Foreign direct investment (FDI) in India

FDI in Figures

According to UNCTAD's World Investment Report 2024, FDI inflows reached USD 28.1 billion in 2023, down by 42.9% year-on-year, making it the sixteenth-largest recipient worldwide. At the end of the same period, the total stock of FDI stood at 536.9 billion. FDI has been pivotal in India's development, offering significant non-debt financial resources, facilitating technology transfers, and generating employment opportunities. According to data from the Ministry of Commerce, FDI in India’s renewable energy sector rose 50% to USD 3.76 billion in FY 2023-24, up from USD 2.5 billion in FY 2022-23, with cumulative FDI since FY 2010-11 reaching USD 17.07 billion. The power sector also saw strong growth, increasing 144% to USD 1.7 billion in FY 2023-24, from USD 697.92 million the previous year. In contrast, FDI in petroleum and natural gas dropped 81% to USD 32.57 million in 2023-24, from USD 171.65 million in the prior year. In the period April 2020-September 2024, FDI inflows were mostly directed towards the services sector (16.3%), computer software & hardware (15.1%), trading (6.5%), telecommunications (5.6%), automobile industry (5.3%), and construction (infrastructure) activities (5%). In terms of country, Mauritius (25.0%), Singapore (23.6%), U.S.A (9.6%), Netherlands (7.4%), Japan (6.1%), and the United Kingdom (5%) were the main investors. FDI in Q1 of FY 2024-25 reached USD 6.9 billion, up from USD 4.7 billion in the same period last year, as per the Reserve Bank of India’s latest report. This growth was fueled by a 26.4% year-on-year increase in gross inward FDI, which totalled USD 22.5 billion in Q1 of 2024-25. One of the biggest projects announced in 2024 was the partnership between Taiwan’s Powerchip Semiconductor Manufacturing Corporation (PSMC) and Tata Electronics to build India’s first semiconductor fab in Gujarat, with an investment of up to USD 11 billion, supporting Delhi’s goal to boost domestic semiconductor production.

In recent years, India has implemented significant structural economic reforms aimed at enhancing the business environment. These reforms encompass liberalizing restrictions on foreign investment, updating bankruptcy and labour laws, abolishing retroactive taxation, and replacing state border taxes with a national Goods and Services Tax. Additionally, to streamline tax compliance for startups and foreign investors, the Income Tax Act of 1961 was amended in 2024 to eliminate angel tax and reduce the income tax rate on foreign company income. Nevertheless, persistent protectionist measures hinder the expansion of bilateral trade and pose challenges for Indian producers seeking integration into global supply chains. These measures include imposing some of the highest tariffs among major economies, promoting manufacturing localization to foster "self-reliance," and implementing India-specific standards and regulations that effectively exclude foreign goods and services. Global investors typically focus on India mainly because of its demographics, but also for its stable barometers, whether it be inflation, fiscal deficit or growth. However, the country still has several restrictive laws on foreign investment, excessive bureaucracy, and high levels of corruption. Still, given India’s growing demographics, and huge e-commerce and technological markets, activity in both areas is expected to grow in the upcoming years. FDI entering India is subject to either the "automatic route" or the "government route" review process. The majority of sectors fall under the automatic route, where foreign investors only need to notify India's central bank, the Reserve Bank of India (RBI), and adhere to applicable domestic laws and regulations for the respective sector. Conversely, investments in specific sensitive sectors, like defence, undergo scrutiny under the government route. This necessitates prior approval from the ministry overseeing the concerned sector, along with the agreement of DPIIT (Department for Promotion of Industry and Internal Trade). India ranks 39th among the 133 economies on the Global Innovation Index 2024 and 126th out of 184 countries on the latest Index of Economic Freedom.

What to consider if you invest in India

Strong Points

Advantages for FDI in India:

• Deep-rooted and highly effective democratic regime, which ensures a calm and stable political environment
• Well-developed administration and an independent judicial system, along with a vast geography, making the country a repository of resources
• Work force is educated, hard-working and skilled (engineers, management staff, accountants and lawyers). 
• India hosts an ever-growing consumer base, making it one of the world's largest markets for manufactured goods and services. 
• Proximity to key manufacturing sites, key suppliers and low development costs. These factors make it an effective base from which multi-national companies can export to other high-growth emerging markets. 
• Transparency International gave Indian companies the top ranking among emerging market multinationals in terms of transparency and compliance.

Weak Points

Some of the principal disadvantages for FDI in India :

• Lack of adequate infrastructure slowing down the development of this country-continent
• Cumbersome and slow administrative procedures at the federal level hindering any economic reform (bureaucratic red tape)
• Labour regulations remaining rigid and among the most complex in the world
• High corporate debt and non-performing assets (NPA)
• Net importer of energy resources
• Weak public finances

Government Measures to Motivate or Restrict FDI

The Government of India provides tax and non-tax investment incentives in specific sectors (e.g. electronics) and regions (Northeast region, Jammu & Kashmir, Himachal Pradesh and Uttarakhand). It has also created incentives for manufacturing companies to set up in Special Economic Zones (SEZ), National Investment & Manufacturing Zones (NIMZ) and Export Oriented Units (EOUs). In addition, each state government has its own policy, providing additional investment incentives, including subsidised land prices, attractive interest rates on loans, reduced tariffs on electric power supply, tax concessions, etc. The central government development banks and state industrial development banks offer medium to long-term loans for new projects.

The Government has recently relaxed FDI policy in a variety of sectors by such measures as raising the foreign investment limit, easing conditions for investment and putting many sectors on the ‘automatic route’ (as opposed to the ‘Government route’, which requires approval from the Foreign Investment Promotion Board). Reforms to clean up the banking system have been implemented, but they take time and may impact the supply of credit. On the other hand, while the fiscal deficit and public debt remain large, the government has taken steps to reduce them. The most notable of these initiatives is the introduction of the GST (Good and Services Tax), which aims to boost tax revenues and make the economy more competitive in the long run. Sectors that have benefited from the expansion include real estate, private banking, defence, civil aviation, single-brand retail and television news.

In order to position India as a global hub for Electronics System Design and Manufacturing (ESDM) and push further the vision of the National Policy on Electronics (NPE) 2019, three schemes namely the Production Linked Incentive Scheme (PLI), Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and Modified Electronics Manufacturing Clusters Scheme (EMC 2.0) have been notified.

For more information, consult the website of Invest India, the official Investment Promotion and Facilitation Agency of the Government of India.

Bilateral investment conventions signed by India

India has bilateral investment treaties with the United Kingdom, France, Germany, Canada, Malaysia, and Mauritius. UNCTAD has an updated list of conventions signed by India.