ARTICLE
22 November 2021

Determined Regulatory Push For Foreign Direct Investments In India

KC
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The trend of strong year-on-year growth in foreign direct investment in India has continued despite disruptions brought on by the advent of the Covid-19 pandemic.
India Government, Public Sector

The trend of strong year-on-year growth in foreign direct investment ("FDI") in India has continued despite disruptions brought on by the advent of the Covid-19 pandemic. This article seeks to provide a summary analysis of some of the data behind this growth as well as an overview of the regulatory and market aspects that have facilitated such growth.

According to a press release by the Ministry of Commerce & Industry on August 28, 2021,1 FDI equity inflow grew by 168% in the first three months of the financial year 2021-22 compared to growth in the corresponding period in the preceding financial year 2020-21: to USD 15.57 Billion from USD 6.56 Billion. The total FDI inflow for the same period was also much higher, being USD 22.53 billion compared to USD 11.84 billion. Total FDI inflow thus grew by around 90% in the first quarter of FY 2021-22 compared to the first quarter of FY 2020-21. This growth was spread across automobile (27%), computer software and hardware (17%), and the services (11%) sectors. Highlighting this as an endorsement of India as a preferred investment destination amongst global investors, the press release attributed the growth figures to measures undertaken by the Government on the fronts of "FDI policy reform, investment facilitation and ease of doing business."2

The figures are backed up by international sources and metrics. According to the United Nations Conference on Trade and Development's (UNCTAD) 'World Investment Report, 2021', with FDI of USD 64 Billion in 2020, India stood as the fifth largest recipient of FDI inflows globally.3 Moreover, the Organisation for Economic Co-operation and Development (OECD)'s FDI Regulatory Restrictiveness Index ("FDI Restrictiveness Index") scores for India show a drop from 0.42 to 0.21 across the last 16 years.4 The FDI Restrictiveness Index is a marker of the restrictiveness of a country's FDI regulatory regime, effectively attempting to measure the appeal of an investment destination to foreign investors. It is calculated by analysing four main types of restriction parameters, namely:  
 
1) foreign equity limitations;   
2) discriminatory screening or approval mechanisms;         
3) restrictions on the employment of foreigners as key personnel; and       
4) other operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership by foreign owned enterprises.

Each sector is scored between 0 (open) and 1 (closed), and the overall FDI Restrictiveness Index is an average of the relevant sectoral scores. The current figure of 0.21, down from 0.42, is thus indicative of India's increasingly open-handed approach towards foreign capital. This has been realised with increased investment in core sectors such as automotive, computers, information technology, process outsourcing services amongst several others, along with investment in emerging potential sectors such as power, electric vehicles, textiles, and solar energy.

A determined regulatory push has significantly contributed to the rise in FDI in India and the improved the investment climate. In addition, there are other factors at play that have had the effect of raising the commercial attractiveness of Indian markets. Some of the other key drivers for FDI in India are:

  • Corporate tax rate cuts - the September 2019 tax cuts lowered the base corporate tax rate from 30% to 22% for companies that do not seek exemptions or incentives, and from 25% to 15% for new manufacturing companies incorporated on or after October 1, 2019. The move was aimed at attracting foreign investments and spurring domestic manufacturing, thereby stimulating manufacturing, production, and economic growth.
  • Consolidation of Labour laws: the codification of national labour laws into four simplified codes titled the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020.5 In the context of a labour intensive economy such as India, the move is likely to give the impression of regulatory clarity and an increased ease of compliance conformance, possibly even boosting employment generation.

The above changes have the potential to serve as a means to utilize India's huge markets and under-penetrated sectors, and complement the raising of sectoral caps under the Automatic Route in the FDI policy. This has included, in the last three years alone, the following sectors6:

  • Insurance: in one of the most significant reforms undertaken in 2021, the Department for Promotion of Industry and Internal Trade (DPIIT) notified the increase of the FDI cap in the insurance to 74% from 49%7. This follows the removal of the 49% cap on FDI in insurance intermediaries by the Insurance Regulatory and Development Authority of India (Insurance Intermediaries) (Amendment) Regulations, 2019. The increased cap will encourage more international insurance players to operate locally and help domestic insurance companies grow with additional capital infusion.
  • Telecom: in October 2021, the sectoral cap for FDI in the telecom sector was raised from 49% to 100% under the Automatic Route.8 This includes all telecom services, although it should be noted that the above is subject to the provisions of Press Note 3 (2020 series).    
  • Defence: reforms have also been undertaken for accelerating FDI in the Defence sector. In May 2020, the Indian Government announced that the FDI cap on Defence production will be raised to 74% from the existing 49% under the Automatic Route.
  • Coal Mining: in 2019, the FDI Policy was amended to permit 100% FDI under Automatic Route in coal and lignite mining and related activities, including associated processing infrastructure for sale of coal, subject to the provisions of Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.9
  • Single Brand Retail Trading: 2019 also saw the Indian Government permit 100% FDI under the Automatic Route for Single Brand Product Retail Trading which earlier required approval from the Department of Industrial Policy and Promotion for FDI over 49%.

The above constitute some of the important sectors to have recently witnessed significant FDI policy reforms. Coupled with pandemic-driven economic and regulatory reforms such as production-linked incentive schemes, overhauling of MSME structure, and start-up promotion and tax incentives, foreign capital has the potential to contribute significantly to developing industries and to promote further economic growth in India. Another key regulatory change in the last year was the Indian Government's passing of the Taxation Laws (Amendment) Bill, 2021, repealing the retrospective taxation on indirect transfer of Indian assets prior to May 28, 2012 (of Vodafone UK and Cairn Energy fame) and refunding the previously charged amounts.

In summation, the raising of sectoral caps under the Automatic Route in the FDI Policy have boosted investment in important and previously insulated sectors of the Indian market. Significantly, India has also witnessed changes in its regulatory landscape in the shape of reforms to its labour laws, tax codes and seen a galvanization of local business. The combination of the above factors has helped the Indian economy override reservations caused by the pandemic and emerging economic uncertainty, while retaining foreign investor confidence. This is evidenced by FDI figures and trends continuing their annual climb, leaving India well on course to remaining one of the fastest growing economies in the world.

Footnotes

1. Press Release by the Ministry of Commerce and Industry. Link: https://commerce.gov.in/press-releases/fdi-equity-inflow-grows-by-168-in-the-first-three-months-of-f-y-2021-22-us-17-57-billion-compared-to-the-same-corresponding-period-last-year-us-6-56-billion/

2.Ibid

3. Page 48, UNCTAD World Investment Report, 2021. Link: https://unctad.org/system/files/official-document/wir2021_en.pdf

4. The OECD FDI Regulatory Restrictiveness Index. Link: https://www.oecd.org/investment/fdiindex.htm

5. Volume XI, Number 264, The National Law Review Link: https://www.natlawreview.com/article/india-consolidates-and-codifies-its-national-level-labour-laws

6. DPIIT report on FDI Reforms in India. Link: https://dpiit.gov.in/sites/default/files/FDI-Reforms-11June2021.pdf

7. Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021.

8. Press Note No. 4 (2021 Series) Link: https://dpiit.gov.in/whats-new/press-note-4-2021

9. Press Note No. 4 (2019 Series) Link: https://dpiit.gov.in/sites/default/files/pn4_2019.pdf 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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