Foreign Development Investment in India

Foreign direct investment (FDI) in India has played an important role in the positive development of the Indian economy. The Indian government has been trying so hard to turn India to become an attractive international investors friendly place, they tend to encourage and promote a favorable business environment for foreign investors. It seemed that their hard work is paying back. There has been a big increase on the number of FDI and FDI inflow in India, from year to year (graph 1).

It rose by more than 100%, while the cumulative amount of FDI equity inflows is about US$205. 96 billion from April 2000 to May 2011. India is also rank 2 in global foreign direct investments published by the United Nations Conference on Trade and Development (UNCTAD). They also forecasted that India would be one of the top 5 attractive destinations for foreign investors during 2011 – 2012. In the 2010 European Attractiveness Survey done by a global consultancy firm Ernst & Young, India is named fourth as the most attractive FDI destination (with a share of 22%).

It also forecasted that in the next 3 years, India would become more attractive and ranked second with a proportion of 61%. This rising level of attractiveness is good for India, as FDI has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. FDIs are permitted through financial collaborations. The Ministry of Commerce and Industry of India, has allowed FDI in all sectors including the services sectors (except a few sectors that does not permit FDI beyond a ceiling, such as arms, coal and mining industries).

Almost all FDI regarding activities are brought in through the Automatic Route that is powered by the Reserve Bank for India, which makes it easier for investors. The remaining activities usually have to go through the Government for approval where it will be analyze by the Foreign Investment Promotion Board. Some ownership limits for FDI does exist in some sectors (refer to list 1), however India’s Prime Minister Manmohan Singh try to open up these FDI limits.

As mentioned before, India economy is certainly benefiting from FDIs. One of the benefits is the job opportunities that FDIs bring to the country, which can help to decrease the number of unemployed people. Another benefits is that India can gain knowledge and technology advancement from the foreign countries. For example, India is able to upgrade its civilian nuclear facilities as the civilian nuclear deal between the United States and India allow both countries to transfer knowledge regarding their nuclear energy.

India is striving forward to become more and more attractive, and its low inflation, low debt, and favorable demographics is certainly helping. India’s Commerce and Industry minister Kamal Nath, has even brand India as a “safe and stable investment destination”. The huge damage that Europe is facing from the economic crisis has certainly helped India to ‘shine’ more to foreign investors. However, some investors still refuse to put India as a high priority destination and India seem to always be behind China.

This is due to the lack of physical infrastructure that allows FDI to only be at a few specific regions. Telecommunications, highways, and ports have also created barriers for India to become more attractive. The slow development of railways, water, and sanitation also prevent investors from ‘coming in’. To make matters worse, the federal legislation view FDI as a chance to gain income from corruption and as a hassle of paperwork. With these flaws solved, there is a chance that India can be at the top at being an attractive location for FDI.