by Foreign direct investment in India is the most influential financial resource, especially for the emerging sectors. Foreign direct investment helps in exploiting a wide range of opportunities and utilizing the same to attain the desired level of development in the nation (Gola, Dharwal, & Agarwal, 2013). The world economy including both the developed countries and other emerging countries are facing some varying trends of foreign direct investment in recent years.
The major player that is coming into view of late in India. Analyzing the trend of foreign direct investment in India shows that it is rising and the main reasons for such an increase are due to new government policies and various initiatives such as Make in India. The country has faced elevated trends of the foreign direct investment due to building investor-friendly climate in the country, thereby enabling the ease of doing business. India has been able to climb up to 10th position in 2015 from 15th position in 2014 as a trusted nation for Foreign direct investment. As a result, India has attracted foreign direct investments worth of $40 billion for the financial year 2015- 16, which was 29.2% higher than the last year (UNCTAD, 2016).
Sources of foreign direct investment in India
By catching the attention of the economies worldwide, India has been able to gain a huge sum by the way of equity inflows. Singapore has become the largest investor with a total investment of $13.69 billion during the financial year 2015-16. Followed by Singapore are the economies including Mauritius and USA investing $8.35 and $4.19 billion respectively. The aggregate Merger and Acquisition (M&A) deals as well as the private equity deals, which are the methods of foreign direct investment inflow, have grown up 2 times from the last year of 2015 (IBEF, 2016a).
Foreign direct investment in India has shot up 318.2 times starting from the year 1991 to 2005, from $129 million in 1991-92 to $41050 million (Dutta & Sarma, 2008). Before the year 2015-16, Mauritius was the topmost investor in the country as succeeded by Singapore. Still, the country is the major investor with its cumulative percentage share to total inflows being 34% more than double the percentage of Singapore.
The report of the department of industrial policy and promotion has shown that India has been able to gain value in various sectors including the service sector, information technology (IT) sector, automobile industry, pharmaceutical sector, power industry and construction business from the period of 2000 until 2015.
Trends of foreign direct investment in the service sector
The service sector has been able to draw the highest amount of foreign direct investment equity in the country, totalling up to $240.57 billion during 2000-2015. In 2015 the total amount of foreign direct investment in this sector amounted to $27.63 billion (DIPP, 2015). From 1991-2000, the share of service sector in the foreign direct investment in India was 15.2% as compared to the share in 2000-2011 is 19.9%.
The notable increase in the foreign investments in the service sector from the year 2014 was due to the current government coming in power and introducing a more investor-friendly climate. The major reason for such a rise in foreign direct investment in this respective sector includes the various initiatives taken by the government. The investment cap has risen in various sectors including the insurance sector from 26% to 49% and others including defence and railways. Changes in the timelines of the approval of foreign direct investment projects have also contributed to such growth of investment in this sector (IBEF, 2016).
Trends of foreign direct investment in the information technology sector
The information technology sector is the second most attractive industry for foreign investments in India. The total inflows in this sector have reached the mark of $108.13 billion in 2015 since 2000 and in the year 2015, it amounted to $34.3 billion (DIPP, 2015). Some notable motivation in this regard is that the IT industry in the country is rapidly growing and the availability of cheap labour that is highly attracting the companies from the overseas market. Again the turning year in this regard is the year 2014.
Trends of foreign direct investment in the construction industry
The construction business is again a major sector attracting foreign direct investment in the country from the past 15 years. The industries draw $113.8 billion foreign direct investment starting from the year 2000 till 2015. Various initiatives introduced by the Indian government such as Make in India helps to attract a large amount of foreign direct investment in this sector. However, the influx of foreign direct investment in the year 2015 dipped to $0.67 billion (DIPP, 2015). It is observed that even though the amount of investment is decreasing from the year 2011 itself, but its cumulative inflows from the year 2000 have been the second highest, only after service sector. The rise of foreign direct investment in such sector owes it to the rising opportunities in the power sector including power generation, distribution, transmission and equipment. Besides, the infrastructure sector has also gained momentum on an average from the year 2000. Foreign direct investment in the construction sector contributes 9% to the total foreign direct investment inflows in the country (IBEF, 2016b).
Government’s Policy in Regard to Foreign Capital:
After India became independent in August 1947, Jawaharlal Nehru, the then Prime Minister of India, made a statement in April 1949 giving the following assurances to foreign capital:
- There would be no discrimination between foreign companies and purely Indian companies which meant that foreign capital would get the same treatment as indigenous capital.
- Foreign investors would be permitted to remit profits and repatriate capital, taking into consideration India’s position in regard to availability of foreign exchange.
- In case a foreign company was nationalised, fair and equitable compensation will be given to foreign investors.
The above policy was based on several considerations. There was a shortage of indigenous capital and that needed supplementing by foreign capital, if rapid industrial and economic development were to be brought about. Also, there was need of capital goods and equipment and technical know-how from abroad as India then lacked these essential requisites of growth and development.
Tax Concessions:
In the initial stages, with a view to attract foreign capital (that is, foreign companies) to India, Government offered various tax concessions and to avoid delays in finalising foreign collaboration agreements, streamlined its licensing policy of procedures to quickly approve foreign collaboration agreements.
In 1961 the Indian Investment Centre was opened, the objective being to bring together Indian and foreign businessmen and appraise foreign investors of the vast business opportunities in India.
In 1972 the Government of India took another major step to attract foreign capital into the country. It permitted wholly-owned subsidiaries in India of foreign companies, provided they undertook to export 100 per cent of their production.
Export Liability:
If the export liability was less than 100 per cent of its output, the extent of permissible foreign capital was to be decided by negotiations between the foreign companies and the Government of India.
Thus, the Government of India had to choose between the Indianisation of foreign subsidiary companies in India or boosting up export through their help. Government preferred the second of the above two possible courses. But Government’s choice of the second policy was beset with many difficulties.
