U.S. International Trade Commission
08/29/2024 | Press release | Distributed by Public on 08/29/2024 14:24
Recent Shifts in Inward Foreign Direct Investment in India
U.S. International Trade Commission Executive Briefings on Trade, August 2024
The views expressed solely represent the opinions and professional research of the author. The content of the EBOT is not meant to represent the views of the U.S. International Trade Commission, any of its individual Commissioners, or the United States government.
Recent Shifts in Inward Foreign Direct Investment in India
Dominique Eric Varier and Wen Jin "Jean" Yuan, Office of Economics
Inward foreign direct investment (FDI) stock in India more than doubled from 2014 to 2022. During that same period, the Modi government engaged in a series of reforms on FDI regulations that liberalized many sectors, including traditionally restricted sectors such as defense, rail infrastructure, and pharmaceuticals. The FDI Restrictiveness Index, a measure to assess India's FDI environment across 22 sectors, declined from 0.26 to 0.21 between 2014 and 2020. Sectors like fisheries, transport, and media, which were the focus of PM Modi's liberalization efforts, experienced the most significant reductions in index values. Between 2014 and 2022, India saw a rapid increase in the number of greenfield FDI projects, primarily concentrated in software and IT services and business services. Geographically, South India witnessed the most significant growth in inward greenfield FDI within India.
Recent Trends in India's Inward FDI
Figure 1: Inward FDI Stock in India, billion USD, 2014-22
Since efforts in the 1990s to open the economy, India has emerged as an attractive destination for FDI. India ranked 17
th
overall and 4th
among developing nations in 2022 for inward FDI stock. Between 2014 and 2022, India's inward FDI stock rose from $312.9 billion to $636.6 billion, an increase of 104 percent (Figure 1).
Changes in FDI Restrictions in India
The government of Prime Minister (PM) Narendra Modi has liberalized India's FDI regime faster than any of its predecessors. Between 2014 and 2017, PM Modi made 37 sectoral relaxations in FDI rules, with additional reforms in 2019; this outpaces the number of sectoral relaxations in the entire six-year run of PM Vajpayee and is equal to that of PM Singh during his ten years in office. Notably, many reforms extended to sectors which traditionally had the strictest FDI restrictions, including defense, insurance, railways, construction, and e-commerce.
Source:International Monetary Fund, Coordinated Direct Investment Survey, 2023.
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Table 1: Select FDI Reforms Under Prime Minister Modi, by Sector, 2014-2022Defense
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FDI cap, which limits the equity percent that can be held by foreign investors, raised from 26 to 74 percent via automatic route, and FDI beyond 74 percent allowed via government route.
1 |
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Railway
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FDI cap eliminated, allowing up to 100 percent via automatic route for the construction, operation, and maintenance of specific rail infrastructure projects.
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Construction
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Restrictions like lock-in periods were relaxed.
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Pharmaceuticals
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FDI cap raised from 0 percent to 74 percent via automatic route for acquiring existing firms, while FDI beyond 74 percent permitted via government route; FDI up to 100 percent allowed via automatic route for greenfield projects.
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Medical Devices
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Updated provisions included allowing up to 100 percent FDI via automatic route for manufacturing medical devices.
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Coal Mining
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FDI cap eliminated, allowing up to 100 percent via automatic route for the sale of coal and other coal mining activities.
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Insurance and Pension
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FDI cap raised from 49 percent to 74 percent via automatic route for insurance and pension firms; FDI cap eliminated, allowing up to 100 percent via automatic route for insurance intermediaries.
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Fisheries
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Conditions removed to allow up to 100 percent in FDI via automatic route for aquaculture and pisciculture.
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E-Commerce
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Conditions relaxed to allow up to 100 percent in FDI via automatic route for marketplace e-commerce, i.e., platforms that connect sellers with buyers.
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