FDI in India – The Permitted Sectors

Being a key driver of economic growth to raise global competitiveness, FDI plays an important role in economic growth and stability. The Team of Legal Window will assist you with the various routes and benefits of FDI in India. Let’s take glimpses at forms of pooling investment in a domestic country from the rest of the world i.e., Foreign Direct Investment (FDI). Any Foreign company which has the urge to invest in the Indian domestic market, then the routes of FDI provided by the Indian Government. FDI is a way of Investment to acquire ownership. FDI includes Equity capital, long-term capital and short-term capital.

Meaning of FDI in India 

FDI is the method of investment across the border. An investor, resident i.e., an individual or company make an investment in another country for acquiring ownership. FDI is a major source of investment for economic growth and development. Foreign companies may directly invest in the private sectors of the country. FDI mainly includes “merger, amalgamation, acquisition, reinvestment of earned profit”.

FDI means the inflow of money, skills, expertise, and knowledge as well as technology. An economy that has growth prospects, as well as skilled labour, attracts more FDI. In India, FDI is regulated by the Department of Promotion of Industry and International Trade (DPIIT) under the Foreign Exchange Management Act, of 1999(FEMA). 

India is a country with cheap labour and a dynamic business environment attracts large FDI. After the 1991 Economic crisis, FDI substantially raised in India. FDI is a key element of any economy to ensure economic development with stability.

Types of FDI

Mainly, FDI is of two types:

• Horizontal: Horizontal FDI means expanding the same activities of the business in another country. Under such FDI, a company invests in another company located in a different country, where both companies are producing similar products.
• Vertical: Vertical FDI means expanding business activities in another country but for different supply chains. Vertical FDI is further divided into backward vertical integration and forward vertical integration.

Other two types of FDI are:

• Conglomerate: Under this type of FDI, businesses take on different activities in a foreign country i.e., Penetrating a new country and an entirely new market.
• Platform: Under this type of FDI, business activities are expanding in another country and then exporting to a third country.

Routes of FDI in India        

• Automatic route: FDI is allowed without prior approval of the Government or Reserve Bank of India. the Application is not required under the Automatic Routes.
• Government route: FDI is allowed with the approval of the Government. The foreign investor has to file their FDI proposal under the Foreign Investment Facilitation Portal managed by DPIIT.

Permitted sectors of FDI in India

Following are the sectors which are permitted for FDI in India

• Agriculture and Animal husbandry.
• Automobiles and Auto Components.
• Banking Sector.
• Biotechnology
• Broadcasting
• Goods and services.
• Construction
• Investment Company.
• Healthcare
• Insurance
• Pension
• Pharmaceuticals
• Print Media.

Three broad categories of permitted FDI India

Prohibited sectors of FDI in India

The following are the prohibited sectors of FDI in India are:

• Lottery Business
• Gambling and betting, including casinos
• Chit funds
• Nidhi Company
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business or Construction of Farm Houses.
• Manufacturing of cigars, Cheroots, cigarillos and cigarettes, tobacco.
• Atomic energy and railways.
• Foreign technology collaborations.

Methods of Foreign Investment (FI) in India under FDI

There are certain methods of FI in India as per FDI. These are:

• Subscription to Memorandum of Association.
• Merger/de-Merger/Amalgamation.
• Private Placement.
• Right issue or Bonus issue.

Importance of FDI in India

There are certain significances of FDI in India. These are discussed below:

• Foreign capital inflow: FDI helps to bring in large foreign capital which raises government treasury.
• Helps in improving Balance of Payments: FDI helps to boost the stability of the country by enhancing exports and falling imports, indicating a positive Balance of Payments. It shows economic development with stability.
• Development of human capital resources: Human Capital refers to knowledge, expertise, skills, experience and competitiveness. FDI promotes the Human capital of the economy. FDI is bringing marketing as well as management skills.
• Generates employment opportunities: Another benefit of FDI is generating employment opportunities in a country like India.
• GDP growth: Aggregate output of the economy improves, resulting in economic growth helping to develop backward regions of the economy and improve the standard of living.
• Increasing productivity: FDI brings the latest technology as a part of the investments, consequently efficiency improves, and high productivity emerges in the economy.
• Creating a competitive market: FDI helps in developing a competitive market by breaking the domestic monopoly. Consumers get the opportunity to access a large variety of products in the market.

Takeaway

With the dynamic business environment, more sectors grow in the market through FDI. The government of India has amended the FDI policy to attract more foreign investment by providing routes of FDI. A large category of permitted Sectors for FDI in India increases the demand for the Indian rupee. Recently, as per the reports, India is among the top 10 global economies for FDI. The major sectors like construction activities, computer software and hardware, Rubber Goods, Retail Trading, Drugs and Pharmaceutical and Electric Equipment have jumped in equity compared to the previous year. FDI may help to stimulate the investment level, leading to a rise in income and employment.