Trends of foreign direct investment in India

Foreign direct investment in India is the most influential financial resource, especially for the emerging sectors. Foreign direct investment helps in exploiting a wide range of opportunities and utilizing the same to attain the desired level of development in the nation (Gola, Dharwal, & Agarwal, 2013). The world economy including both the developed countries and other emerging countries are facing some varying trends of foreign direct investment in recent years.

The major player that is coming into view of late in India. Analyzing the trend of foreign direct investment in India shows that it is rising and the main reasons for such an increase are due to new government policies and various initiatives such as Make in India. The country has faced elevated trends of the foreign direct investment due to building investor-friendly climate in the country, thereby enabling the ease of doing business. India has been able to climb up to 10th position in 2015 from 15th position in 2014 as a trusted nation for Foreign direct investment. As a result, India has attracted foreign direct investments worth of $40 billion for the financial year 2015- 16, which was  29.2% higher than the last year (UNCTAD, 2016).

Sources of foreign direct investment in India

By catching the attention of the economies worldwide, India has been able to gain a huge sum by the way of equity inflows. Singapore has become the largest investor with a total investment of $13.69 billion during the financial year 2015-16. Followed by Singapore are the economies including Mauritius and USA investing $8.35 and $4.19 billion respectively. The aggregate Merger and Acquisition (M&A) deals as well as the private equity deals, which are the methods of foreign direct investment inflow, have grown up 2 times from the last year of 2015 (IBEF, 2016a).

Foreign direct investment in India has shot up 318.2 times starting from the year 1991 to 2005, from $129 million in 1991-92 to $41050 million (Dutta & Sarma, 2008). Before the year 2015-16, Mauritius was the topmost investor in the country as succeeded by Singapore. Still, the country is the major investor with its cumulative percentage share to total inflows being 34% more than double the percentage of Singapore.

The report of the department of industrial policy and promotion has shown that India has been able to gain value in various sectors including the service sector, information technology (IT) sector, automobile industry, pharmaceutical sector, power industry and construction business from the period of 2000 until 2015.

Major sources of foreign direct investment in India
Major sources of foreign direct investment in India

Trends of foreign direct investment in the service sector

The service sector has been able to draw the highest amount of foreign direct investment equity in the country, totalling up to $240.57 billion during 2000-2015. In 2015 the total amount of foreign direct investment in this sector amounted to $27.63 billion (DIPP, 2015). From 1991-2000, the share of service sector in the foreign direct investment in India was 15.2% as compared to the share in 2000-2011 is 19.9%.

The notable increase in the foreign investments in the service sector from the year 2014 was due to the current government coming in power and introducing a more investor-friendly climate. The major reason for such a rise in foreign direct investment in this respective sector includes the various initiatives taken by the government. The investment cap has risen in various sectors including the insurance sector from 26% to 49% and others including defence and railways. Changes in the timelines of the approval of foreign direct investment projects have also contributed to such growth of investment in this sector (IBEF, 2016).

Inflow of foreign direct investment in service sector
The inflow of foreign direct investment in the service sector

Trends of foreign direct investment in the information technology sector

The information technology sector is the second most attractive industry for foreign investments in India. The total inflows in this sector have reached the mark of $108.13 billion in 2015 since 2000 and in the year 2015, it amounted to $34.3 billion (DIPP, 2015). Some notable motivation in this regard is that the IT industry in the country is rapidly growing and the availability of cheap labour that is highly attracting the companies from the overseas market. Again the turning year in this regard is the year 2014.

Inflow of foreign direct investment (in million $) in hardware and software industry
The inflow of foreign direct investment (in million $) in hardware and software industry

Trends of foreign direct investment in the construction industry

The construction business is again a major sector attracting foreign direct investment in the country from the past 15 years. The industries draw $113.8 billion foreign direct investment starting from the year 2000 till 2015. Various initiatives introduced by the Indian government such as Make in India helps to attract a large amount of foreign direct investment in this sector. However, the influx of foreign direct investment in the year 2015 dipped to $0.67 billion (DIPP, 2015). It is observed that even though the amount of investment is decreasing from the year 2011 itself, but its cumulative inflows from the year 2000 have been the second highest, only after service sector. The rise of foreign direct investment in such sector owes it to the rising opportunities in the power sector including power generation, distribution, transmission and equipment. Besides, the infrastructure sector has also gained momentum on an average from the year 2000. Foreign direct investment in the construction sector contributes 9% to the total foreign direct investment inflows in the country (IBEF, 2016b).

Inflow of foreign direct investment (in million $) in construction sector
The inflow of foreign direct investment (in million $) in the construction sector

Roots of foreign direct investment

Foreign Direct Investment has been able to expand its roots in the country and is still the prospects of investment is higher. The business environment in India has become investor friendly because of the various policies formed by the government that are promising in this regard. Some notable policies have been made in the sectors mentioned above that can prove to be advantageous in the coming period of time for the economy of the country.

The construction industry is going to have a higher reach in the country as the Government has proposed to work under the Public Private Partnership projects in the infrastructure projects. Along with it, the government has also proposed some major reforms in the IT sector by making the fundraising norms easier and simplifying the taxation rules. Investment in financing, insurance, business sector and the real estate sector attracted towards the tax haven countries as the rules for foreign investors were complex. Besides, allowing 100% foreign direct investment in Asset Reconstruction Companies will surely help in extending the roots of foreign investments in the country.

As far as the growth of service sector is concerned, more value to the service sectors including the health, transport, tourism, communication and education has only lead to such sector becoming the topmost sectors for investments in the country. It is because the government is taking steps towards digitization of the nation.

References

  • DIPP. (2015). Fact Sheet of FDI.
  • Dutta, M. K., & Sarma, G. K. (2008). Foreign Direct Investment in India since 1991: Trends, Challenges and Prospects.
  • Gola, K. R., Dharwal, M., & Agarwal, A. (2013). Role of Foreign Direct Investment in the Development of the Indian Economy. GYANPRATHA – ACCMAN Journal of Management, 5(1), 1–10.
  • IBEF. (2016a). Foreign Direct Investment.
  • IBEF. (2016b). Infrastructure Sector in India.
  • IBEF. (2016c). Service Sector in India.
  • UNCTAD. (2016). World Investment Report 2016.

Himani Madaan

Research analyst at Project Guru
Himani is a post graduate in Masters of Business Economics from Panjab University, Chandigarh. Inferential statistics is her core area of interest and she works on several statistical software such as SAS, SPSS and Excel.
Himani Madaan
3 thoughts on “Trends of foreign direct investment in India”
  1. Avatar Deepanshi pandey 7 months & 3 weeks ago

    It is very helpful for india

  2. Avatar Bhaarat marele 7 months & 3 weeks ago

    Very helpful

  3. Avatar Soumitra Tiwari 7 months & 3 weeks ago

    Nice article.

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