations, according to both economic theory and current empirical data.

4. What is the difference between FDI and FPI?

The purchase of securities and other financial assets by investors from another nation is known as foreign portfolio investment (FPI). Foreign direct investment (FDI) is capital invested in a business in another nation by a person or a company from one country.

5. What are the 3 types of foreign direct investment?

There are 3 types of FDI:

  1. Horizontal FDI.
  2. Vertical FDI.
  3. Conglomerate FDI.
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