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(GIST OF KURUKSHETRA) Changing Paradigm of Foreign Direct Investment

(September-2023)

Changing Paradigm of Foreign Direct Investment

Introduction:

In the last few years, the industry under Make in India, has not only emerged as a magnet to attract FDI to India and make India a global manufacturing hub but the contribution of these industries to India’s GDP as well as employment creation has also increased over time. This has also contributed to making India a resilient economy in the post-pandemic world.

FDI: The Conceptual Background

FDI refers to long-term participation by one country in another country. It usually involves participation in management, joint ventures, and the transfer of technology and expertise. The International Monetary Fund defines FDI as “The acquisition of at least ten per cent of the ordinary shares or voting power in a public or private enterprise by non-resident investors. Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of profits”.

FDI: Change in Policy Paradigm

In recent years, the Government of India has implemented several changes to the Foreign Direct Investment (FDI) policy to promote investment, ease business operations, and enhance economic growth. Here are some significant changes in the FDI policy in India.

Single-Brand Retail Trading (SBRT)

100% FDI under the automatic route: In January 2018, the government allowed 100% FDI in single brand retail trading, permitting foreign retailers to own 100% of their Indian subsidiaries without government approval.
Relaxation of local sourcing norms: The local sourcing requirement was relaxed for entities undertaking SBRT. For the first five years, entities can offset the local sourcing requirement against their incremental sourcing from India.

Construction Sector

In November 2019, the Government revised the definition of “real estate business” to include the development of townships, housing, builtup infrastructure, and construction development projects.
Relaxation of minimum capitalisation norms: The minimum capitalisation requirement for FDI in the construction development sector was reduced from USD 10 million to USD 5 million within six months of the commencement of the project.

Digital Media

26% FDI allowed: In September 2019, the Government allowed 26% FDI under the Government approval route for digital media entities engaged in uploading/streaming news and current affairs content.

Contract Manufacturing

Contract manufacturing under SBRT: In August 2019, contract manufacturing was included in the definition of SBRT, allowing manufacturers to undertake contract manufacturing for entities engaged in SBRT.

Coal Mining and Contract Manufacturing

100% FDI in coal mining under the automatic route: In August 2019, 100% FDI was permitted under the automatic route for coal mining and associated infrastructure activities.
Contract manufacturing under SBRT: Contract manufacturing was included in the definition of SBRT, allowing manufacturers to undertake contract manufacturing for entities engaged in SBRT.

Civil Aviation

100% FDI in scheduled airlines: In March 2016, the Government allowed 100% FDI in scheduled airlines under the automatic route.

Defence Sector

Increase in FDI limit: In February 2021, the FDI limit in the defence sector through the automatic route was increased from 49% to 74%.
Offset guidelines relaxed: Offset guidelines, requiring foreign defence companies to invest a portion of the contract value in India, were relaxed to encourage more significant investments and improve ease of doing business.

Insurance Sector

Increase in FDI limit: In February 2021, the FDI limit in the insurance sector was increased from 49% to 74% under the automatic route.

E-Commerce

Tightening of rules for online marketplaces: In December 2018, the Government introduced new FDI norms for e-commerce companies, including restrictions on exclusive deals, control over inventory, and equity participation in vendors.
Clarity on marketplace vs. inventory-based models: The Government clarified the distinction between marketplace and inventory-based models to ensure compliance with FDI regulations. These changes reflect the Government’s commitment to liberalising the FDI regime, attracting investment, promoting ease of doing business, and fostering economic growth in India.

Conclusion

FDI has become a prominent feature of globalisation, particularly in emerging economies. FDI plays a significant role in emerging economies to bridge the gap between providing capital and technological support for industrial development, which plays a critical role as a driver of economic growth.
The Government of India initiated ‘Make in India’ in 2014 to develop India as a global manufacturing hub. To attract foreign investment, there have been changes made to the FDI policy in India.
In the last few years, the industries under ‘Make in India’ has not only emerged as a magnet to attract FDI to India and make India a global manufacturing hub, but the contribution of these industries to India’s GDP as well as employment creation has also increased over time. This has also contributed to making India a resilient economy in the post-pandemic world.