Foreign direct investment (FDI) in India

FDI in Figures

According to UNCTAD's 2022 World Investment Report, after reaching an all-time high in 2020, FDI inflows decreased from USD 64 billion to USD 44 billion in 2021. However, the stock of FDI increased in 2021, reaching USD 514 billion. India ranks 5th among the top 20 FDI host economies and the largest host in the sub-region; the country historically accounts for 70-80% of inflows into the region. Overall, M&A declined in 2021. However, 108 new international project finance deals were announced in the country: a significant increased when compared to the 20- project average for the last decade. The largest number of projects was in renewables, with other significant investments made in the construction and manufacturing industries. Notable projects include a USD 13.5 billion steel and cement plant by Japanese company, Arcelormittal Nippon Steel, and the construction of a new car manufacturing facility by Suzuki Motor,  for USD 2.4 billion.
During the past couple of years, India has relaxed administrative regulations for foreign investors in some industrial sectors by abolishing the requirement for approval by the Reserve Bank of India under certain conditions. The overall growth of FDI in India is thanks to its many assets, especially its high degree of specialisation in services, with a skilled, English-speaking and inexpensive labour force and a potential market of one billion inhabitants. Mauritius, Singapore, the U.S., the Netherlands, Japan, the U.K., Germany, and the United Arab Emirates are the main investing countries in India. Investments were mainly oriented towards services, computer software and hardware, telecommunications, trade, the automobile industry, construction, and chemicals.

According to the Economist Business Environment, India ranks 64 out of the 82 countries reviewed for their investment climate. The country has conducted a remarkable reform effort, and given the size of the country's economy, these reform efforts are particularly commendable. Since the implementation of these reforms, more than 2,000 companies have used  the new law. Global investors typically focus on India mainly because of its demographics, but also for its stable barometers, whether it be inflation, fiscal deficit or growth. However, the country still has several restrictive laws on foreign investment, excessive bureaucracy, and high levels of corruption. Still, given India’s growing demographics, and huge e-commerce and technological markets, activity in both areas are expected to grow in the following years. Among the biggest investments that occurred in recent years is the merger Sony Pictures Networks India, a subsidiary of Sony Pictures Entertainment Inc., and Zee Entertainment Enterprises for USD 1.575 billion.

What to consider if you invest in India

Strong Points

Advantages for FDI in India:

• Deep-rooted and highly effective democratic regime, which ensures a calm and stable political environment
• Well-developed administration and an independent judicial system, along with a vast geography, making the country a repository of resources
• Work force is educated, hard-working and skilled (engineers, management staff, accountants and lawyers). 
• India hosts an ever-growing consumer base, making it one of the world's largest markets for manufactured goods and services. 
• Proximity to key manufacturing sites, key suppliers and low development costs. These factors make it an effective base from which multi-national companies can export to other high-growth emerging markets. 
• Transparency International gave Indian companies the top ranking among emerging market multinationals in terms of transparency and compliance.

Weak Points

Some of the principal disadvantages for FDI in India :

• Lack of adequate infrastructure slowing down the development of this country-continent
• Cumbersome and slow administrative procedures at the federal level hindering any economic reform (bureaucratic red tape)
• Labour regulations remaining rigid and among the most complex in the world
• High corporate debt and non-performing assets (NPA)
• Net importer of energy resources
• Weak public finances

Government Measures to Motivate or Restrict FDI

The Government of India provides tax and non-tax investment incentives in specific sectors (e.g. electronics) and regions (Northeast region, Jammu & Kashmir, Himachal Pradesh and Uttarakhand). It has also created incentives for manufacturing companies to set up in Special Economic Zones (SEZ), National Investment & Manufacturing Zones (NIMZ) and Export Oriented Units (EOUs). In addition, each state government has its own policy, providing additional investment incentives, including subsidised land prices, attractive interest rates on loans, reduced tariffs on electric power supply, tax concessions, etc. The central government development banks and state industrial development banks offer medium to long-term loans for new projects.

The Government has recently relaxed FDI policy in a variety of sectors by such measures as raising the foreign investment limit, easing conditions for investment and putting many sectors on the ‘automatic route’ (as opposed to the ‘Government route’, which requires approval from the Foreign Investment Promotion Board). Reforms to clean up the banking system have been implemented, but they take time and may impact the supply of credit. On the other hand, while the fiscal deficit and public debt remain large, the government has taken steps to reduce them. The most notable of these initiatives is the introduction of the GST (Good and Services Tax), which aims to boost tax revenues and make the economy more competitive in the long run. Sectors that have benefited from the expansion include real estate, private banking, defence, civil aviation, single-brand retail and television news.

In order to position India as a global hub for Electronics System Design and Manufacturing (ESDM) and push further the vision of the National Policy on Electronics (NPE) 2019, three schemes namely the Production Linked Incentive Scheme (PLI), Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and Modified Electronics Manufacturing Clusters Scheme (EMC 2.0) have been notified.

For more information, consult the website of Invest India, the official Investment Promotion and Facilitation Agency of the Government of India.

Bilateral investment conventions signed by India

India has bilateral investment treaties with the United Kingdom, France, Germany, Canada, Malaysia, and Mauritius. UNCTAD has an updated list of conventions signed by India.