Foreign Direct Investment Prospect for India

India now with consistent growth performance and abundant high-skilled affordable manpower provides enormous opportunity for investment both domestic and foreign. Foreign direct investment (FDI) causes a flow of money into the economies which stimulates economic activity, increases employment and induces the long run aggregate supply and brings in best practices. The FDI policy was liberalized progressively through review of the policy on an ongoing basis and allowing FDI in more industries under the automatic route.

FDI inflows had declined globally in 2009 and 2010. While India was able to largely insulate itself from the decline in global inflows in 2009-10, FDI flows had moderated in 2010-11. The slowdown in FDI inflows could mainly be attributed to a lagged effect of a pause in implementing investment decisions, which could range between one to two years, depending upon the sector and size of individual projects. A number of global investors had then remained cautious about making large investments in new sectors, given the fragility of the global recovery. However, the months of April-June, 2011 have shown a strong revival compared to the last two years. June 2011 witnessed second highest inflow in last 11 years of US$ 5.656 billion, representing an increase of nearly 310%, in US $ terms, over the FDI equity inflows of US $ 1.380 billion received in June, 2010.

Therefore, we can say that there is a credible reversal of downward trend in FDI inflows in the current financial year, where a significant upward trend in the FDI inflows is evident. FDI equity inflows, for the first quarter of the current financial year (April-June, 2011), have been US $ 13.441 billion, representing an increase of almost 133%, in US $ terms, over the FDI equity inflows of US $ 5.772 billion for the corresponding period of the last financial year (April-June, 2010). Commenting on the recovery Shri Anand Sharma, Union Minister of Commerce and Industry said, “There is a continuing effort on the part of the Government to make the FDI policy more investor friendly. The release of the final edition of the consolidated FDI Policy Circular effective from April 2011 is a step in this direction. We have incorporated a number of significant changes in the policy and announcement of the policy for FDI in Limited Liability Partnership (LLPs), are indicators of the Government’s strong commitment towards that end.”

India continues to be one of the favoured destinations for FDI. In fact, the UNCTAD World Investment Report (WIR) 2010, in its analysis of global trends and sustained growth of Foreign Direct Investment (FDI) inflows, reported India as the second most attractive location for FDI for 2010-2012.

There has been a continuing and sustained effort to make the FDI policy more liberal and investor-friendly. Significant rationalization and simplification of the policy has, therefore, been carried out in the recent past. For example, a major exercise has been undertaken for consolidation of FDI policy, with the aim of simplifying FDI policy, promoting clarity of understanding of foreign investment rules among foreign investors and sectoral regulators, as also for having a single policy platform. The process of consolidation involved integration of 178 Press Notes, covering various aspects of FDI policy, which had been issued since 1991, as also a large number of other regulations governing FDI. The document was released as ‘Circular 1 of 2010’, on 31 March, 2010, as per the commitment made. The document has also been updated at six monthly intervals, to ensure that it remains current and updated.

A number of significant changes in the FDI policy have also taken place since. Some of the recent changes include:

(i) Review of policy on cases requiring prior Government approval for foreign investment: As of today, only proposals involving total foreign equity inflows of more than Rs.1200 crores (as against the earlier limit of the total project cost being more than Rs.600 crores), now require to be placed for consideration of CCEA. Further, a number of categories of cases, where prior approval of FIPB/CCEA for making the initial foreign investment had been taken, have been exempted from the requirement of approaching FIPB/CCEA for fresh approval. This has resulted in saving of considerable time and efforts for FIPB/CCEA and also in expediting foreign investment inflows;
(ii) Introduction of a specific provision for ‘downstream investment through internal accruals’: This will ensure that Indian companies have full freedom in accessing their internal resources for funding their downstream investments;
(iii) Flexibility in fixing the pricing of convertible instruments through a formula, rather than upfront fixation: This change, which provides flexibility in fixing the pricing of convertible instruments through a formula, rather than through upfront fixation, will significantly help recipient companies in obtaining a better valuation based upon their performance;
(iv) Inclusion of fresh items for issue of shares against non-cash considerations, including import of capital goods/ machinery/ equipment and pre-operative/ pre-incorporation expenses: This measure, which liberalizes conditions for conversion of non-cash items into equity, is expected to significantly ease the conduct of business;
(v) Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the ‘same field: The requirement of Government approval for establishment of new joint ventures in the ‘same field’ has been done away with. As a result, non-resident companies are now also allowed to have 100% owned subsidiaries in India;
(vi) Development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’: FDI has been permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions;

(vii) FDI has also recently been permitted in Limited Liability Partnerships (LLPs), subject to specified conditions: This change, which permits induction of FDI through the new modality of LLPs, will significantly benefit the Indian economy, by attracting greater FDI, creating employment and bringing in international best practices and latest technologies in the country.

With a view to participative and informed policy making, a mechanism for undertaking stakeholder consultations, through web-based discussion papers, on important issues relating to FDI, was devised. Five discussion papers were released during 2010. These covered FDI in ‘Multi-Brand Retail Trading’, ‘Defence’ and ‘Limited Liability Partnerships’, as also ‘approval of foreign/ technical collaborations in case of existing ventures/ tie-ups in India’ and ‘issue of shares for considerations other than cash’. Of these five, policy action has been completed in respect of the last three papers, while issues pertaining to FDI in ‘Multi-Brand Retail Trading’, and ‘Defence’ are under active consideration of Government. A discussion paper on the ‘rationale and relevance of caps’ under FDI policy has also been released recently.

India registered one of the highest increases in 2008 (more than China, Brazil, Indonesia, Argentina and South Africa). The total FDI flows into India increased dramatically to a peak US $ 40.4 billion in the year 2008, despite the global recession. Most of these economies saw declines in 2009.

Current financial woes of key markets will pose a challenge to India but at the same time the scenario has a potential to enhance the attractiveness of India as an investment destination,. A decade and a half ago the prospect of India becoming a major player in the global economy seemed a distance dream, today with the power of FDI it is a reality. With the ushering of social and economic base, we no longer discuss the future of India: we say “the future is India”. (PIB Features)

*Inputs from the Ministry of Commerce

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