India benefits from continued growth in FDI

Foreign Direct Investment (FDI) is an integral part of the Indian economy. Over the years, India has emerged as a popular destination for FDI owing to its huge domestic demand, the availability of natural resources and its favourable business environment. The Department for Promotion of Industry and Internal Trade released data showing that India received USD84.835 billion in FDI in the financial year 2021-22, despite the covid-19 pandemic. This is a 3% increase over the previous financial year.

FDI is governed by the Foreign Exchange Management Act, 1999 (FEMA), and the rules framed under it. The Reserve Bank of India (RBI) issued the FED Master Direction 11/2017-18, which was updated in March 2022.

FDI has seen constant growth since the introduction of the FEMA. The government has also launched initiatives such as the Make in India programme, liberal FDI policies and tax incentive schemes that have encouraged businesses across the globe to invest in the country.

In the past decade, the FDI process has undergone a complete overhaul. Under the Ease of Doing Business initiative, the government has introduced various schemes and policies that attract business houses across the globe to take part in the Indian success story. Before, companies had to obtain registrations and approvals from individual departments and authorities. Now, with the introduction of the National Single Window System (NSWS), the process for companies to obtain registrations and approvals has been eased. Applications to receive FDI, including those through the government route, are now made through the NSWS portal instead of the foreign investment facilitation portal.

This has made it very easy for companies to receive FDI in any permitted sector through the government route. The government has also relaxed requirements in various sectors such as single retail brands and e-commerce marketplace models, to bring a new era of investments to these sectors. Regular attempts by the authorities to smooth and simplify the process of FDI is a major factor why startups with limited resources can explore markets and investments around the world.

The continual growth of the economy, despite upheavals such as covid-19 and the Russia-Ukraine war, its huge domestic market, political stability, special economic zone schemes and consumption trends have led foreign countries to trust India. Government plans to develop the country’s infrastructure have also been a magnet for foreign investors. In FY2021-22, cumulative FDI stood at USD84.83 billion compared to the cumulative FDI in FY2000-01 of USD4.02 billion, showing a cumulative growth of more than 2,000%.

In the current financial year, up to December 2022, the sectors that have received the most FDI are services and computer software and hardware, followed by trading and drugs and pharmaceuticals. During this period, the state of Maharashtra received the maximum FDI followed by the states of Karnataka and Delhi. During this time, Singapore emerged as the top investor followed by Mauritius and the US.

There are many sectors able to receive funds through FDI. Some receive their funding through the automatic route and some through the government route. The automatic route means the permitted FDI route, which does not require prior approval from the RBI or from the government. The government route means that prior approval is needed.

However, there are a few sectors where FDI is prohibited, such as lottery businesses, including online lotteries, gambling and betting, Nidhi or mutual benefit companies, chit funds, trading in real estate transferable development rights, real estate generally and the construction of farmhouses.

On the basis of the available facts and numbers, it is clear that FDI in India has been constantly growing. The country registered its highest yet total FDI inflows of USD84.84 billion in 2021-22. With the implementation of and active work in initiatives such as the Ease of Doing Business and the NSWS portal for approvals, and with a skilled workforce, digitisation, the robust legal system and a competitive tax system, India is set to become a major global hub for FDI.

Rohit Jain is the managing partner and Diviay Chadha is a partner at Singhania & Co.