Meaning Of FDI

International Monetary Fund(IMF) defines FDI as a category of international investment that

reflects the objective of a resident in one economy(the direct investor) obtaining a lasting interest
in an enterprise resident in another economy(the direct investmet enterprise). The lasting interest
implies the existence of a long-term relationship between the direct investor and the direct
investment enterprise, and a significant degree of influence by the investor on the management
of the enterprise. A direct investment relationship is established when the direct investor has
acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad.
A direct investment relationship in another economy may be established by any of the following
ways:
1.
2.
3.
4.

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise

FDI Policy of India

The history of FDI in India can be discussed in two sessions i.e.
(i) the pre liberalization period, and
(ii) the post liberalization period.
During pre liberalization period (i.e. before New Economic Policy, 1991), India had a very
stringent and selective approach to FDI. Indias policies was aimed to become self-reliant and
had a dual nature of policy intentions allowing FDI through foreign collaborations in the areas
of high technology and high priorities and and discouraging in low technology areas to nurture
domestic industries. The major regulations were conducted through the Foreign Exchange
Regulation Act (FERA), 1973 wherein foreign equity holding in a joint venture was allowed only
up to 40 per cent. In order to remove the unattractiveness of Indian market to foreign investors,
the government also announced Industrial Policy (1980 and 1982) and Technology Policy

(1983). The policy was characterized by de-licensing of industrial rules and emphasizing on
modernization through liberalized imports of technology. There was also tariff reduction and
shifting to Open General Licensing in many areas.
A major change was adopted through the introduction of New Economic Reforms in 1991. The
restrictions were gradually removed by the government and allowed increased access to foreign
technology. Existing companies in the pre-liberalization period were allowed an investment of 51
percent (which was later increased further). The Foreign Exchange Regulations Act was
substituted by the more liberal Foreign Exchange Management Act in 1999. Also, dual route of
approval was introduced (i) Government Route, and (ii) Automatic Route. Foreign Investment
in India is governed by the FDI policy announced by the Ministry of Commerce and Industry,
government of India and the provision of the foreign Exchange Management Act(FEMA) 1999
and the Reserve Bank of India(RBI) directives in this regard. The Consolidated FDI Policy
Circular, dated 12th May, 2015is the latest.
This policy provides details such as prohibited sectors, FDI Caps, entry routes, etc.
The various sectors in which FDI is allowed as per the latest policy are:
1.
2.
3.
4.
5.
6.

Agriculture and Animal Husbandry

Tea Sector
Mining and Petroleum & Natural Gas
Manufacturing
Defense
Services Sector such as banking, insurance, broadcasting, aviation, single & multi-brand

retailing, etc.
7. Pharmaceuticals
8. Power Exchanges
Sectors prohibited for FDI are as follows:
1.
2.
3.
4.
5.
6.
7.
8.

Lottery Business
Gambling and Betting, casinos,etc.
Chit Funds
Nidhi Company
Trading in Transferable Development rights
Real estate Business(other than construction development)
Construction of Farm Houses
Manufacturing of Cigars, cheroots or tobacco

9. Activities/ sectors not open to private sector investment such as Atomic energy, Railway
Operations, etc.
Foreign investment could be direct or indirect. FDI is direct since the foreign investor, whether
it may be a person, company or group of entities, or seeking to control, manage, or have
significant influence over the Indian enterprise. When investment is done through a portfolio, it
is indirect investment. According to the Arvind Mayaram Committee Report on FDI & FII in
June 21,2014, foreign investments in India shall be Foreign Direct Investment(FDI) or Foreign
Portfolio Investm,ent(FPI). FPI includes Foreign Institutional Investors(FII) and Qualified
Foreign Investors(QFI).

Entry Routes for FDI In India

1) Automatic Route
FDI under the automatic route does not require any prior approval either by the Government or
the Reserve Bank. The investors are only required to notify the concerned regional office of the
RBI within 30 days of receipt of inward remittances and file the required documents with that
office within 30 days of issuance of shares to foreign investors.
2) Government Route
Here, investment can be made only with prior approval of Government i.e Foreign Investment
Promotion Board (FIPP) Department of Economic Affairs, Ministry of Finance or Department of
Industrial Policy and Promotion(DIPP), as the case may be. The FIPB approval limit was
announced to be above 2000 crores. This was raised to 3000 crores and further to 5000crores
during 2015 as part of liberalization of FDI policies.

FDI Flow In India

Need of FDI savings and investment rate in any country. As per CMIE Report 2012, India faced
a capital deficiency of .5% (investment 23.4% less savings 22.9%) in 1990-91. By 2010-11, it
has aggravated to 4.2% (investment 36.5% less savings 32.3%). The deficit in capital formation

and scarcity of financial resources has motivated the government to open up the Indian economy
to foreign investors. AS discussed earlier, foreign money in form of FDI and FPI has been
continuously flowing towards India since liberalization, privatization and globalization.
Table 1
Financial Year Wise FDI Inflows Data (US $
Million)
Year
Total Cum FDI
Annual Growth
Inflow
Rate
1991- 129
92
1992315
144%
93
1993586
86%
94
19941314
124%
95
19952144
63%
96
19962821
32%
97
19973557
26%
98
19982462
-31%
99
1999- 2155
-12%
00
4000
3500
3000
2500
2000
1500
1000
500
0
1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

It is evident from the Table 1 that there has been a stable growth in FDI inflow to Indian
economy. FDI inflow soared from mere US$ 129 million to US$ 2155 million in 2000 (CAGR of
35.79% per year). Given below is the inflows from 2001 onwards as per international standard
practices. While analyzing inflows during 2000-2015 also, there is an increase in the FDI inflows
from US$ 4029 million to US$ 44291 million.
Table 2
Financial Year Wise FDI Inflows Data (US $
Million)
Year
Total Cum FDI
Annual Growth
Inflow
Rate
2000-01
4029
2001-02
6130
52%
2002-03
5035
-18%
2003-04
4322
-14%
2004-05
6051
40%
2005-06
8961
48%
2006-07
22826
155%
2007-08
34835
53%
2008-09
41873
20%
2009-10
37745
-10%
2010-11
34847
-8%
2011-12
46556
34%
2012-13
34298
-26%
2013-14
36046
6%
2014-15 44291
23%

Financial Year Wise FDI Inflows Data

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0

Trends
Year
2011-12
2012-13
2013-14
2014-15

Table 3
in FDI Inflows Between 2011-12 and
2014-15
Annual Growth
Total FDI Inflows
Rate
46556
33.61%
34298
-26.35%
36046
5.1%
44291

22.87%

Total FDI Inflows

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0

2011-12

2012-13

2013-14

2014-15

Table 3 analyzes the trend of FDI inflows during the recent years i.e. from 2011-12 to 2014-15.
This shows that Indias FDI Inflows have been highly fluctuating during the past four years.
Although there is a decline in 2012-13, there is a steep increase of 23% in investments during
2014-15. This increase could be attributed to the liberalized policies and the Make In India
initiative of the government.
Also, the returns during the period April to September, 2015 have shown an increase of around
US$ 2159 million (% increase remaining constant) (Table 4).

Table 4
Comparison Between FDI Inflows Between
2014-15 & 2015-16
-For the months from April to SeptemberMonth
2014-15
2015-16
April
May
June
July
August
September
Total

1705
3604
1927
3500
1278
2458
14472

3605
3850
2054
2007
2220
2897
16631

% increase over
last year

15%

15%

Comparison Between FDI Inflows Between 2014-15 & 2015-16

-For the months from April to September4500
4000
3500
3000

2014-15

2500

2015-16

2000
1500
1000
500
0
April

May

June

July

August September

Country- wise FDI Inflows in India

Top 10 investor countries in India include Mauritius, Singapore, United Kingdom, Japan,
Netherlands, USA, Cyprus, Germany and others. These ten countries account for 85% of Indias
total FDI inflows from April 2000 to January 2015. Among the top ten investors, Mauritius tops
the list by 35% of the entire FDI inflows. The main reason for these high levels of investments is
the Double Taxation Avoidance Agreement (DTAA) that India has entered with it long ago. Such
an agreement was also signed with Singapore in 2013 which ranks second in the list.
Table 5
Cumulative FDI Inflows From Top Ten
Countries
Total Cum FDI
Year
Total Inflow %
Inflow(US$ Million)
Mauritius

91222

34%

Singapor
e
UK
Japan
Netherlan
ds
US
Germany
Cyprus
France
UAE

38882
22563
19167

15%
9%
7%

15769
14605
8337
8328
4767
3307

6%
6%
3%
3%
2%
1%

Cumulative FDI Inflows From Top Ten Countries

100000

91222

90000
80000
70000
60000
50000
40000
30000
20000
10000

38882
22563

19167

15769

14605
8337

8328

4767

3307

However, analyzing inflows from April 2012 to September 2015, there is a slight change in the
rankings of the top ten investor countries. For this period, the percentage of investment from
Mauritius has become 25% which is lower as compared to 34% of the total inflows from April
2000 to September, 2015. Countries namely Singapore and Netherlands have increased their
respective investment while the remaining major countries to India registered a decline. Also,
UAE has surpassed Switzerland to occupy the tenth position during this period.

Table 6
FDI Inflows Between April 2013 September 2015
Country

201314

2014-15

Mauritius
Singapore
UK
Japan
Netherlands
US
Germany
Cyprus
France
UAE

4859
5985
3215
1718
2270
806
1038
557
305
255

9030
6742
1447
2084
3436
1824
1125
598
635
367

2015-16
Upto
Sept. 15
3667
6694
353
815
1098
854
693
284
254
262

Total Cum FDI

Inflow
(US$ Million)
17556
19421
5015
4617
6804
3484
2856
1439
1194
884

Total
Inflow %

Year-Wise Comparison
2013-14 to 2015-16 (Upto september)
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

2013-14

2014-15

2015-16 upto sept.15

25%
27%
7%
6%
9%
5%
4%
2%
2%
1%

Total Cum. Inflow From Various Countries

2013-14 to 2015-16 (Upto september)
25000
20000
15000
10000
5000
0

Sector Wise FDI Inflows into India

FDI inflows into India have been concentrating on 10 sectors of the economy. The largest share
is that of service sector with as high as 17% of the total FDI inflows into India since 2000. Next
comes construction with 9% share of total FDI inflows. Other major sectors include computer,
telecommunication, automobile, drugs, chemicals, etc. Services sector includes banking,
insurance, outsourcing, research and development, courier and technology testing.
Table 7
Sectoral Analysis of FDI inflows
Total FDI Inflow
SECTOR
Total FDI Flows
%
Services
Construction
Computer
Hardware &
Software
Telecommunicati
ons
Automobile
Drugs
Chemicals
Trading
Power
Metallurgical

45367
24156

17%
9%

18170

7%

17717

7%

14002
13321
10823
10335
9967
8687

5%
5%
4%
4%
4%
3%

Trading
Sectoral Analysis
Of FDI
4

Chemicals
ServicesMetallurgical
Power
4 Drugs
3
17
4
5
Construction
9
Automobile
5 Telecommunications Computer
7
7

Table 8
Sectoral Analysis of FDI Inflows
Between April 2013 September 2015
Sector
Services
Construction
Computer
Telecommunication
s
Automobile
Drugs
Chemicals
Trading
Power
Metallurgical

4443
769
2296

2015-16
Upto
Sept. 15
1464
81
3057

Total Cum FDI

Inflow
(US$ Million)
8132
2076
6479

1307

2895

659

4861

1517
1279
878
1343
1066
568

2726
1498
763
2728
707
359

1464
226
393
2308
360
253

5707
3003
2034
6379
2133
1180

201314

2014-15

2225
1226
1126

Sectoral Analysis of FDI Inflows

Bet. April, 2013 & September, 2015
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0

2013-14

2014-15

2015-16 upto Sept.

There are various reforms that had been taken over by the government to increase flow of FDI
into Indian Economy. As part of a major initiative, it introduced the Make In India campaign.
Government eased FDI norms in 15 sectors as part of this initiative. We can observe from the
given figure that there has been a hike in the inflows of computer, automobile and trading during
the period April-September, 2015. Also, there is an increase in capital flows during 201415
period.
Higher FDI from 2014 onwards may be a positive sign of the investor friendly policies adopted
by the government. The FDI data also shows signs of NDA being highly investor friendly. The
steep rise of FDI inflows by 65% during June, July and August, 2014 as compared to 2013 itself
is an indication that the NDA government has been considered as an investor-friendly
government.
Table 9
Trends in FDI Inflows in 2013 & 2014
Month
2013
2014
June

1311

2326

July
August
Total

1374
2032
4717

1528
3951
7805

4500
4000
3500
3000
2500

2013

2000

2014

1500
1000
500
0
June

July

August