Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) plays an important role in the economic development of a country. It helps in transferring of financial resources, technology and innovative and improved management techniques along with raising productivity. India after liberalizing and globalizing the economy to the outside world in 1991, there is a massive increase in the flow of foreign direct investment.

Recent Developments

FDI in States

  • Karnataka registered the biggest increase in Foreign Direct Investment (FDI) in FY17-18, as inflows from overseas jumped 300% in the 12 months ended March, 2018.
  • Tamil Nadu too saw a rebound reversing a slowdown in the preceding period, while Gujarat, Maharashtra and Andhra Pradesh all saw a drop in FDI inflows, as per RBI.
  • While Karnataka received $8.58 billion in FY17-18, a sharp increase from the $2.13 billion in the previous fiscal, Tamil Nadu netted $3.47 billion, a 56% increase from the $2.22 billion in the prior period, as the State appeared to buck concerns about the investment climate.
  • Other major states Maharashtra, Gujarat and Andhra Pradesh saw a dip in FDI inflows.
  • Andhra Pradesh saw FDI inflows drop 43% to $1.25 billion in FY17-18.
  • Overall, sector-wise investment data show that computer software and hardware gained from a 68% jump in FDI last year to $6.15 billion.

The Walmart-Flipkart Deal

The world’s largest company by revenue and the American retail behemoth Walmart acquired India’s leading Bengaluru based e-commerce firm Flipkart for $16 billion. Walmart had been trying to enter India for years.

Potential Risks

  • There are concerns that Walmart is bypassing the Indian FDI laws by taking over an online retail company as FDI in multi-brand physical retail is restricted in India.
  • Small scale traders are too concerned about funding from foreign companies with huge capital potential as they would take up predatory pricing and highly competitive discounting that would edge them out.
  • The deal is expected to hit the flagship Make in India campaign. Walmart is known to be sourcing its products from international markets which now will be sold in India, further destroying the small scale and medium scale sector which is the largest provider of employment.

Potential Benefits

  • Walmart may have to collaborate with offline retail due to certain regulatory constraints. In anticipation of such a tie-up, the existing players in the offline space could do well.
  • It is likely that the capital flow in India will increase. This surge is expected as only limited global firms are willing to invest in the developing economy of India, but with the US retail biggie investing in the Indian e-com start-up, other potential investors may view this as an opportunity to enter the Indian market.
  • Walmart claims that it buys more than 90% of goods locally in every country where it runs stores and e-commerce business to fulfil shorter lead times. This will help create millions of jobs over time and help the economy through local sourcing of goods by the company.

100% FDI in Single Brand Retail

The Union Cabinet in January, 2018 tweaked foreign investment rules to allow 100% foreign direct investment (FDI) in single-brand retail.

Current Policy and Latest Changes

  • In case of single-brand retail, while the current FDI policy allows 49% FDI under the automatic route and FDI beyond 49% and up to 100% through the government approval route, the revised policy allows 100% FDI under the automatic route.
  • It has been decided to permit single-brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store against the mandatory sourcing requirement of 30% of purchases from India.

Foreign Direct Investment

  • Foreign investments mean both Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI). FDI brings better technology and management, marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. Alongside opening up of the FDI regime, steps were taken to allow foreign portfolio investments into the Indian Stock Market through the mechanism of foreign institutional investors.
  • The objective was not only to facilitate non-debt creating foreign capital inflows but also to develop the stock market in India, lower the cost of capital for Indian enterprises and indirectly improve corporate governance structures.

An Indian company may receive Foreign Direct Investment under the two routes as given under:

  1. Automatic Route: FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India.
  2. Government Route: FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance (MoF).

FDI in India Sector Wise

  • Single - Brand Retail Trading: Presently, FDI in retail trade, is prohibited except in single brand product retail trading, in which FDI, up to 51% is permitted.
  • FDI in Hotel & Tourism Sector: 100% FDI is permissible in the sector on the automatic route. The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists.

Revised Position: The Government of India has reviewed the extant policy on FDI and decided that FDI, up to 100%, under the government approval route, would be permitted in Single-Brand Product Retail Trading.

  • FDI in Non-Banking Financial Companies (NBFC): Around 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.
  • FDI in Insurance Sector: FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA).
  • FDI in Telecommunication Sector: In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions.
    • ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements.
    • No equity cap is applicable to manufacturing activities.
    • FDI up to 100% is allowed for the following activities in the telecom sector
  • FDI in Trading Companies: In India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. 100% FDI is permitted in case of trading companies for the following activities:
    • Exports;
    • Bulk imports with ex-port/ex-bonded warehouse sales;
    • Cash and carry wholesale trading;
    • Other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.
  • FDI in Power Sector: FDI up to 100% is permitted in projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.
  • FDI in Drugs & Pharmaceuticals: FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

  • FDI in Roads, Highways, & Ports: FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports.
  • FDI in Pollution Control and Management: FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.
  • FDI in Call Centers: FDI up to 100% is allowed subject to certain conditions.
  • FDI in Business Process Outsourcing: FDI up to 100% is allowed subject to certain conditions.
  • FDI in Small Scale Industries (SSI’s): Recently, India has allowed Foreign Direct Investment up to 100% in many manufacturing industries which were designated as Small Scale Industries.

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