Foreign Direct Investment

1. Role of Foreign Direct Investment
• FDI provide
• FDI removes Balance of Payments Constraints Capital
• FDI brings Technology, Management and Marketing
Skills
• FDI promotes Exports of Host Developing Country
• FDI provides Increased Employment
• FDI results in Higher Wages
• FDI generates Competitive Environment in Host
Country
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2. Government Policy for foreign Capital
 The Industrial Policy Resolution of 1948 and 1956 were the
basis of the Government’s policy on foreign capital till 1991.
 The Indian Government recognised foreign capital as
important supplement to domestic saving for the
development of the country and for securing scientific,
technical and industrial know-how.
 Although as a matter of policy the major ownership and
effective control of undertaking was to be in Indian hands, the
government permitted, in a few cases, foreign capital to have
major control of an enterprise.
 Foreign investment in India has been the direct outcome of
the liberal trade policies undertaken and implemented by
successive governments. The liberalisation program of the
government aims at rapid and substantial growth of the
country's economy and besides a harmonious integration
with global economy.

3. • There have been significant changes in approaches and
policies relating to FDI in India in tune with the
developments in the industrial policies and also foreign
exchange situations from time to time. There are four distinct
phases of Government’s policy on FDI in India:
• First Phase (1950-1967): Cautious welcome of FDI
• During this period, India’s development strategy focused on
import substitution industrialization. The availability of
capital, technology, skills, entrepreneurship etc. was very
limited. The attitude towards foreign investments was highly
receptive. Foreign investors were assured of non-
discriminatory treatment at par with domestic enterprises. It
was however, emphasized that the majority interest in
ownership and control would always be in Indian hands. The
incentives and concessions were offered to attract foreign
investments.

4. • Second Phase (1967-1980): Restrictive Policies
• During this phase restrictions on FDI flows were
imposed. The investible requirements of funds
increased due to industrialization and foreign
exchange outflows were increasing due to
technology and inputs imports. Thus government
adopt restrictive attitude towards the FDI to arrest
investments which allow higher outflows in terms of
royalty payments, dividends, interest etc. Foreign
Exchange Regulation Act (FERA) was enacted in
1973 to control FDI inflows.

5. Third Phase (1980-1990): Gradual
Liberalization
• The gradual liberalization of FDI policies in the
80’s occurred due to the deterioration of foreign
exchange position in the wake of oil crisis and low
exports growth. Hence a gradual liberalization on
foreign investment inflows were allowed in the
industrial and trade policies. A degree of flexibility
was introduced in the policy concerning foreign
ownership. The rules and procedures concerning
payments of royalties and lump sum technical fees
were relaxed and taxed were reduced.
• Fourth phase: Post Reform Phase-Important
measures for Promoting foreign Investment in the
post-Reform Period are as follows:

6. • The policy has opened large number of sectors for FDI
with higher level of foreign equity participation.
• The transparency is introduced in the approval
procedures viz automatic approval of FDI up to 51
percent (now up to 100 percent in certain cases) in high-
priority, capital intensive, high technology industries.
• Non-Resident Indian (NRIs) are allowed to invest up to
100 percent in the high-priority industries.
• Foreign technology agreements are also liberalized in
terms that transfer based on the commercial judgment
are freely allowed.
• Foreign Investment promotion Board has been set up to
look into large foreign investment projects.

7. Government Policy for Foreign Capital in
Post- Reform period:
• A special empowered board was constituted to
negotiate with a number of large international
firms and approve direct foreign investment in
selected areas.
• Allowed 100% foreign equity participation for
setting up power plants.
• Disinvestment of equity by foreign investors
allowed at market rates.
• Foreign companies were allowed to use their
Trade mark on domestic sales from may 14,
1992.

8. • FIIs were allowed to invest in a company under the
portfolio investment route beyond 24% of the paid-
up capital. This was further liberalised to without
any limit in 2002-03.
• Foreign equity investments in Non-Banking
Financial Companies was allowed.
• Permitted to open operating subsidiaries.
• FDI up to 100% allowed in telecom sector.
• FDI up to 26% in insurance sector was allowed.
• The defence sector was opened for Indian private
firms with FDI 26% both subject to licensing

9. • In January 2004 the government raised the FDI
limit to 100% in petroleum sector.
• Foreign investment in Banking Sector was
liberalised to 74% under automatic route.
• On January 2008 the government relaxed foreign
ownership norms in aviation, mining, oil refining,
real estate, commodity exchanges, and credit
information companies.
• FDI in multibrand retail was allowed up to 51%
subject to government approval.

10. Year Foreign Investment Inflow Gross inflows/
Gross Investments
₹ Billion US $ Million
1 2 3
2000-01 184.04 4031
2006-07 1030.37 22826
2011-12 2200.00 46552
2015-16 3641.46 55559
2016-17 (P) 4040.57 60220
As on 15 Sept. 2017
Source: RBI data ****