Foreign Direct Investment
Foreign Direct Investment (FDI) is an investment made by a company or individual in one country into business interests in another country, typically involving the establishment of business operations or the acquisition of a lasting ownership stake — usually defined as at least 10 percent of equity — in a foreign enterprise.
FDI was distinguished from foreign portfolio investment by the degree of control and the long-term nature of the investment. An FDI investor acquired a meaningful ownership stake with the intention of influencing or controlling business operations, unlike a portfolio investor who sought financial returns without operational involvement. SEBI and FEMA (Foreign Exchange Management Act) regulations in India defined FDI as investment crossing the 10 percent equity ownership threshold.
India attracted FDI through two routes: the automatic route (where no prior government or RBI approval was required, applicable to most sectors) and the approval route (where government approval was necessary, applicable to sensitive sectors like defence, media, and insurance above certain thresholds). The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce administered India's FDI policy and published periodic circulars consolidating the permitted sectoral caps and conditions.
India's FDI inflows grew significantly following the 1991 liberalisation and accelerated further during the 2000s and 2010s. Annual FDI equity inflows grew from around USD 6 billion in 2000 to a peak of USD 84 billion in 2021–22, before moderating somewhat. Key sectors attracting large FDI included computer software and hardware, services, telecommunications, automobiles, construction, and pharmaceuticals. Mauritius, Singapore, the USA, Netherlands, and Japan were consistently among India's largest FDI source countries, though the Mauritius and Singapore routes partly reflected treaty-shopping by investors from other jurisdictions due to favourable tax treaty provisions.
The relationship between FDI and economic development was multi-dimensional. Unlike portfolio investment, FDI brought not just capital but also technology, managerial expertise, global supply chain access, and employment creation. Greenfield FDI (building new facilities) had a direct impact on productive capacity, while brownfield FDI (acquiring existing businesses) primarily transferred ownership without immediately expanding capacity, though it could improve efficiency under new management.
India's FDI policy underwent significant relaxation over 2014–2024 in sectors including defence (74 percent FDI through automatic route), insurance (74 percent), and retail (100 percent in B2B and under conditions in B2C). Foreign investment in Indian government securities and corporate bonds, while technically FPI, was also a significant capital account inflow. The PLI (Production-Linked Incentive) schemes launched from 2020 were explicitly designed to attract manufacturing FDI in sectors including semiconductors, electronics, pharmaceuticals, and renewable energy.