Foreign Direct Investment
- § Definition:
- Foreign direct investment (FDI) is basically an investment made into a company or cooperation of a country by an individual or a company located in another country either by acquiring the ownership or through joint venture for business expansion. It is a major non-debt monetary source driving the economic developments in India.
§ Why is it important ?
Foreign Direct investment plays a vital role in economic development as
a.It acts as a bridge to fulfill the gap between investment and saving.
b.Provides access to the best and modern technology
c.Generates new production opportunity and employment
§ Evolution of FDI in India :
- Prior to economic reforms of 1991, Foreign investments did exist but with utmost caution and selective approach. It was only in 1991 when it was introduced under Foreign Exchange Management Act (FEMA) by then finance minister Dr. Manmohan Singh. Although FDI was introduced in the year 1991, it attracted very less foreign investments in the early years and it was from 2014 onwards when liberalized government policies facilitated upsurge in foreign inflows and now in the current scenario India has managed to become one of the most attractive destination for foreign investments.
- However there are various sectors including atomic energy, chit funds and many more in which FDI is restricted. Except the
- prohibited ones, rest of the sectors are enlisted under their respective permissible routes .
§Routes for FDI
§ Three main types of FDI :
|
Horizontal FDI |
Vertical FDI |
Conglomerate FDI |
|
Company or an individual makes investment into a same business in another country. |
Company or an individual makes investment into a related business in another country. |
Company or an individual makes foreign investment into a business i.e.completely different to its existing business. |
|
eg. Suppose Kitkat invests into dairy milk firm. |
eg. Kitkat invests into a sugar firm which will be used in its chocolate business. |
eg. Kitkat company invests into an automobile company. |
§ Why was FDI recently in news?
1. In May 2020, Government increased FDI in Defence manufacturing under the automatic route from 49 per cent to 74 per cent.
2. In April 2020, the Government reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and thus amended the existing consolidated FDI Policy, 2017 as follows:
i. An individual or a company of any country that shares a land border with India can invest in India firms only through government route which was earlier exclusive to Pakistan and Bangladesh only.
ii. The amendment also applies to “Beneficial Ownership” who are residents of a neighbouring country even though the investing company is not located in the neighbourhood.
3. In March 2020, Govt. permitted non-resident Indians (NRIs )to acquire upto 100 per cent stake in Air India.
§ In matters of conflict – Any violation of regulation under FDI falls under the purview of penal provisions under FEMA . RBI administers FEMA, Enforcement Directorate and ministry of finance holds the authority of investigation in case of any conflict /violation.
* FEMA – Foreign Exchange Management Act ,1999 was enacted under the Ministry of Finance by the Parliament of India for consolidation and amendment of laws relating to foreign exchange (FOREX) in India .
Sources:
PIB
Dept. for Promotion of Industry and Internal Trade (DPIIT)
The Economic Times
Drishti IAS
— Sonali Raulo