India’s FDI inflows have been growing steadily over the past 3 years. When you look at the graph on the right, you can see that the growth in FDI inflows started increasing substantially around 2014 and peaked in 2016 in which year, India became the largest recipient of FDI in the world. In fact, since April 2014, India has attracted FDI inflows of close to US $156.53 billion[i] and is now ranked among top 3 FDI destinations in the world. This development can be credited to the change in overall global investor sentiment regarding India when Modi came to power in 2014. Under Modi, India’s FDI norms have, in fact, eased significantly.
How Things Were
Prior to 2014, India had a limited list of sectors that were open to FDI. Sectors that were not part of this list were not allowed to receive foreign investments. While India had started liberalizing its economy in 1991, several restrictions had still remained in place. These restrictions not only limited the overall FDI inflows but also stunted growth. For example, before Modi, not only could India not receive any FDI in its defense sector, even Indian private companies were not allowed to manufacture defense equipment. Today the defense sector is allowed 49% FDI and the total sector opportunity is expected to reach US $168 billion[ii] , just for Indian companies.
What has Changed Now
The Modi regime has changed the industrial policy significantly to attract more FDI. Today, instead of a list of limited sectors allowed to receive FDI, there now exists a short "negative" list of sectors that are prohibited from receiving FDI. Sectors not on this list, have, therefore, become automatically open to foreign investment. Today, these “open” sectors can receive FDI through two routes:
- Automatic Route: FDI in sectors included in this list require no prior permission from the government. Close to 90% of total FDI inflows are through this route.
- Government Route: Sectors included in this list are also open to receiving foreign investment but require prior government approval.
Thus, most sectors in India are now open to FDI[iii] and a large number of them are allowed 100% FDI too. This, by and large, explains why India has received so much FDI in the past 3 years.
It appears though that the Indian government does not wish to stop here as is evident from its recent policy change to allow startups in India to raise money more easily from foreign venture capital investors[iv]. Till regulators in India are happy, one can expect foreign investments to rise further in India.
Sid Goyal is the Senior Associate, Marketing at Excel Funds and is also the in-house India specialist at Excel Funds. He takes keen interest in world politics and is extremely active on twitter where he is followed by multiple influencers including the Prime Minister of India, Narendra Modi. Sid holds an MBA from Ivey Business School, Western University.
[i] Industrial Policy 2017 - Discussion Paper: http://www.dipp.nic.in
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