October 13 2017

Foreign Direct Investment (FDI) and Portfolio Investment India

In August 2017, FDI inflows surged to a record high of 8.6 billion USD, an increase of 4.6 billion USD from July 2017.

Published monthly by RBI. Update till the month of August 2017 (published on October 13th, 2017)

Recent Data Trend

Total investment inflows for the month of August increased to 9.1 billion USD. The foreign direct investment (FDI) into the country reached an all-time high of 8.6 billion USD. According to the monthly RBI bulletin, India received 19.7 USD billion FDI during the period April-August 2017. The unfurling of the consolidated FDI Policy of 2017 by the Department of Industrial Policy & Promotion (DIPP) in August is expected to make the process of FDI more streamlined and investor friendly. The abolishment of the Foreign Investment Policy Board (FIPB) and provision for startups to issue convertible notes (debt instrument) to non-residents are some of the notable developments. Also, the launch of the GST in July may have played an active role in the large upswing in inflows. The flurry of reforms by the NDA government to make foreign inflows as a regime of sustainable economic growth is, however, questionable.

While it is true that foreign inflows have seen a boom recently, but has it really helped our core sectors like mining, power or augmented industrial output? Instead, foreign investors are venturing more towards financing retail trade vis-a-vis E-commerce entities. One aspect which should be looked into is the composition of inflows which are mostly received from private equity (PE) firms looking to expand their market shares and firm valuations. Also, inward and outward foreign inflows among the emerging market economies have a correlation with US policy rate, so anomalies in inflows may contribute to economic fragility in the long run.

Since PM Modi took charge of reins, the government has strived to make India one of the preferred destination for overseas investors in Asia and it has succeeded as well. The move is welcoming, though the idea of realizing 'Making in India' goals solely on the contribution of foreign inflows is not. 

Brief Overview

Foreign Institutional Inflows (FIIs) imply investments registered in a country outside of the one in which it is investing. It constitutes Foreign Direct Investment(FDI), Equity inflows, Non-Residing Indian (NRI) Deposits, etc. However, FDI has been the most attractive form of capital inflow. From a sectoral perspective, FDI has mostly flowed into services sector, followed by the manufacturing sector. In India, foreign investment was mainly introduced in 1991 under Foreign Exchange Management Act (FEMA). The two routes under which foreign investment can be made are automatic route and the government route.

Historically, there has been a sea change in India's approach towards foreign investment since the early 1990s. Pre-liberalisation, FDI through foreign collaboration was only allowed in specific sectors related to high technology. A major shift occurred post-1991 reforms, whereby, restrictions were gradually removed in low technology areas. Over the last decade, reform measures have steadily gained momentum, as is evident from the ever-increasing volumes of FDI inflows being received in India.

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Next Release Date: First half of November, 2017