FDI Inflows
FDI net inflows are the value of inward direct investment made by non-resident investors in the
reporting economy. FDI net outflows are the value of outward direct investment made by the
residents of the reporting economy to external economies.
Inward Direct Investment, also called direct investment in the reporting economy, includes all
liabilities and assets transferred between resident direct investment enterprises and their direct
investors. It also covers transfers of assets and liabilities between resident and nonresident
fellow enterprises, if the ultimate controlling parent is nonresident.
FDI Inflows declining
The decline in FDI inflows comes at a time when domestic indicators already point towards a
slowdown in consumption and investment activity. India’s economy grew at the slowest pace in
five quarters at 6.6% in the three months ended December, prompting the statistics
department to trim its 2018-19 forecast from the 7.2% previously forecast to 7% in February.
The first set of macro data the new government will have to deal with is the fourth-quarter GDP
data (to be announced on 31 May) that may further decelerate to 6.4%.
The two sectors where FDI inflows dropped the most in 2018-19 are telecommunications (fell
56% to $2.7 billion) and pharmaceuticals (dropped 74% to $266 million).
FDI in the services sector, including financial, banking, insurance and outsourcing businesses,
rose 37.3% in 2018-19, arresting the extent of the decline in FDI inflows.
The telecom sector is going through tumultuous times after Reliance Jio Infocomm Ltd’s entry
in September 2016 brought data tariffs to rock bottom and made voice calls free, making the
sector less attractive for foreign investors. In the case of pharmaceuticals, the price control
mechanism introduced by the government on several essential medicines might have
discouraged foreign investment.
While Mauritius remained India’s top source for FDI, its share declined by 2 percentage points
to 32% in 2018-19, while the share of Singapore rose by 2 percentage points to 20% during the
same year.
Capital gains on investments made in India through companies in Mauritius and Singapore have
become fully taxable from 1 April, as concessions cease to exist on the routes after India signed
new double tax avoidance treaties with both countries. This may further impact FDI inflows into
India from these two countries.
Sales of automobiles across segments in India fell 16% in April to touch the lowest in eight
years, while domestic air travel in April contracted 4.5% for the first time in nearly five years.
The government in its full budget, which is likely to be presented in July, will be tempted to
breach fiscal discipline and go for a demand stimulus
Reason for declining FDI inflow in Pharmaceuticals
According to industry experts and some global pharmaceutical companies in the country, the
reason for a drop in FDI is a mix of regulatory uncertainty in India, the lack of a proper
environment for companies to invest in growing opportunities in this space as well as
divestments by global firms to release capital in the last few years.
There is a lot of uncertainty in the pharma sector, whether it has to do with the pricing
pressures in the US markets, FDA inspections and dark clouds over drug approvals. In the
domestic market, also, there is a push towards generic-generics and reduction in drug prices,”
said a senior executive of a global drug maker. “For an investor, it doesn’t give confidence of an
improved sustainable profitability,”
The key FDI inflow into the pharmaceutical sector in India was through inbound mergers and
acquisitions, and such “large” have happened in the last few years, but have not occurred in the
2018-19 financial year, said Kartikeyan Thangarajan, associate director, India Ratings &
Research
Reason for declining FDI inflow in Telecommunication
The telecom sector though has remained weighed down by some Rs 8 lakh-crore of debt, due
to high historical spectrum prices coupled with severe pressure on revenue and profitability,
due to a brutal price war triggered by Reliance Jio’s disruptive entry some three years ago
which offered free voice for life and data and dirt cheap rates.
The Nordic telecom carrier had come with a long-term view to stay invested in India, it was
forced to leave as the situation became too competitive after Jio entered the market along with
changes in the regulatory system. Both Telenor and Sistema JSFC reportedly lost about $4
billion each on their India telecom investments.
Changes in FDI Inflows
The department for the promotion of industry and internal trade ("DPIIT") has issued Press
Note 4 of 2019 dated 18th September 2019 notifying the changes to the foreign direct
investment policy of the government approved by the Union Cabinet of the Government of
India. The changes are to come into effect from August 28th 2019.
The changes introduced by the Press Note 4 to the foreign direct investment policy circular
2017 ("FDI Policy") are as follows:
(1) Coal and Lignite Mining
Under the Press Note 4, 100% foreign direct investment under the automatic route has been
permitted in Indian entities engaged in coal and lignite mining for captive consumption for
power projects, iron and steel and cement units and for other activities permitted under and
subject to the provisions of the Coal Mines (Special Provisions) Act, 2015 and the Mines and
Minerals (Development and Regulation) Act, 1957. 100% foreign direct investment under the
automatic route has also been permitted in Indian entities engaged in the sale of coal, coal
mining activities including associated processing infrastructure subject to the provisions of the
Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and
Regulation) Act, 1957 and other relevant laws on the subject matter. A clarification has been
provided that "associated processing infrastructure" includes coal washing, crushing, coal
handling and separation (both magnetic and non-magnetic).
The rationale behind this amendment is to attract international players to create a competent
and efficient coal market in India.
(2) Contract Manufacturing
Foreign direct investment in manufacturing was under the 100% automatic route under the FDI
Policy. Press Note 4 however clarifies that foreign direct investment in Indian entities engaged
in contract manufacturing through a legally tenable contract whether on a principle to principle
basis or on a principle to agent basis is also permitted under the 100% automatic route.
(3) Single Brand Retail Trade
Foreign direct investment in SBRT had been permitted upto 100% under the earlier FDI Policy
however investments exceeding 49% had to procure prior government approval and were not
under the automatic route (i.e. the route which required no prior government approval for the
investment). Under Press Note 4 all foreign direct investment in SBRT is permitted 100% under
the automatic route.
The Press Note 4 also introduces changes to the sourcing norms. In all cases of investments
beyond 51%, 30% of the value of the good has to be procured from India as in case of the
earlier FDI policy. However, under the Press Note 4 for the purpose of meeting local sourcing
requirements, all procurements made from India by the SBRT entity for that single brand shall
be counted towards local sourcing, irrespective of whether the goods procured are sold in India
or exported. The SBRT entity is also permitted to set off sourcing of goods from India for global
operations against the mandatory sourcing requirement of 30%. The Press Note also clarifies
that, 'sourcing of goods from India for global operations' shall mean value of goods sourced
from India for global operations for that single brand (in INR terms) in a particular financial year
directly by the entity undertaking SBRT or its group companies (resident or non-resident), or
indirectly by them through a third party under a legally tenable agreement.
Further under the previous FDI policy, an entity undertaking SBRT could only under take retail
trade through e-commerce after opening a brick and mortar store. This requirement has been
relaxed under Press Note 4 which provides that online retail trading can be undertaken prior to
opening a brick and mortar store provided the brick and mortar store is opened within two
years from the date of start of online retail trading.
(4) Digital Media
Press Note 4 introduces a new entry of digital media and permits 26% FDI under the
government approval route in entities that are engaged in uploading / streaming of news &
current affairs through digital media.
The prevailing FDI Policy permits 49% FDI under the government approval route in "Up-linking
of News & Current Affairs' TV Channels and 100% FDI under the automatic route in the Up-
linking of Non- News & Current Affairs' TV Channels/ Down linking of TV Channels".
This entry appears to be a little ambiguous as it is not clear whether uploading / streaming of
non- news & current affairs through digital media would fall under the automatic route. Further
the limit of 26% FDI for digital media is unclear.
Sector wise FDI Inflows in India
Sector wise
700 639.99
600
500 452.97
400 309.63
300
183.37 183.09
200 136.85 136.85
73.3
100 15.03 18.42
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The services sector in India received the highest share in FDIs amounting
to over 639 billion Indian rupees in fiscal year 2019. This sector included
finance, banking, insurance and other non-financial sectors like research
and development, testing, analysis and outsourcing.
The telecommunications sector came second in terms of FDI equity
inflow, amounting to almost three billion dollars that year. Overall, the
country saw the highest highest-ever FDI inflow of over 44 million U.S.
dollars between 2018 and 2019.
Services sector in limelight
All in all, the business services sector in the country seemed to be faring
very well in terms of attention from foreign investors. One possible reason
for this could be because almost 56 percent of the registered foreign
companies in India were under this sector. Out of this, most companies
were registered in the state of Maharashtra, followed by the capital city
of Delhi indicating a good business trajectory.
FDIs to aid an ailing economy
foreign investments play a critical role in developing countries since they
help bring in resources, latest technologies and best practices that help
push economic growth on to a higher curve. In August 2019, India opened
its doors further to FDIs by loosening its grip on the sourcing
requirements for various sectors. The government also allowed 100
percent FDI in sectors like commercial coal mining and contract
manufacturing, hoping to diversify its supply chains. These were just
some of the measures being taken by the government in order to give a
stimulus to the ailing economy.
