Foreign Direct Investment

Foreign Direct Investment (FDI) has been recognized as one of the important drivers of the economic growth of India. Government has, therefore, been making all efforts to invite and facilitate FDI and investment from Non Resident [NRIs- which also includes Persons of Indian Origin (PIO)] to complement and supplement domestic investment.

Foreign direct investment is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the automatic route. Investment under the automatic route shall continue to be governed by the notified sectoral policy and equity caps and RBI will ensure compliance of the same. The National Industrial Classification (NIC) 1987 shall remain applicable for description of activities and classification for all matters relating to FDI/NRI investment.

Foreign investment

· Foreign direct investments in the period April - March, 2004 - 05 stood at US$ 4.70 billion.

· Foreign Direct Investment inflows more than doubled from US$ 434 million in April-May 2004 to US$ 922 million in April-May 2005. However, there was a net outflow of US$ 427 million of portfolio investments, which reduced the total foreign investments in April-May 2005 to US$ 495 million as against the inflows of US$ 993 million in April-May 2004. The non-resident deposits with the scheduled commercial banks went up by US$ 88 million in April 2005 as against the addition of US$ 79 million in April 2004.

· On the inward FDI front, Mauritius still tops the list, followed by the US and the Netherlands. An encouraging note, during the last fiscal, was that the FDI flows from Germany and Japan rose sharply. FDI flows were directed mainly at the manufacturing sector, which received $924m, followed by computer services at $372m and business services ($363m). Foreign portfolio flows at $8.8bn were also buoyant during '04-05.

· Sector-wise break-up of FDI is as follows: fuels -28.1%, telecom-16.7%, transportation-8.4%, electrical equipments-6.7%, services-6.7% and metallurgical industry-5.3%

· Major FDI destinations are Maharashtra-17.4%, Delhi-12%, Tamil Nadu-8.6%, Karnataka-8.2%, Gujarat-6.5%, and Andhra Pradesh- 4.6%.

· MNCs, which have invested in India include GE, Dupont, Eli Lily, Monsanto, Caterpillar, GM, Hewlett Packard, Motorola, Bell Labs, Daimler Chrysler, Intel, Texas Instruments, Cummins, Microsoft, IBM, Toyota, Mitsubishi, Samsung, LG, Novartis, Bayer, Nestle, Coca Cola and McDonalds.

· FII investment during the period 2004 - 05 stood at US$ 9.4 billion.

· Foreign institutional investors (FII) have pumped in $1.9 billion in July, the highest ever in any calendar year. The total net FII investment in CY05 is now more than $6.7 billion.

· The current calendar saw a rise in the number of FIIs registered with Sebi. According to Sebi, a whopping 145 new foreign institutional investors (FII) logged in to the country in CY05. The total number of registered FIIs as on August 2, 2005 was 739, much higher than 637 as on December 31, 2004.

· Many Japanese and European funds have also started eyeing India with an aim to cash in on the rising equity markets. Registrations from non-traditional countries like Denmark, Italy, Belgium, Canada, Sweden and Ireland went up significantly in the fiscal 2004-05, according to the Securities and Exchange Board of India (Sebi).

· CALPERS (California Public Employees Retirement System ), the world's biggest pension fund with a base of US$ 165 billion has recently decided to invest US$ 100 million in India thus adding India to their list of countries for investment.

· US$ 8.5 billion of FII funds in calendar year 2004 went into equities. The cumulative FII inflow in equities in calendar 2005 (till 8 September 2005) has already reached US$ 7.93 billion as compared to the whole of calendar year 2004, where the inflow aggregated US$ 8.5 billion.

· FIIs have 50 percent stake in one third of the 30 companies which make up the BSE-30 Index and hold about 10 percent of the stakes in public sector undertakings.

Potential for investment in India

· The Government is focusing on expansion and modernization of roads and has opened this up for private sector participation. 48 new road projects worth US$ 12 billion are under construction. Development and upgradation of roads will require an investment of US$ 24 billion till 2008. Private sector participation in road projects will grow significantly.

· Special incentives and tax-breaks are given for certain sectors such as power, electronics, telecom, software, hydrocarbons, R&D and exports.

· The railway sector will need an investment of US$ 22 billion for new coaches, tracks, and communications and safety equipment over the next ten years.

· Upgradation and modernization of airports will require US$ 33 billion investment in the next ten years.

· There is potential for investment in the expansion and modernization of ports. The Government has taken up the US$ 22 billion 'Sagarmala' project to develop the Port and Shipping sector under Public-Private Partnership. 100 percent FDI is permitted for construction and maintenance of ports. The Government is offering incentives to investors.

· The Ministry of Power has formulated a blueprint to provide reliable, affordable and quality power to all users by 2012. This calls for investment of US$ 73 billion in the next five years. Opportunities are there for investment in power generation and distribution and development of non-conventional energy sources.

· There is potential for investment in urban infrastructure projects. Water supply and sanitation projects alone offer scope for annual investment of US$ 5.71 billion.

· The entire gamut of exploration, production, refining, distribution and retail marketing in the oil & gas sector presents opportunities for FDI.

· India has an estimated 85 billion tons of mineral reserves remaining to be exploited. Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, cobalt, silver, tin etc. There is also scope for setting up manufacturing units for value added products.

· The telecom market, which is one of the world's largest and fastest growing, has an investment potential of US$ 20-25 billion over the next five years. The telecom market turnover is expected to increase from US$ 10 billion in 2004 to US$ 13 billion by 2007.

· The IT industry and IT-enabled services, which are rapidly growing offer opportunities for FDI.

· India has emerged as an important venue for the services sector including financial accounting, call centers, and business process outsourcing. There is considerable potential for growth in these areas.

· Biotechnology and Bioinformatics, which are on Government's priority list for development, offer scope for FDI. There are over 50 R&D labs in the public sector to support growth in these areas.

· The Indian auto industry with a turnover of US $ 12 billion and the auto parts industry with a turnover of US$ 3 billion offer scope for FDI.

· The Government is encouraging the establishment of world-class integrated textile complexes and processing units.

· While India has abundant supply of food, the food processing industry is relatively nascent and offers opportunities for FDI. Only 2 percent of fruits and vegetables and 15 percent of milk are processed at present. There is a rapidly increasing demand for processed food caused by rising urbanization and income levels. To meet this demand, the investment required is about US$28 billion. Food processing has been declared a priority sector.

· The Healthcare industry is expected to increase in size from its current US$ 17.2 billion to US$ 40 billion by 2012.

· The Government has recently established Special Economic Zones with the purpose of promoting exports and attracting FDI. These SEZs do not impose duty on imports of inputs and they enjoy simplified fiscal and foreign exchange procedures and allow 100% FDI.

· The travel and tourism industry, which has grown to a size of US$ 32 billion offers scope for investment in hotels, resorts and tourism infrastructure.

· India's Foreign Investment policies and procedures are simple, transparent and investor friendly.

· The Common Minimum Programme of the Government states that, "FDI will continue to be encouraged and actively sought particularly in areas of infrastructure, high technology and exports where local assets and employment are created on a significant scale. The country needs and can easily absorb at least two to three times the present level of FDI inflows".

· Foreign investment can be freely channeled into all sectors except for the following sectors: retail trade, agriculture (excluding floriculture, horticulture, development of seeds, animal husbandry, pisiculture & cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro & allied sectors), plantations (other than tea plantations), atomic energy, gas pipelines, courier services, trading and lottery and gambling. In most of the sectors, foreign investors can go through the Automatic Route without need for any approvals. The investor has to merely keep the Reserve Bank of India informed of the flow of funds and issue of shares.

· Maximum limits on foreign investment in some sectors are being progressively liberalized, eg : telecommunications (74%), insurance (26%), banking (74%), mining (74%) aviation (49%), defence equipments(26%), cable networks (49%), trading (51%), print media (26%) and small-scale industries (24%). FDI in excess of 24% is permitted in small-scale industry with 50% export obligation.

· 100% FDI is allowed in non news publications, which means all foreign non-news scientific, technical, specialty magazines, periodicals and journals are allowed to be published and sold throughout the country.

· Retail Trading is permitted under automatic route with FDI up to 51% provided it is in primarily in export activities, and the undertaking is an export house/trading house/super trading house/star trading house.

· Wholesale trading activity is allowed subject to prior approval of Foreign Investment Promotion Board (FIPB).

· The Government has decided to allow FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure), subject to the following guidelines. Minimum area to be developed under each project would be as under:

- In case of development of serviced housing plots, a minimum land area of 10 hectares
- In case of construction-development projects, a minimum builtup area of 50,000 sq.mts
- In case of a combination project, anyone of the above two conditions would suffice

· Prior approval of the Government is needed in those cases, which require industrial license (examples: alcoholic beverages, cigarettes, defence equipments, gunpowder and hazardous chemicals. ) and those involving investment beyond the maximum limits. Such cases are cleared by the Foreign Investment Promotion Board in a transparent, efficient, time-bound and predictable manner. The FIPB meets once a week.

· The Department of Industrial Policy and Promotion is the nodal agency for information and assistance to foreign investors. Their website www.dipp.nic.in has comprehensive information for foreign investors and gives weekly updates on proposals for foreign investment under consideration. It also gives information on projects available for foreign investors and contains online applications for clearances.

· The various State Governments in India extend incentives and competitive offers to foreign investors.

· Intellectual Property Rights Laws of India are well on track with the rest of the world.

· Full capital account convertibility is allowed for foreign investors.

Source: DIPP, Ministry of Commerce