While India is one of the fastest-growing economies in the world, it has also emerged as one of the top destinations for foreign direct investments. A large consumer base, growing disposable incomes, and expanding digital infrastructure are some of the key drivers in the evolving global preference for investing in India. Indeed, foreign direct investments are an essential driver of a country’s economy since they boost the job market, and technical knowledge base and provide non-debt financial resources.
Over the years, successive governments in India have understood the potential of overseas investments and liberalized FDI policies. There are two routes to making foreign direct investment in India. The automatic route allows investments without needing any approval or license from the government. These sectors include air transport, healthcare, IT and BPM, manufacturing, and financial services. The sectors that require prior government approval fall under the government approval route including banking and the public sector, food products retail trading, print media, satellite, and others. The amount of investment depends on the sector, however, over the years, the government has allowed 100 percent FDI in various sectors. There are currently nine sectors in which FDI is prohibited, including lottery, gambling, chit funds, real estate business, and cigarettes.
The gross foreign direct investment inflows to India were valued at nearly 71 billion U.S. dollars in the financial year 2024. The computer hardware and software sector constituted the largest part of the total inflows. However, there was a decline in total FDI inflows in India in the last two years as compared to the financial year 2022, the year that witnessed the highest-ever FDI inflow of over 84 billion U.S. dollars. The Russia-Ukraine war and global economic uncertainties are considered some of the reasons for this fall. This decline mirrored a broader global phenomenon amid investor uncertainty and the declining profitability of multinational corporations. FDI relative to GDP stood at 1.5 percent.
Government sources expect the Production-linked incentives and export promotion through SEZs to attract overseas investments amid geopolitical headwinds and tighter interest rates. The lower house of the Parliament approved the union Jan Vishwas Bill 2023 in the Indian parliament that amends 42 laws to decriminalize ‘minor’ offenses and is touted to reduce the compliance burden on individuals and businesses and ensure ease of doing business. As per experts, the FDI growth in 2024 is expected to remain sluggish, however, India remains one of the most attractive FDI destinations in the world.
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