FDI and the Investment Climate of India

Introduction

The economic landscape of India was changed drastically in 1991, the New Economic Policy had turned the tides. India was now open for the outside world to conduct business here. The landmark decision came after India sought reform to continue development of the then highly nationalised climate. The three major goals of the NEP was to liberalise, privatise, and globalise. An important part of the policy was now the inflow of foreign investment in the country, which was seen as developmental funds to revitalise industries.

It is high time to define what FDI means. As per the Government of India, “it means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company”. It is money invested by resident of one country into a foreign country for a long period of time. There are name two ways to do so in India, the automatic route and the government route; as the name suggests, the automatic route require no need for the investor to seek government approval and can invest directly, but in the government route the investor must fulfil government compliances to start investing in India. The automatic route is only a viable choice for some sectors and is not available to neighbouring countries of India. Moreover, to make the government investment route less tedious, they’ve created single window clearance and set up specific zones of which we will talk about later.

There are different types of FDI that companies employ in different situations. Two of them are:

  1. Horizontal form of FDI: when an enterprise expands its domestic operations into another country. In such cases the same activities which were conducted domestically are conducted in the foreign country. For example McDonald’s expanding its business operations into India by opening restaurants.
  2. Vertical form of FDI: when an enterprise enters a foreign country to operate on different task as compared to their on the domestic country, it is referred to as vertical FDI. An example of this would be a car manufacturing company entering a foreign country to manufacture FMCG products.

 

Make In India and Other Factors Which Stimulate FDI

“FDI flows into India have grown consistently since liberalization and are an important component of foreign capital since FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovation, competition and employment creation amongst other benefits.” The Indian government has welcomed FDI and has also made reforms after the NEP to make it easier for countries and MNC’s to invest in the country. India has linked the development of the country to increased inflow of the FDI which is somewhat true.

Some other initiatives taken by the government include, but not limited to, are:

  1. Reduced corporate tax
  2. 100% automatic route
  3. Single window clearance
  4. Make in India:
    • Need:
      • Launched in September 2014, as a response to emergent markets bubble burst in India.
      • India was deemed as a fragile investing climate by investors.
      • India’s growth rate was at its lowest in a decade.
      • “Was India too big to succeed or to big fail,” was the question pondered by investors at the time.
    • Objective:
      • to increase the manufacturing sector’s growth rate to 12-14% per annum.
      • to create 100 million additional manufacturing jobs in the economy by 2022.
      • To ensure that the manufacturing sector’s contributions to GDP is increased to 25% by 2025.
    • Progress
      • Tedious processes have been changed to transparent and user-friendly system.
      • Previously nationalised sectors are now recording substantially high levels of FDI, namely; railways, medical devices, insurance and defence.
      • The ministry is working with the World bank to identify areas of improvement in the EoDB parameters.
      • Workshops by the DPIIT* for the state governments to integrate Business Reforms action plan.
      • In September 2014, an Investors Facilitation Cell was formed to assist investors.
  1. Ease of Doing Business:
    • Meaning: It is a ranking index held by the world bank group. The higher the ranking the easier it is to conduct business in that country, which indicates simpler regulations and stronger property rights.
    • India ranking: India ranked 63rd in the index on the criterion of: starting a business of all, dealing construction permits, getting electricity, property rights, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency.

SEZs and Their Contribution to FDI

In addition to the these the government set up Special economic zones. However, it is first important to understand their predecessor Export processing zones.

Export processing zones:

  1. First setup in Kandla 1965.
  2. Supports world class infrastructure
  3. Has easier compliance clearance
  4. Generates employment
  5. Connects local firms to global markets
  6. These are usually seen in labor abundant developing countries which need foreign capital and exchange
  7. The main goal is to attract FDI, trade, and capital without impacting the domestic markets as whatever is produced here is exported.

Now that we have a basic outline of EPZs let’s move on to SEZs

Special Economic Zones

  1. Meaning and objective
    • To accomplish the goal of being the 3rd largest economy in the world by 2030, India has launched numerous policies one of which is the SEZ.
    • Special economic zone policy was announced in 2000, with it being a driving force of economic growth and quality infrastructure. It was also supported with an attractive fiscal package at both the centre and state level. The SEZ rules were finalised and put into place onm10th February, 2006.
    • Alike EPZs, SEZs are setup in such a manner that the they provide single window clearance, as well as a government compliance office. Moreover, anyone can register for an SEZ online.
    • Its objectives were similar to that of an EPZ that is it to aims to develop infrastructure, connect global markets, exchange technology and bring capital investments to India.
  2. Performance of SEZs
    • SEZs have touched new heights in terms of providing employment, boosting exports, improving global relations, and stimulating the growth in technology.
    • Exports of Rs. 22,840 Crore in 2005-06 has increased to Rs. 7,59,524 Crore in 2020-21.
    • Investment of Rs. 4,035.51 Crore in 2005-06 has increased to Rs. 6,17,499 Crore (cumulative basis) by 2020-21.
    • Employment provided to 1,34,704 persons in 2005-06 has increased to 23,58,136 persons (cumulative basis) in 2020-21.

Conclusion

The result of these and other steps taken by the government led to an all-time increase in FDI inflows. Moreover, it also created a trustworthy investing climate, as the investors knew that the government found FDI crucial to India’s development. It is said that the investment climate has improved noticeably since 1991. The fruits of these initiatives can be seen through results. India has ranked 63rd in the Ease of doing business index (EoDB index). Moreover, FDI has grown at 65.3% from $266.21 bn in 2007-14 to $312.05 bn in 2014-21, similarly inflow has also increased by from $185.03 bn during 2007-14 to $312.05 bn (2014-21). Additionally, India has attracted a total of $27.37 bn during the first four months of the fiscal year of 2021-22 which was 62% as compared to the corresponding time frame of F.Y. 202 Total FDI inflows in the country in the last 21 years (April 2000 – March 2021) are $763.5 bn while the total FDI inflows received in the last 5 years (April 2014- September 2019) was $319 bn which amounts to nearly 50% of total FDI inflow in last 20 years.

During FY 2020-21, total FDI inflow of $58.37 bn, 22% higher as compared to the first 8 months of 2019-20. FDI equity inflows received during April – November 2020 is $43.85 bn which is 37% more compared to April – November 2020 ($32.11 bn).

FDI equity inflow grows by 168% in the first three months of FY 2021-22 ($17.57 bn) compared to the same corresponding period last year ($6.56 bn) due to ease in FDI policy in India.

It is evident that the government has put emphasis on the development of India by increasing capital through FDI and making it easier to conduct business in India. However, a consequence of encouraging investors to invest India is the price that the labourers and other unorganised sector workers have to bear in the form of poor working conditions, unfair pay, sudden hiring and firing, and un unionised sectors. This has been acknowledged by the government and it has been working to towards a solution, but the pandemic has led to cyclical unemployment, which has only worsened the situation as the supply is high and the demand is low. This creates a vicious cycle that can only be broken down by government intervention. Without government intervention such exploitation will continue to happen, as India has a huge youth population.