Strategies for Attracting Higher Foreign Investment in India: Initiatives and Policies

Posted On - 19 July, 2023 • By - Sreedevi Pillai

Introduction

In the fiscal year 2021-22, India witnessed a record high of US$ 83.57 billion in foreign direct investment (FDI) inflows. Over the past seven fiscal years (2014-2021), FDI inflows amounted to US$ 440.27 billion, which accounts for approximately 58% of the total FDI inflows of US$ 763.83 billion during the past 21 fiscal years (2000-2021).

The top five countries contributing to FDI equity inflows between April 2014 and August 2021 were Singapore (28%), Mauritius (22%), the United States (10%), the Netherlands (8%), and Japan (6%). In terms of sectors, the computer software and hardware industry attracted the largest share of FDI inflows at 19% during the same period, followed by the service sector (15%), trading (8%), and telecommunications and construction (infrastructure) (7% each).

India has implemented several strategies to attract foreign investments, including measures like reducing corporate tax rates, addressing liquidity issues in non-banking financial companies (NBFCs) and banks, enhancing the ease of doing business, and implementing reforms in the FDI policy. The government has also taken steps to reduce the compliance burden and promote domestic manufacturing through initiatives such as Public Procurement Orders, Phased Manufacturing Programme (PMP), and Production Linked Incentive (PLI) schemes across various ministries.

To further encourage investment, policies like India Industrial Land Bank (IILB), Industrial Park Rating System (IPRS), National Single Window System (NSWS), National Infrastructure Pipeline (NIP), and National Monetization Pipeline (NMP) have been introduced.^[1]

Fostering FDI Orientation: Evolving Initiatives

One of the primary game-changers in attracting more investments from foreign nations has been the budgetary measures implemented over the years. These initiatives, aimed at improving the ease of doing business, have been instrumental in attracting more FDI, including those from the United States. Several changes have been introduced to foster a favorable investment climate and encourage greater FDI, such as:

Special tax incentives have been introduced to attract long-term foreign investors, particularly sovereign wealth funds.
The budget focuses on increasing income and purchasing power, emphasizing strong economic fundamentals and inflation control.
Measures to boost the digital industry and infrastructure investments highlight India’s attractiveness for global investments despite the growth slowdown.
Simplification of GST and relaxation of audit requirements for MSMEs, instant PAN issuance, pre-filled tax returns, and faceless appeals have improved the ease of doing business.
The removal of the dividend distribution tax (DDT) has been well-received by foreign investors, eliminating a major disincentive for expanding their businesses in India.
Schemes promoting electronics manufacturing and medical device adaptability aim to boost domestic production, exports, and cost-effective manufacturing.
The budget demonstrates a comprehensive, growth-oriented, and transformative approach to attract foreign investments and shift focus from countries like China to India.

Government Initiatives

India has witnessed a surge in its attractiveness as a destination for foreign direct investment (FDI) due to the implementation of favorable government policies. The country has introduced a range of schemes and policies that have significantly bolstered its FDI, with particular emphasis on emerging sectors like defense manufacturing, real estate, and research and development. Notable government initiatives in this regard include:^[2]:

The Indian government has raised the limit for foreign direct investment (FDI) in the defense sector to 74% through the automatic route and 100% through the government route.
Amendments to the Foreign Exchange Management Act (FEMA) now permit up to 20% FDI in LIC, an insurance company, through the automatic route.
The government is considering easing scrutiny on certain FDI from neighboring countries.
The initiatives such as PM Gati Shakti, single window clearance, and the establishment of a GIS-mapped land bank are anticipated to facilitate an increase in FDI inflows.
The Space Activity Bill, expected to be introduced in 2022, will define FDI regulations in the Indian space sector.
In September 2021, India and the UK agreed to enhance trade and strengthen bilateral ties through increased investment.
The Union Cabinet announced in September 2021 that 100% FDI in the telecom sector would be allowed via the automatic route.
In August 2021, amendments to the Foreign Exchange Management Rules raised the FDI limit in the insurance sector by 74%.
Special Economic Zones (SEZs) have been established with top-notch facilities, providing tax exemptions for the first five years.
Labor laws have been made more flexible to incentivize companies and increase profitability.[3]

Sector-Wise Incentives Provided By The Government Of India

1. Pharmaceutical Industry

To safeguard India’s prominent position in the pharmaceutical industry, the Government of India has implemented the following initiatives in response to the COVID-19 pandemic:

Projects related to active pharmaceutical ingredients (APIs) and bulk drug intermediates will receive faster environmental clearances.
The Directorate General of Foreign Trade (DGFT) has revised the export policy for various APIs, including vitamins B1, B6, and B12, tinidazole, metronidazole, acyclovir, progesterone, and chloramphenicol, removing their previous restrictions.[4]

2. Medical Devices

The COVID-19 pandemic has brought about unprecedented shifts in the pace of operations within the medical devices industry. In India, this industry encompasses major multinational companies with extensive service networks, along with small and medium enterprises (SMEs). The current market size of the medical devices industry in India is estimated to be $11 bn.To propel further growth within this sector, the Government of India has undertaken the following initiatives:

Over 280 units have been set up in Special Economic Zones (SEZs), focusing on the production of vital goods such as pharmaceuticals and medical devices.
Imported essential items like ventilators, masks, personal protective equipment (PPEs), test kits, and their manufacturing inputs have been granted exemptions from basic customs duty and health cess until September 2020.ESDM (Electronics Sector)

To establish India as a global hub for Electronics System Design and Manufacturing (ESDM) and advance the goals outlined in the National Policy on Electronics (NPE) 2019, the Ministry of Electronics and Information Technology (MEITY) has introduced three schemes. These schemes, namely the Production Linked Incentive Scheme (PLI), Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), and Modified Electronics Manufacturing Clusters Scheme (EMC 2.0), were notified by the MEITY in April 2020.

3. Production Linked Incentive Scheme (PLI)

The Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing aims to provide a financial incentive to attract significant investments in the electronics value chain, including mobile phones, electronic components, and ATMP units, from foreign investors. The scheme provides support to food manufacturing entities that fulfill the specified minimum sales criteria and are ready to make the required minimum investment for expanding their processing capacity and promoting their brands internationally. The government has set a target of granting Production Linked Incentives amounting to INR 40,951 crores over a span of five years..[5]

4. Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS)

The objective of the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) is to enhance the manufacturing ecosystem for electronic components and semiconductors. This scheme aims to encourage the production of electronic components and semiconductors to meet domestic demand and create employment opportunities in this sector. Under this scheme, incentives totaling up to INR 3,285 crore will be provided over a duration of 8 years..[6]

Steps Taken By RBI

The Reserve Bank of India (RBI) has implemented several measures to enhance foreign exchange (forex) inflows. These measures comprise:

Exempting incremental deposits in Foreign Currency Non-Resident (Bank) [FCNR (B)] and Non-Resident (External) Rupee (NRE) accounts from the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.
Granting permission to banks to raise fresh FCNR (B) and NRE deposits without adhering to existing regulations on interest rates until the end of October 2022.
Including all new issuances of Government Securities (G-Secs) with 7-year and 14-year tenors under the Fully Accessible Route (FAR) for Foreign Portfolio Investors (FPIs).
Exempting FPI investments in G-Secs and corporate debt made until October 31, 2022, from the short-term limit.
Allowing Foreign Portfolio Investors (FPIs) to invest in commercial paper and non-convertible debentures with an original maturity of up to one year.
Temporarily increasing the limit for external commercial borrowings (ECBs) under the automatic route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion.
Raising the all-in cost ceiling under the ECB framework by 100 basis points, subject to the borrower having an investment-grade rating.
Granting permission to Authorized Dealer Category-I (AD Cat-I) banks to utilize overseas foreign currency borrowings for lending in foreign currency to entities for a broader range of end-use purposes, in addition to exports.[7]

Conclusion

Promoting and attracting foreign Investment in India is crucial for the country’s economic progress and advancement. India has successfully implemented various schemes and policies to create a favorable investment climate. These initiatives have effectively enticed foreign investors and fostered a conducive business environment. In recent times, India has emerged as a significant global destination for FDI, with a high level of interest from international investors.

Corporate tax reductions and simplified labor laws have further enhanced India’s appeal. FDI restrictions have also been significantly reduced over the years. India’s potential as an attractive market for both short-term and long-term investments remains strong. The low-skill manufacturing sector is particularly promising for FDI.

These factors combined could result in FDI inflows of US$ 120-160 billion annually by 2025. Initiatives, like Make in India, Startup India, Digital India, and GST, have yielded positive outcomes, boosting competitiveness, economic growth, and employment opportunities. However, sustaining and further increasing foreign investment requires the government’s ongoing commitment to reforms, promoting stability, and addressing any remaining challenges. By doing so, India can continue its trajectory as a global investment destination, leading to long-term economic prosperity.

^[1]https://pib.gov.in/PressReleasePage.aspx?PRID=1782353

^[2]https://www.ibef.org/economy/foreign-direct-investment

[3]https://www.ibef.org/economy/foreign-direct-investment#:~:text=The%20government%20has%20recently%20made,over%20the%20previous%20financial%20year

[4]https://pib.gov.in/newsite/PrintRelease.aspx?relid=199758

[5]https://www.meity.gov.in/esdm/pli

[6]https://www.meity.gov.in/esdm/SPECS

[7]https://pib.gov.in/PressReleasePage.aspx?PRID=1846088

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch