Trends of FDI Inflows in India

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FDI

Foreign Direct Investment (FDI) is a key element in international economic integration. FDI inflows mean the investment which a country receives from other countries, which in turn help the host country to have access to new technologies, capital and organizational technologies and management skills. FDI creates direct, stable and long-lasting links between economies. It encourages the transfer of technology and know-how between countries. It provides a win-win situation to the host and the home countries. While it offers opportunities of employment and introduction of new skills, etc. in the home country, it allows the host economy to promote its products more widely in international markets.

In India, FDI is considered as a development tool, which can help in achieving self-reliance in all the sectors of the economy. India’s rich and diversified resources, its sound economic policy, good market conditions and highly skilled human resources, made India as one of the attractive destination for foreign investments.

Today, India receives large FDI inflows in line with its robust domestic economic performance. The attractiveness of India can be ascertained from the increase in FDI inflows into India as depicts in Table 1 from 1980 to 2016. During eighties, India’s FDI inflows were very minimal – around $0.08 billion. The complex legal and constitutional framework, restrictive and close door FDI policy were some of the major reasons behind this. FDI was allowed only in selected sectors subject to various conditions such as domestic equity participation, local content requirements, export obligation and local research and development (R&D) promotion. Such a restrictive policy did not provide an environment conducive to FDI in India. Therefore, only a few foreign countries such as the United States (US), United Kingdom (UK), Japan and Germany invested in India.

With the opening up of Indian economy in 1991, FDI policy as a part of broader process of economic reforms underwent a significant change. Foreign investments were allowed in a phased manner in most of the sectors and restrictive conditions were waived or relaxed. These measures motivated the foreign investors from every corner of the world to India; and the country emerged as a strong economic player at that time. From 1992 till 1997, FDI inflows continuously increased in India and reached to peak at $3.62 billion in 1997. During 1998 and 1999 the FDI reveals the cyclic trend because of several factors. These include the mild recession in US and global economy, financial crisis of South-East Asia, political instability and the poor domestic industrial environment.

The introduction of Foreign Exchange Management Act (FEMA) in 1999 and recovery from the South-East Asian crisis resulted in the increase in FDI inflows. In 2001, FDI inflows again grown to $5.48 billion and reached at $25.35 billion in 2007. Well-developed financial sector, strong industrial base and critical mass of well educated workers raised India’s FDI inflows to the highest level at $47.10 billion in 2008. Although, the adverse effect of the US financial crisis at the end of 2008, India’s FDI inflows were declined in 2009 and 2010, in 2011, India succeeded to invite substantial inflows. With the entry of Modi government in 2014, which took another phase of reforms in FDI policy revive the confidence of foreign investors again in India. At the end of 2016, the FDI inflows reached at the highest level – $44.49 billion.

Table 1: Trend of India’s Global FDI Inflows, 1980 – 2016

Year

India’s FDI Inflows (in US$ Billion)

India’s Share in Global FDI Inflows

1980

0.08

0.15

1981

0.09

0.13

1982

0.07

0.12

1983

0.01

0.01

1984

0.02

0.03

1985

0.11

0.19

1986

0.12

0.14

1987

0.21

0.16

1988

0.09

0.06

1989

0.25

0.13

1990

0.24

0.12

1991

0.08

0.05

1992

0.25

0.15

1993

0.53

0.24

1994

0.97

0.38

1995

2.15

0.63

1996

2.53

0.65

1997

3.62

0.75

1998

2.63

0.38

1999

2.17

0.20

2000

3.59

0.26

2001

5.48

0.80

2002

5.63

0.95

2003

4.32

0.78

2004

5.78

0.84

2005

7.62

0.80

2006

20.33

1.45

2007

25.35

1.33

2008

47.10

3.14

2009

35.63

3.02

2010

27.42

1.97

2011

36.19

2.31

2012

24.20

1.60

2013

28.20

1.98

2014

34.58

2.61

2015

44.06

2.48

2016

44.49

2.55

Source: Compiled by author Compiled by author from UNCATD Statistics, available at http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx

Today, India has performed well in global FDI inflows. India’s contributing share in global FDI inflows has increased steadily. In 1980s, India has a small share of around 0.15 per cent in global FDI inflows, in 1997, it  increased to 0.75 per cent; 3.14 per cent in 2008 and reached to 2.55 per cent in 2016 (see Table 1 above).

In the recent years, the government has introduced several reforms in order to attract more FDI. These include improving infrastructure, revisiting the land-acquisition law, reforming the labour law, and streamlining the process of obtaining environmental clearances. The new government has instructed different ministries to work together, and meetings are now frequently happens at the central government level. However, foreign investors still find it difficult to navigate India’s bureaucratic controls and procedures to get the necessary clearances and approvals. Therefore, improving coordination between States and the Central government for project clearance is imperative. Indian government should need to create a better environment for infrastructure development with an appropriate institutional framework such as dispute-resolution mechanism, independent regulatory authority, etc. India should need to work to increase FDI caps in sectors with FDI potential and allow more sectors to come under the automatic route to minimise the hurdles to investing in India.

The government is very serious about improving investment climate, therefore, foreign companies need to better understand the Indian market and have their own R&D in India to design products to cater to the price sensitivity of the Indian consumer market.

FDI is important for India because it is an important economic growth driver and has the potential to transfer knowledge and technologies, create jobs and eradicate poverty through economic development of different regions. However, there are many hurdles in the way of FDI inflows. The government, therefore, should develop fast track clearance system, change the mind set of bureaucracy and create conducive atmosphere through the development of basic infrastructure. India also needs to adopt a more purposeful and pragmatic approach towards FDI. Overall, it can be said if all these measures should be undertaken on priority basis then the FDI definitely will play a dominant role in the economic development of India.


Also published on Medium.