The inflow of FDI in the key industries of India

By Divya Narang & Saptarshi Basu Roy Choudhury on January 29, 2019

India highly depends on foreign investments in the form of foreign direct investments (FDI) to fund its economic growth (Demirhan & Masca, 2008). Amongst all the sectors, the manufacturing sector and service sector have undergone a transformation and experienced high growth rates in the past few years. However, from the data on FDI, it can be observed that a few key industries belonging to these two sectors have boosted at a faster rate than the others and attracted more FDI than the others.

As identified and discussed in the previous article, metallurgical, chemical, pharmaceutical and textile are few of the key industries which have attracted large FDI inflows and showed impressive growth in the post-reform period. The increase in the share of FDI in these key industries can be attributed to favourable Government policies, availability of raw materials, cost competitiveness and greater demand for their final products.

The textile industry is one of the key industries of India

The Indian Government offers flexible policies for foreign investors by allowing 100% FDI in the textile industry via the automatic route (IBEF, 2018). Under this route, foreign investors are allowed to invest without any prior approval from the Government.

Apart from the favourable Government policies, cost competitiveness is one of the major reasons why India is one of the preferred destinations for foreign investment in the textile industry. The ample availability of raw materials like yarn and fabric at low cost offers a comparative cost advantage. Moreover, India is experiencing a comparative cost advantage in terms of manufacturing costs. In addition to this, the availability of labour at a cheap rate reduces the average cost of production which helps to attract foreign investors.

The chemical industry’s key economic drivers in India

The chemical industry has emerged as one of the key drivers of growth in India. There are a number of factors that act in favour of this industry in attracting FDI. The manufacturing of almost all the chemical products has been de-licensed except a few including hydrocyanic acid and its derivatives, isocyanates, phosgene and its derivatives and diisocyanates of hydrocarbons. The Government has also adopted a set of measures to improve the competitiveness of this industry. 100% FDI in the industry is granted, the excise duty is reduced from 14% to 10% and strong anti-dumping laws have been passed to promote FDI in the chemical industry (India Brand Equity Foundation, 2017). In addition, the size of the Indian market and returns of the industry have helped attract foreign investors. The growth of the industry is also attributed to strong external demand for chemicals including agriculture-related chemicals.

The pharmaceutical industry

Prior to the introduction of the Patent Act of 1970, there was no protection in the pharmaceutical industry which made the market undesirable to multinational companies. Under the new patent laws, multinational companies gradually entered the industry and even started outsourcing the patented drugs to India. Furthermore, economic reforms that brought new policies have promoted the growth of the industry and attracted more foreign investment (Tewathia, 2014). Apart from Government policies, the pharmaceutical industry also has the advantage of low-cost raw materials and capital expenditure.

Metallurgical Industry of India

The metallurgical industry in India is supported by the availability of rich reserves of minerals like bauxite, iron ore, copper, zinc etc. The bauxite reserves in India account for about 7.5% of the total world’s deposits. In addition to this, India has favourable demand conditions from various industries including engineering, electrical, infrastructure, automobile components, packaging and so on which is driving the growth in FDI.

Furthermore, Government measures like a liberalized policy regime and approval of up to 100% FDI through the automatic route and reduced customs duty on primary and secondary metals have attracted foreign investors in the sector. India has a well-developed mining and engineering industry in terms of capabilities in plant and machinery for manufacturing, steel and aluminium.

Other key industries that lack FDI inflow

India has displayed rapid economic growth in the past few years. The influx of FDI supported by Government policies is one of the major reasons that can be attributed to its growth. However, only a few industries have been the main recipients of FDI inflows. The textile, chemical, metallurgical and pharmaceutical industries that are supported by the liberal Government policies have shown high growth in FDI inflows. However, India has witnessed a decline in FDI influx in 2017-18 by US$3 billion as compared to 2016-17. This dip in growth rate can be attributed to the failure to attract FDI in some key industries like defence. The agricultural sector is also one of the low recipients of FDI. This sector is facing multiple challenges including over regulations that increase the price risk and lead to uncertain outcomes. In addition to this, inadequate infrastructure facilities can also lead to rising costs. Furthermore, government intervention in the form of huge subsidies has hindered the growth of the sector.



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