Foreign direct investment (FDI) is an investment made by any company or an individual in the business concern of another country with a motive to start any business in other country or to become partner/ owner in the business of other country.
Example: A citizen or a company in America when invest money into the business of India, the investment made by such American Citizen, shall be termed as FOREIGN DIRECT INVESTMENT.
Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business.
WHETHER FDI CAN BE MADE IN ALL THE COUNTIES?
Foreign direct investments are commonly made in open economies, as opposed to tightly regulated economies, that offer a skilled workforce and above average growth prospects for the investor. Moreover, there may be a no. of countries which may or may not allow the Foreign Direct Investment in their own countries. However, Foreign direct investment frequently involves more than just a capital investment. It may include provision of management or technology as well.
METHODS OF FOREIGN DIRECT INVESTMENT
Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company.
Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate in nature.
Horizontal direct investment: It refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening up stores in China.
Vertical investment: It is the one in which different but related business activities from the investor’s main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products.
Conglomerate type of foreign direct investment: It is the one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry the investor has no previous experience in, it often takes the form of a joint venture with a foreign company already operating in the industry.
FOREIGN DIRECT INVESTMENT IN INDIA
Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India. Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing business environment of India. Economic liberalisation started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in India. It were Manmohan Singh and P. V Narasimha Rao who brought FDI in India, which subsequently generated more than one crore jobs. According to the Financial Times, in 2015 India overtook China and the US as the top destination for the Foreign Direct Investment. In first half of the 2015, India attracted investment of $31 billion compared to $28 billion and $27 billion of China and the US respectively. Source: Source of Data of investment is from Wikipedia
The Government of India has amended FDI policy to increase FDI inflow. In 2014, the government increased foreign investment upper limit from 26% to 49% in insurance sector. It also launched Make in India initiative in September 2014 under which FDI policy for 25 sectors was liberalised further. As of April 2015, FDI inflow in India increased by 48% since the launch of “Make in India” initiative.
India was ranking 15th in the world in 2013 in terms of FDI inflow, it rose up to 9th position in 2014 while in 2015 India became top destination for foreign direct investment.
SIZE OF INDIAN RETAIL MARKET
Size of Indian retail sector is growing at a very fast rate. The current size of Indian retail market is around 28 billion dollars which is expected to reach the level of around 260 billion dollars in 2020.
SECTORS WHERE FDI INFLOW WAS ON HIGHER SCALE IN INDIA
During 2014–15, India received most of its FDI from Mauritius, Singapore, Netherlands, Japan and the US. On 25 September 2014, Government of India launched Make in India initiative in which policy statement on 25 sectors were released with relaxed norms on each sector. Following are some of major sectors for Foreign Direct Investment.
Infrastructure
10% of India’s GDP is based on construction activity. Indian government has plans to invest $1 trillion on infrastructure from 2012–2017. 40% of this $1 trillion is to be funded by private sector. 100% FDI under automatic route is permitted in construction sector for cities and townships.
Automotive
FDI in automotive sector was increased by 89% between April 2014 to February 2015. India is 7th largest producer of vehicles in the world with 17.5 million vehicles annually. 100% FDI is permitted in this sector via automatic route. Automobiles shares 7% of the India’s GDP.
Pharmaceuticals
Indian pharmaceutical market is 3rd largest in terms of volume and 13th largest in terms of value. Indian Pharma industry is expected to grow at 20% compound annual growth rate from 2015 to 2020.100% FDI is permitted in this sector.
Service
FDI in service sector was increased by 46% in 2014–15. Service sector includes banking, insurance, outsourcing, research & development, courier and technology testing. FDI limit in insurance sector was raised from 26% to 49% in 2014.
Railways
100% FDI is allowed under automatic route in most of areas of railway like High speed train, railway electrification, passenger terminal, mass rapid transport systems etc. Mumbai-Ahemdabad high speed corridor project is single largest railway project in India, other being CSTM-Panvel suburban corridor. Foreign investment more than ?90,000 crore (US$13 billion) is expected in these projects.
Chemicals
Chemical industry of India earned revenue of $155–160 billion in 2013. 100% FDI is allowed in Chemical sector under automatic route. Except Hydrocynic acid, Phosgene, Isocynates and their derivatives, production of all other chemicals is de-licensed in India. India’s share in global specialty chemical industry is expected to rise from 2.8% in 2013 to 6–7% in 2023.
Textile
Textile is one major contributor to India’s export. Nearly 11% of India’s total export is textile. This sector has attracted about $1647 million from April 2000 to May 2015. 100% FDI is allowed under automatic route. During year 2013–14, FDI in textile sector was increased by 91%. Indian textile industry is expected reach up to $141 billion till 2021.
Airlines
Foreign investment in a scheduled or regional air transport service or domestic scheduled passenger airline is permitted to 100, with FDI up to 49% permitted under automatic route and beyond 49% through government approval. For airport modernization, 100 % FDI will be allowed for existing airport under automatic route.
CONCLUSION:
FDI Route has now been widened by the Indian Government for the NRIs, Foreign Nationals and Foreign Countries. This will not only help the India in getting the status of Developed Country very soon with too much investment in India and Growth of Jobs and Standard of Living simultaneously. Moreover, shall provide the good return to the investors also.
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CS Mohit Saluja,
Mohit Saluja & Associates, Company Secretaries
Malhotra Complex, Sehdev Market, Jalandhar
Mobile: 99145-58709, csmohitsaluja.jal@gmail.com
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