Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment. Indian Economy Investment models.

Key Phrases: Covid-19, World Investment Report, UNCTAD, Foreign direct investment, Make in India, Atmanirbhar Bharat, DPIIT, macroeconomic variables, Government policies.

Context:

• Despite the major slowdown in the global economy induced by the Covid-19 pandemic and the projections of World Investment Report of expected decline in FDI flows of 30-40 per cent, the resilient Asian economies witnessed favourable FDI flows which were rather higher than the global average (UNCTAD, 2020). Additionally, South Asia experienced a robust surge in FDI during this period, with Indian seeing a 27 per cent rise.

Rising Trend of FDI in India:

• ‘Make in India’ and ‘Atmanirbhar Bharat’ campaigns coupled with the strengthening of India’s footing in global supply chains have given momentum to FDI inflows over the past few years. In 2017-18, the inflows surpassed $60 billion for the first time ever and the Department of Promotion of Industry and Internal Trade (DPIIT) put FDI growth at 14 per cent in 2019-20, the highest in four years.
• The Government of India amended the FDI policy in 2014 to increase FDI inflow. In 25 sectors,FDI was increased to up to 100% and up to 49% in the insurance sector. Following this, India became the top destination for FDI overtaking China and USA.
• According to DPIIT data, the main investor in India is Singapore, comprising 29% of the total FDI followed by USA at 23%, Mauritius at 9%, and Netherlands at 6%. Other investors include Japan, UK, Germany,France, UAE and Cyprus.
• The first wave of pandemic prompted around 1,000 companies to shift their base out of China, with nearly 300 of them being in the areas of medical and electronic devices, mobiles and textiles. For India, companies like Lava International with over 600 employees clarified its intention to shift its base to India from China.
• With Apple’s manufacturing partner, Pegatron, already in place in India, it is expected to infuse $29 billion in the coming years under the Production Linked Incentives (PLI) scheme. Corporate giants like Silver Lake, Google, Facebook, Foxconn, Saudi Arabia’s PIF, General Atlantic Singapore, Hitachi, Walmart and Catterton are also expected to invest billions of dollars in the Indian economy.

Impact of FDI:

• A study has estimated the impact of expected FDI inflow on macroeconomic variables. The results indicate an estimated increase of 5.68 per cent in India’s GDP. The industrial output of sectors like metals, construction, machinery and equipment, motor vehicle parts, computer, electronics, and optical products are expected to receive a huge boost relative to others.
• Exports are also expected to witness a rise, because of the FDI-fuelled increase in scale, quality standards and technology transfer, along with enhanced employment opportunities.
• FDI strengthens the balance sheet as it raises the assets of the companies. Profits of the businesses increase and labour productivity too increases. Per capita income increases and consumption improve. Tax revenues increase and government spending rises.

Government's key policy measures:

• Increased FDI in defence manufacturing
  • The FDI limit in defence manufacturing under automatic route has beenraised to 74% from 49%, to attract global defence majors to set up manufacturing facilities in India.
• Amendment restricting opportunistic takeovers
  • Government approval is mandatory for an entity of any country with which India shares land borders before investing.
• Availability of land
  • The land has been a major impediment for foreign investors in India. To attract companies exiting China, the government has identified and is developing a total area of 461,589 hectares.
  • Exploring the opportunity to utilise unused land available in special economic zones, which already have a robust infrastructure in place.
• Identification of 10 mega clusters across 9 states
  • Attractive destinations for companies to set up production base.
• Tax holiday to win new investments
  • The government proposes to give a 10-year full tax exemption to companies investing upwards of $500 million
• Building of local supply chain capacity
  • Calibrated trade policies, nudging smartphone companies to manufacture display panels and touch assembly locally.

Way Forward:

• Government policies/decisions are of crucial importance in creating a conducive environment for global investors. The disruptions induced by the pandemic have given opportunities for India to expand its global footprints. The government should strive to strengthen the FDI environment through an array of policy initiatives and reforms at all levels.

Source: The Hindu BL

Mains Question:

Q. What is Foreign Direct Investment? Why is it important for developing counties like India? Examine.