Challenges to be addressed in FDIs market and recent trends

There were many reasons for FDI inflows to India have remained low till lately compared to other emerging markets. Some of the major impediments for India have been infrastructure, confusing tax and tariff policies, restrictive labour laws, absence of Center–State coordination, a dormant Special Economic Zone policy and a lack of institutional reform, well-entrenched corruption, and governmental regulations. The cost and time overruns due to contractual and institutional failures are also major obstacles and are often caused by a lack of coordination among central and state government departments on land acquisition and environmental clearances. Further, the setback in attracting FDI was partly due to macroeconomic concerns, such as a high current account deficit and inflation, as well.

 As per the 2011 World Investment Report, India received $25 billion in 2010, against China’s US$105 billion and Brazil’s $48 billion. When FDI inflows to emerging countries revived after the global financial crisis, India lost out due to a lack of reforms and low investor confidence. The report also observes that India’s global ranking as a destination for FDI fell from 8 to 14.  Moreover, much of the $36 billion worth of FDI in 2009 was absorbed into the real estate sector, with hardly any investment going into manufacturing or the services sector.

FDI reforms in India have been progressive and successful at the macro level.  Over the period, India has emerged as an auto hub due to investment from foreign multinationals such as Peugeot, Hyundai, and Nissan. The decision by major global power equipment firms to set up production bases in India to cater to domestic demand proves that India is an attractive destination for FDI. The plus point is that the majority of FDI is domestic market-seeking and there is no export obligation for foreign investors. This is contrary to China’s FDI policy, where export obligation is mandatory for foreign investors.

The ‘Fact Sheet on FDI’ by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, reveals that  there has been substantial growth in FDI inflows into the country during the last five years as compared to that in the preceding five years, they are;

In the year 2019: 50.55$Billion;

In the year 2020: 64.07$Billion;

In the year 2021:44.73$ Billion;

In the year 2022:49.35$Billion;

According to Department for Promotion of Industry and Internal Trade data, the foreign direct equity (FDI) investments contracted by 21 per cent Y-o-Y to $41.31 billion during the calendar year 2023. This was because FDI was dragged down by lower infusion in computer hardware and software, telecom, auto, and Pharmacy sectors, according to the data.

However, the recent spurt in FDI inflows into India can be attributed to various factors, including several bold policy reforms and initiatives undertaken by the government over the last few years to enhance economic competitiveness and the ease of doing business in the country. Besides, political stability has also boosted the confidence of foreign investors. The most important policy reforms that had been pending for long but that were implemented by the government only in the recent past include the introduction of the goods and services tax (GST) regime and a significant cut in the corporate profit tax rate to 17% for new manufacturing firms and 25% for other firms. The reduction in the corporate tax rate has made India more attractive from a tax perspective and put the country on par with many counterparts in the Asian region. Other major reforms that have contributed to improving the overall investment environment in the country include the progressive liberalisation of the FDI regime relating to key sectors like manufacturing, railways, insurance, pension, defence, construction, single brand retail trading, coal mining, etc. The rationalisation of labour laws into four labour codes and the implementation of the Insolvency and Bankruptcy Code, 2016, have also helped enhance India’s attractiveness.