By Sravya Vemuri
The Minister of State for Commerce and Industry C R Chaudhary, in a written reply to the Lok Sabha, said that foreign direct investment has increased ‘steadily’ in India. The total capital inflows reached USD 208.99 billion during the period of April 2014 and December 2017.
Investment trends across sectors
The maximum foreign investment was received in sectors that include services, computer software and hardware, telecommunications, construction, trading and automobile. This disparity in the investment flow across sectors can be attributed to various factors. While inflows rose significantly into some sectors the BJP-led NDA government opened upincluding insurance, construction, broadcasting and tourismthe impact of the FDI liberalisation measures in defence, railways and retail is not visible. Despite executing the Make in India initiative, the manufacturing sector did not receive any significant FDI flow. Historically, the services sector has been the most attractive sector for FDI. The FDI hit the zenith in these sectors because of the reforms by the NDA government. The NDA (National Democratic Alliance) came to power in 2014 majorly due to big promises of development. The newly formed government was eager to push through major reforms to help speed up the economic recovery process. To name a few reforms, the government has been trying to introduce the land acquisition bill, the GST (Goods and Services Tax), reforms in the banking sector, and reforms regarding retrospective taxation.
Reforms in FDI policy
The government of India eased restrictions on foreign direct investment (FDI) in India with a view to promoting the ‘Make in India‘ and ‘Start-up India‘ initiatives. In the banking sector, the new FDI policy now permits full fungibility of foreign investment in the private banking sector. Accordingly, Foreign Institutional Investors, Foreign Portfolio Investors and Qualified Foreign Investors can now invest up to the sector limit of 74 percent, provided that there is no change of control and management of the investee company. Under the old FDI policy, the minimum area to be developed was 20,000 square meters and a minimum amount of USD 5,000,000 had to be invested within six months of the commencement of business. The new FDI policy removes both of these requirements, which will allow foreign equity to access smaller developments. Under the new FDI policy, a foreign investor is permitted to exit and repatriate its foreign investment before the completion of a project without FIPB approval, provided that a lock-in period of three years, the “lock-in period“, has expired, calculated with reference to the date of each tranche of equity invested.
According to the Department of Industrial Policy and Promotion, India has now thrown open 92.5 percent of FDI through the automatic route, which is a welcome development. The recent reforms are a necessary change to the regulatory environment in India and another step closer to the goal of full convertibility. However, more reforms are needed to bridge the gap of investment in sectors like manufacturing, agriculture and real estate sectors. Only when there is no biased investment, will all the sectors develop equally.