New Policies On FDI- The 2012-2018 Update on Foreign Direct Investment
New Policies On FDI- The 2012-2018 Update on Foreign Direct Investment

New Policies On FDI: The 2012-2018 Update on Foreign Direct Investment

 

 

The Indian Government has initiated favorable policies aimed at creating a robust business environment to drive the flow of Foreign Direct Investments in the country. Many foreign companies that invest in India take advantage of the special investment incentives and opportunities like relatively low wages and tax exemptions. In recent years, the Government of India has initiated steps to increasing FDI by relaxing most of the laws that served as bottlenecks against the inflow of FDI.

According to the 2018 World Bank’s Global Economic Prospects Report, India will likely be the fastest growing economy with an accelerated rate of 7.3%. More than this, India has taken a higher spot in the World bank’s 2018 ranking index on Ease of Doing Business. These positive results can be traced to the government’s efforts at improving the FDI regulations to encourage a thriving business environment.

The Indian economy to a large extent depends on the Foreign Direct Investment Policy. Every year, GOI in conjunction with the Department of Industrial Policy and Promotion (DIPP) creates policies that determine the modes of operation of FDIs. In addition, so many foreign companies in the country have generated a lot of direct and indirect employment, thereby enhancing the standard of living of those that are employed by these companies.

 

WHO IS ELIGIBLE TO PARTAKE IN FDI?

Foreign investment in India is permitted in almost all the sectors of the economy except in just a few areas. Thus, foreigners can invest either directly or through joint ventures in the Indian market.

Any qualified investor can invest in the majority of the sectors in India under the automatic route. These are:

Non-resident individual (NRI) or Entity: the FDI policy stipulates that NRIs can invest in any sector in India except in the restricted sections. Citizens of Bhutan and Nepal can only invest based on repatriation.

Companies: FDIs can be made in company or partnership firms established owned by NRIs and established outside of India.

Others are: Foreign institutional Investors (FII) and Foreign Portfolio Investors (FPI), Registered FII and SEBI registered Foreign Venture Capital Investor (FVCI).

 

Table of Performance of FDI in India from 2012 – 2018

The table below displays the value of FDI inflow for all sectors in India from 2012 to 2018. The fiscal year of 2017 had the highest in FDI inflow of approximately 43.48 Billion Dollars.

Year FDI in Billions of Dollars
2012 35.12
2013 22.42
2014 24.30
2015 30.93
2016 40.00
2017 43.48
2018 28.04

 

FALL IN FOREIGN DIRECT INVESTMENT IN INDIA AS AT MAY 2018

According to RBI data, Indian Company Investment into their overseas joint ventures and companies reduced by 63% which translates to $1.17Billion as at May this year.

In May of 2017, FDI in India was $3.12Billion. In April this year, Outward Foreign Direct Investment (OFDI) of Indian companies stood at $3.56Billion.

In May 2018, the total investment by domestic companies in foreign-based ventures stood at $374.18 million in equity, $162.96 million in loan and $630.45 million as guarantee issuances.

The total FDI in India between April – May was $4.73Billion.

 

UPDATE ON PM NARENDRA MODI’S SPEECH ON COMMITMENT TO FOREIGN INVESTORS

During the PM’s address to foreign investors at the annual meeting of the Asia Infrastructure Investment Bank (AIB) he restated his commitment to encouraging investors by keeping inflation under control irrespective of higher oil prices at the global market.

He added that India has become a “bright spot in the global economy the 7th largest in the world and the third largest in terms of purchasing power parity (PPP)”. He noted that the Indian economy had grown by 7.4% in 2017 and will remain stable throughout 2018.

The Prime Minister assured investors of an economic policy that will remain strong with tight fiscal control to better manage inflation and protect the interest of the investors.

He urged faster clearance for infrastructure projects. “the needs in Asia are big. It will require simpler process and faster approvals. High quality and robust projects are needed,” Says Narendra Modi.

 

UPDATE ON WHY ONLINE BUSINESS IS BACKWARD IN FDIs?

The major reason e-commerce FDI is backward in India is the Foreign Direct Investment rules themselves. Majority of the online trading platforms in India with FDI adhere tenaciously to the Indian FDI rules. The conditions that had been outlined for trading platforms are not flexible.

Complying completely to these rules will hamper the smooth running of online trading businesses. Every creative designed must be patterned according to the law irrespective of the quality of innovation involved.

India has a legal policy with numerous kinds of trading. Some of the trading categories include; retail trading (single/multi-brand trading), e-commerce, cash and carry wholesale trading, manufacturer and trader trading.

The reason for these restrictions is fueled by political concerns instead of actual business considerations. The government believes that lifting the ban on FDI in online trading could result in loss of confidence from the trading community and that can further reduce the number of possible votes.

Successive governments have repeatedly sided with the local traders thus hindering the growth of online trading platforms.

E-commerce is the next trading platform of the future with which foreigners and Indians can take advantage of. The step to improving FDI in this sector is to introduce laws that will benefit the local and global online market.

 

FDI INVESTMENT ROUTES

Foreign Direct Investment can be made through these routes:

 

Automatic Route: those investments that are allowed without the requirement of seeking regulatory approval is through the automatic route. Indian Companies operating in various sectors of the economy can issue shares to foreign investors up to 100% of the company’s total capital.

Government Approval Route: those sectors that are outside the automatic routes must require government’s approval for their business activities. Thus, such sectors are categorized under the approval route.

 

PROHIBITED SECTORS

The following sectors are completely prohibited from any Foreign Direct Investment. These are:

  • Lottery Business including government / private lottery, online lottery etc.
  • Gambling and betting including Casinos
  • Chit Fund
  • Nidhi Company
  • Trading in transferable development rights
  • Real Estate business or Construction of farm houses
  • Manufacturing of Cigar, cheroots, cigarettes and tobacco substitutes.
  • Atomic energy and Railway operations.

 

NEW POLICIES ON FDI

Prime Minister Modi seems to go on the right track in the ability to attract huge Foreign Direct Investments into India. With a recorded FDI inflow of $60Billion from 2016 to 2017, the revised policy on FDI seems to yield positive results.

The Department of Industrial Policy and Promotion (DIPP) had released the updated Foreign Direct Investment Policy on 28th August 2017. The policy contains the various subjects issued by the GOI over the years.

Here are a few of the changes that is reflected in the 2017-2018 Policy Act:

  • A reformed procedure for Government Approval: the most significant reform in this category is the removal of the Foreign Investment Promotion Board (FIPB) which in time past will approve FDI applications and is replaced with Foreign Investment Facilitation Portal (FIFP) an institution to process FDI
  • Introduction of ‘Standard Operating Procedure’ (SOP) to facilitate proposals.
  • The listing of competent authorities for approval of specific FDI applications.
  • 100% FDI is allowed under automatic routes for conversion of companies.

 

REVISION OF EXISTING 2016 FDI POLICY

The FDI Policy 2017 issues 100% automatic routes to sectors in the 2016 policy that must be revised. These include the following sectors;

  • Manufacturing
  • Civil Aviation
  • Single brand retailing
  • Other financial services

 

 

Conclusion


The changes in the FDI policies reflects the commitment of the Indian Government at liberalizing the Foreign Direct Investment of the Country to boost employment opportunity and improve the economy. It is expected that the government will further improve the policies to accommodate the sectors that are presently restricted to bring further liberalization to the FDI.

To maintain a steady rise in the global ease of doing business index, the FDI policies must be more business concerned to appeal to the interest of the investors and the economy. Political consideration may not be totally overruled, but should be the least in making overall FDI policies.

Since 1991 until date, the changes made in the FDI policies have played a major role in the economic and infrastructural development of India. If policies are unfriendly, foreign investors will not consider the huge market size at the expense of their investments. Policies that are aimed at strengthening the local industries should be reconsidered as they can prove to be irrelevant and inimical to FDI inflow to India in the long run.

The policies should follow a systematic standpoint for smooth implementation and absolute adjustment by both locals and foreigners.

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