Foreign Direct Investment is an investment to own a stake or control ownership in a business linked to one country.
It is made by an individual or company from another country.
FDI offers direct control either ‘organically’- where a company expands the operations of its business in a foreign country, or ‘inorganically’ where a company buys a company in a foreign country.
FDI was first introduced in India under the period of radical economic change, the year 1991, where India saw its economy open under Liberalisation Privatisation and Globalisation.
It was under Manmohan Singh as FM.
It was introduced under the Foreign Exchange Management Act (FEMA) and has since been a critical monetary source for economic development and business expansion.There are two routes by which India gets FDI:
- Automatic route, where FDI is allowed without prior approval by the government or RBI
- Government route, where a prior approval is required– Foreign Investment Promotion Board (FIPB) oversees this route.
In 2014, under PM Modi’s Make in India initiative, the FDI policy for 25 sectors was liberalised.
In defence, FDI beyond 49 percent and up to 100 percent has been permitted through the government approval route.
There is 100 percent FDI under the government route for trading, including e-commerce.
The government has permitted 74 percent FDI under automatic route in existing pharmaceutical ventures, after which an approval will be required to continue beyond 74 percent and up to 100 percent.
The government has allowed 100 percent FDI in India-based airlines, but a foreign carrier can only own up to 49 percent stake in the venture and the rest can come from private investors including those overseas.
Last year’s budget allowed 100 percent foreign investment in processed food retailing on the condition that it was manufactured in India.
Budget 2016 eased FDI in the insurance and pension sectors through the automatic route, from 26 percent to up to 49 percent.
Presently, infrastructure, automobile, services, railway, pharmaceuticals, telecom, aviation, computer hardware and software are some key sectors for FDI.