Analysing India’s FDI flows

September 13, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

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Analysing India’s FDI flows

Subject :Economy

Section: External Sector

Key Points:

A relook at India’s FDI policy is necessary given the skewed composition, regional disparity and outdated regulatory framework.
In FY23, India received $46.03 billion in FDI equity inflows, a decrease from the $58.77 billion recorded in FY22
Benefits:
- FDI remains vital for strengthening domestic industry, stimulating growth, and enhancing global competitiveness.
Concerns:
- Geopolitical: As India’s international ties deepen, it must carefully consider the potential risks of providing foreign investors unfettered access to critical sectors.
- Sectoral imbalance: Sector-specific analysis of DPIIT data highlights a notable trend: despite the government’s Make in India initiative, more than 90 per cent of investment has funnelled into non-manufacturing sectors, with the manufacturing sector predominantly receiving non-greenfield investments.
- Regional imbalance:
Sectoral imbalance:
- Within sectors, there’s a heterogeneous composition.
- In 2022, the services sector saw the lion’s share of investment, with the financial sector leading, while research and development received a mere 0.2 per cent (the lowest).
- Similarly, the computer software and hardware sector attracted a significant portion of inflows, constituting nearly 31 per cent of the total.
- However, the bulk of investments went into computer software (0.2 per cent in hardware), largely due to ICT industry acquisitions.
Geopolitical:
- These sectors deal with sensitive and critical data, including personal and geographical information, making them data-rich and vulnerable.
- Dependence on foreign solutions increases the risk of exploitation, underscoring the need for proactive security measures.
Regional disparities:
- Regional disparity in FDI has widened over the years, with FDI-attracting States maintaining their dominance while others miss out on its positive spillover effects.
- In 2023, the top 10 States attracting FDI include Maharashtra (28.6 per cent), Karnataka (23.6 per cent), Gujarat (16.9 per cent), Delhi (13.3 per cent), Tamil Nadu (4.5 per cent), Haryana (4.15 per cent), Telangana (2.5 per cent), Jharkhand (1.4 per cent), Rajasthan (1.1 per cent), and West Bengal (0.7 per cent), leaving the remaining 22 States sharing a mere 2.4 per cent of FDI.

Consolidated FDI Policy 2020 Highlights

Investments under the ‘automatic route’ require no prior permission, resulting in minimal monitoring. Sectors like agriculture, manufacturing, airports, e-commerce, pharmaceuticals, railway infrastructure, among others, allow 100 per cent FDI.
Investments under the ‘government route’ in sectors like defense (beyond 49 percent), mining (100 per cent), print media (26 percent), and telecom (beyond 49 percent) necessitate government approval.
Security clearances apply only to specific areas such as broadcasting, defense, private security, civil aviation, and mining, with the Ministry of Home Affairs (MHA) and Ministry of External Affairs (MEA) overseeing scrutiny and security clearance. Additionally, investments from Pakistan and Bangladesh also require security clearance.
The primary amendment in the consolidated FDI Policy 2020 aimed to prevent “opportunistic takeovers of weakened domestic companies by foreign firms” during the Covid-19 pandemic.
It explicitly stated that countries sharing land borders with India could no longer invest under the automatic route and must seek approval for proposed investments. This rule applied to China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan
Additionally, it required government approval when the beneficial owner investing in India belonged to any of these seven countries.

Note:

A clear definition of a ‘beneficial owner’ is missing in the FDI Policy and causes ambiguity to both domestic firms as well as foreign investors. The Companies Act is the only source of credible reference of definition, so far.
The Foreign Investment Promotion Board (FIPB), which once processed approval route investments, was replaced by the Foreign Investment Facilitation Portal (FIFP) in 2017 for faster processing. Applications received are then directed to relevant ministries.