Foreign Direct Investment Surge: Unprecedented Transformation

Let’s understand what foreign direct investment (FDI) is, how foreign direct investment works, and how this foreign direct investment affects our economy.

What is Foreign Direct Investment (FDI)? Foreign Direct Investment (FDI) refers to investment made by a company or a person from one country into a business or property in another. This can include acquiring a significant ownership stake in the foreign company, establishing new business operations, or investing in new projects.

Types of Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) comes in various forms, each with different implications for the investing and host countries. There are different types of FDI, each with different implications for the investing and host countries.

Here are some of the main types of Foreign Direct Investment (FDI):

1. Greenfield Investments:

Greenfield Investment is a type of investment undertaken by a firm intending to establish its operation in a new country by creating a new business or producing a factory from scratch.

Example: A technology firm builds a new research and development center in another country.

2. Mergers and Acquisitions (M&A):

This ranges from the acquisition of an already established firm, or the merger of a firm in a foreign country.

Example: A multinational corporation purchases a local company in the target country to expand its market presence.

3. Joint Ventures:

This comprises establishing a new business venture together with a domestic organization in the host nation. The two are affiliated having identical ownership structures, equal risks, and a proportional share of profits.

Example: A U.S. automotive company forms a joint venture with a local manufacturer in China to produce vehicles.

4. Strategic Alliances: This is a type of business relationship in which two or more companies from different states cooperate and accomplish specific operations or actions and do not legally merge.

Example: A global pharmaceutical company and a local biotech firm collaborate on developing a new drug.

5. Acquisitions: This is a kind of M&A where an investing company buys a substantial part of equity or many votes in a foreign company.

Example: A European retail chain acquires a major retailer in Brazil.

6. Brownfield Investments: This includes buying existing plant facilities or businesses; the latter usually includes the rehabilitation or enlargement of these facilities.

Example: A foreign company buys and upgrades an old manufacturing plant in the host country.

7. Wholly Owned Subsidiaries: This means that through direct investment a company establishes or buys an enterprise in a foreign country and exercises exclusive control on it.

Example: A multinational corporation establishes a fully owned subsidiary in a foreign market. FDI is not only about earning dollars, it’s about building trust in the economy. A trust toward people.

How does Foreign Direct Investment Work? When individuals in a particular country invest in businesses, properties, or other assets in another country they engage in cross-border investment. The government may have rules that relate to the amount of equity ownership that can be exercised by the foreign investor, the areas that are open for investment amongst other regulatory frameworks that may pertain to investment in the host country. Shareholders usually realize their returns on the shares that they hold, which may be redistributed back to their country of origin, or reinvested in the host country.

How this Foreign Direct Investment Effected Our Economy?

Let’s understand how this foreign direct investment affected our economy:

India’s enormous growth can be largely attributed to substantial Foreign Direct Investment. If we dig deeper, we will discover India’s total inflow since independence amounts to US$950 billion. But, what makes the difference even more striking is the rate of inflow. More than 50% of India’s net FDI inflows since independence have come in the last 90 months.

If you break down this net Foreign Direct Investment, this money inflow is from 162 countries in 8 years which came across 61 sectors.

The calculation shows that 93% of the total FDI received, came through the open route (also known as the automatic route). A variety of sectors that are open to FDI via automatic route are as follows:

Agriculture and Animal Husbandry Infrastructure Manufacturing Mining and Exploration E-commerce (Marketplace Model) Pharmaceuticals (Greenfield Projects)

But, we have some sectors that remain prohibited for FDI such as:

Atomic Energy Lottery Businesses Chit Funds

Gambling Real Estate Business (Excluding development of townships, construction of residential /commercial premises, roads and bridges, etc.)

Manufacturing cigars, cigarillos, cheroots, using Tabaco or any of its substitute)

FDI is not only about earning dollars, it’s about building trust in the economy. A trust toward people.

How Pouring of Foreign Money Affect Real Estate? 1. Augment of Property Value Boost in demand for properties can be increased by an Inflow of overseas capital, raising the prices of real estate. This is particularly witnessed in major cities that attract international investors.

High-end properties are mostly targeted by international investors, leading to the boom of the luxury market.

If we consider the average property value in India that would be estimated to be 7500 Rupees per square foot.

2. Economic Impact

Construction activity can be Enhanced by investment, which will indirectly create jobs and Invigorate the local economy.

TGeneration of High property tax revenue, giving the government the luxury to spend on transactions.

HIndia’s gross tax revenue, in 2023, was projected to grow by 10.4% over the previous fiscal year which accounts for 27.58 trillion rupees.

3. Currency Flux Exchange rate:

Foreign currency’s value relative to local currency can affect the layer of investment. A favorable value for the exchange rate can attract a lot of buyers and investors

4. Market Stabilization

Foreign Direct Investment can provide stability in a market by widening the investor base and reducing dependence on the local economic environment.

5. Demographic Shifts Changes in the demographic makeup of neighborhoods can be seen due to a shift in foreign investment in the economy.

Limits of Foreign Direct Investment in India: Specific Sectors

Sectors Limits • Banking 20% for the Public Sector and 74% for the Private Sector • Insurance 74% • Asset Reconstruction Companies 100% • Credit Information Companies 100% • White Label ATMs 100% • Pension Sector 49% • Agriculture and Animal Husbandry 100% • Food Products Retail Trading 100% • Core Investment Company 100% • Multi-brand Retail Trading 51% • Broadcasting Content Services 49% • Uploading or Streaming of News and Current Affairs 26% • Investment by Foreign Airlines 49%

But we have some sectors that remain prohibited for FDI such as:

Atomic Energy Lottery Businesses Chit Funds Gambling Real Estate Business (Excluding development of townships, construction of residential /commercial premises, roads and bridges, etc.) Manufacturing cigars, cigarillos, cheroots, using Tobacco or any of its substitute)

What Changed in India Over These Years? Real GDP has gone up in the past few years. Thus, more consumption in the economy. The size of the GDP of India leaves some countries behind Russia, Italy, Brazil, France, UK. A visible rise of the middle-class economy, particularly middle to higher class. As of 2021, Middle-class constituted 31% of the population and will rise to approx. 60% in 2047. In recent years Indians have had increased access to bank accounts, which has enabled the government to undertake much more targeted fiscal subsidies through direct transfers, making sure the beneficiaries are directly accessed instead of any media. One such success story is scripted through UPI which reached approx 10.24 billion transactions per annum.

Unlike the USA and China, India created an agnostic technology platform by imposing open architecture, fostering interoperability, and avoiding dependence on any single technology stack. 2/3rd of India’s GDP is driven by domestic demand, which clearly shows the state of our nation. Our nation’s domestic demand is ahead of supply. The surge in Foreign Direct Investment to capitalize the demographic dividend and free access to the burgeoning Indian market.

Last 10 Years Flow of Foreign Direct Investment in India The table below provides the inflow of foreign direct investment in India over the past decade, with data sourced from UNCTAD.

Financial Year (April-March) Total FDI Inflow (US $) % of GDP 2013 28.19B 1.52% 2014 34.58B 1.70% 2015 44.06B 2.09% 2016 44.48B 1.94% 2017 39.90B 1.51% 2018 42.15B 1.56% 2019 50.55B 1.78% 2020 64.07B 2.41% 2021 44.73B 1.42% 2022 49.35B 1.47% 2023 28.16B 0.71% Such reasons and many more shows why India deserve this huge amount of influx.

Why Foreign Companies Want to Invest in India? 1. Skilled Labour Force By 2047, India will have 21% of the world’s workforce. With 30 people moving to cities per minute, India will create a population similar to the USA in 10 years. Every year, there is a large supply of skilled labor in foreign IT sectors, witnessed by the inward flow of foreign remittance. The total inflow of foreign remittances in 2023 is estimated to be $125 billion.

2. Government Reforms A. RERA Real Estate Regulatory Authority, introduced in 2016, functions to ensure transparency and accountability. Easing FDI norms (allowing 100% FDI under automatic routes in construction development projects). Relaxing FDI rules for affordable housing. Initiatives include forming the Smart Cities Mission and Housing for All.

B. REITS Real Estate Investment Trusts allow large-scale investments. REITS typically own and operate income-producing real estate. REITS do not develop properties to resell but to operate them as part of their investment portfolio.

C. Large Growing Markets The luxury market is projected to increase by $85 billion by 2023. Sectoral growth is evident in sectors like software and hardware, construction, services, trading, and telecommunications.

Conclusion India remains one of the most open economies on the planet, with the private sector and global partners playing a role. The number of opportunities India presents is unmatched. Growth is inclusive.

A clear statement can be made—India’s unprecedented transformation has just begun!