Manufacturing sector -the FDI inflow

  • December 29, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Manufacturing sector -the FDI inflow

Subject :Economy

Context:

Despite the government’s effort to attract more investments in the manufacturing sector the FDI inflow is still tilted in favour of the services sector according to the  India Ratings and Research (Ind-Ra).

Details:

  • As per the World investment Report 2022 of United Nations Conference on Trade and Development (UNCTAD), India is among the top 10 (ranked 7) FDI destinations globally.
  • Among the emerging market economies, India has done reasonably well in attracting FDIs. Only China has been consistently ahead of India.
  • The highest FDI flowed into the services sector, followed by the manufacturing sector (excluding computer hardware) during April 2000 to March 2014 as well as during April 2014 to March 2022.
  • While within services, FDI predominantly flowed into trading, telecommunications, banking/insurance, IT/business outsourcing and hotels/tourism, within manufacturing it remained concentrated in segments such as auto, chemicals, drugs and pharmaceuticals, metallurgical and food processing.
  • FDIs are highly clustered around a few states.
    • Of the total FDI inflow of $146.7 during October 2019 and March 2022, just four states attracted 83.0% of the FDI with Maharashtra accounting for 27.5%, Karnataka 23.9%, Gujarat 19.1% and Delhi 12.4%.
    • As a result, three distinct FDI corridors have emerged– NCR of Delhi in the north, Maharashtra-Gujarat in the west and Karnataka-Tamil Nadu-Andhra Pradesh-Telangana in the South.

Foreign Direct Investment

  • Any investment from an individual or firm that is located in a foreign country into a country is called Foreign Direct Investment. Generally, FDI is when a foreign entity acquires ownership or controlling stake in the shares of a company in one country, or establishes businesses there.
  • It is different from foreign portfolio investment where the foreign entity merely buys equity shares of a company.
  • Three Components:
    • Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
    • Reinvested earnings comprise the direct investors’ share of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
    • Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.
  • Routes through which India gets FDI:
    • Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
    • Government Route: In this, the foreign entity has to take the approval of the government.
    • The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications which are through approval route.
    • It is administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
  • Trends: 
    • India has received Foreign Direct Investment (FDI) inflows worth USD 339.55 billion in the last five years. It increased from USD 45.15 billion in 2014-15 to USD 81.97 billion in 2020-21.
    • As per the World Investment Report 2021 by the UN Conference on Trade and Development (UNCTAD),India was the fifth-largest recipient of Foreign Direct Investment (FDI) inflows in the world in 2020.
    • In the Financial Year 2020-21, India sees growth of 10% (to $82 bn) in Foreign Direct Investment (FDI). FDI equity investments rose 19% to $60 billion.
    • In April 2020, the DPIIT  came out with a new rule, which stated that the entity of any company that shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of such a country can invest only under the Government route. In other words, such entities can only invest following the approval of the Government of India.
  • Financial year 2021-22
    • Foreign Investment, consisting of foreign direct investment (FDI) and foreign portfolio investment (FPI), is the largest component of the capital account.
    • Falling short of the pre pandemic level, the net foreign investment inflows (FIIs) – primarily driven by FDI – moderated to US$ 25.4 billion in H1: FY 22 compared to corresponding period of FY 21.
    • Total foreign direct investment (FDI) inflow to India declined to $74.01 billion in the calendar year 2021 a decline of15 percent as compared to calendar year 2020,
    • Sectors attracting highest FDI Equity Inflows-Computer Software & Hardware> Automobile Industry> Services Sector> Trading > Telecommunications
    • Top FDI investing countries- Singapore>U.S.A.>Mauritius>Netherlands>Japan
economy Manufacturing sector -the FDI inflow