Unit 20

UNIT 20 FOREIGN CAPITAL Foreign Capital
Structure
20.0 Objectives
20.1 Introduction
20.2 Types of Foreign Capital
20.3 Foreign Investment in India
20.3.1 Trends and Magnitude of FDI
20.3.2 Sectoral Distribution of FDI
20.3.3 Countries of Origin of FDI in India
20.3.4 Evolution of Inward Foreign Capital Policy
20.3.5 Key Measures Taken by India to Attract FDI
20.3.6 Consolidated FDI Policy, 2020
20.4 Capital Outflows- Overseas Foreign Direct Investment
20.4.1 Drivers of India’s OFDI
20.4.2 Evolution of OFDI Policy in India
20.4.3 Trends and Magnitude of OFDI flows from India
20.4.4 Sectoral Composition of OFDI flows from India
20.4.5 Destination-wise OFDI flows from India
20.5 Let Us Sum Up
20.6 Key Words
20.7 Answers or Hints to Check Your Progress Exercises
Appendix 20.1
Appendix 20.2
20.0 OBJECTIVES
After going through this unit, you will be able to:
● analyse the role of foreign capital in the growth process of a developing
economy;
● know the types and sources of foreign capital;
● explain evolution and various phases of India’s policy towards foreign
capital;
● discuss composition, trend, and sources of origin of inward Foreign
Direct Investment to India;
● examine composition, trend, and destinations of Overseas Foreign Direct
Investment (OFDI) of India; and
● evaluate the Government of India’s Policy towards Foreign Capital.
55
External Sector and
Trade Policy
20.1 INTRODUCTION
The term Foreign Capital is primarily associated with inflow of foreign
capital into home country from foreign countries. Spread of globalisation and
opening of the economies along with recent technological advances have led
to movement of firms from one geography to another, thereby contributing to
the economic integration of the world. For any economy, particularly for the
developing economy, foreign capital plays acritical role including by (i)
bridging investment-saving gap (ii) bridging management, entrepreneurship,
technology and skilling gap (iii) bridging foreign exchange gap, (iv)
undertaking initial business risks, (v) contributing to development of basic
economic infrastructure, (vi) supporting stability of foreign exchange and
reducing balance of payment deficit, (vii) facilitating integration with other
economies of the world for trade of goods and services and (vii) eventually
supporting higher development. Because of these collateral benefits
associated with foreign capital, greater use of foreign capital is associated
with improved prospects for economic growth.
Foreign capital helps to improve the competitiveness of the domestic
economy by breaking domestic monopolies. A healthy competitive
environment always pushes firms to continuously enhance their processes
and product offerings, thereby fostering innovation. Consumers also gain
access to a wider range of competitively priced products.
From the perspective of both governments and businesses, foreign capital has
become an important factor in driving economic growth and development. By
acquiring a controlling interest in foreign assets, businesses can quickly
explore new products, technologies, and markets. Leveraging the foreign
capital, governments can create jobs and improve economic growth. Various
studies have shown that the growth of developing and emerging economies is
being driven by leveraging incoming foreign capital in the form of direct
investments. At the same time, firms investing abroad can realise higher
growth rates and diversify their income, which creates opportunities for
investors.
In this unit we shall discuss these various issues related to the foreign capital.
20.2 TYPES OF FOREIGN CAPITAL

In the broader term, foreign capital can be classified in the following
categories:
1) Foreign Investment:
i) Foreign Direct Investment (FDI)
ii) Foreign Portfolio Investment (FPI)
2) External Commercial Borrowings (ECB)
3) Commercial Deposits by Non-Resident Citizens / NRI Deposits
4) External Assistance
i) Loans
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ii) Grants Foreign Capital
iii) Debt Service Payment

iv) Foreign Aid
According to Reserve Bank of India (RBI), foreign investment means any
investment made by a person resident outside India on a repatriable basis in
capital instruments of an Indian company or to the capital of a limited
liability partnership (LLP).
Similarly, Foreign Direct Investment (FDI) is the investment through capital
instruments by a person resident outside India (a) in an unlisted Indian
company; or (b) in 10 per cent or more of the post issue paid-up equity
capital on a fully diluted basis of a listed Indian company. In a broader sense,
FDI pertains to international investment in which the investor obtains a
lasting interest in an enterprise in another country. More precisely, it may
take the form of buying or constructing a factory in a foreign country or
adding improvements to such a facility, in the form of property, plants, or
equipment. FDI is calculated to include all kinds of capital contributions,
such as the purchases of stocks, as well as the reinvestment of earnings by a
wholly owned company incorporated abroad (subsidiary), and the lending of
funds to a foreign subsidiary or branch. The reinvestment of earnings and
transfer of assets between a parent company and its subsidiary often
constitutes a significant part of FDI calculations.
RBI describes Foreign Portfolio Investment (FPI) as any investment made by

a person resident outside India in capital instruments where such investment
is (a) less than 10 per cent of the post issue paid-up equity capital on a fully
diluted basis of a listed Indian company or (b) less than 10 per cent of the
paid-up value of each series of capital instruments of a listed Indian
company. Broadly speaking, FPI is a category of investment instruments that
is more easily traded, may be less permanent, and do not represent a
controlling stake in an enterprise. These include investments via equity
instruments (stocks) or debt (bonds) of a foreign enterprise e.g. Foreign
Institutional Investors, which does not necessarily represent a long-term
interest.
While FDI tends to be commonly undertaken by multinational corporations,

FPI comes from many diverse sources such as a small company’s pension or
through mutual funds held by individuals. The returns that an investor
acquires on FPI usually take the form of interest payments or dividends.
Investments in FPI that are made for less than one year are distinguished as
short-term portfolio flows.
Calculations of FDI and FPI are typically measured as either a “flow”,

referring to the amount of investment made in one year, or as “stock”,
measuring the total accumulated investment at the end of that year.
As per framework introduced by RBI, External Commercial Borrowings

(ECBs)1 are commercial loans raised by eligible resident entities from
1
Master Direction - External Commercial Borrowings, Trade Credits and Structured
Obligations, FED Master Direction No.5/2018-19, Reserve Bank of India 57
External Sector and recognised non-resident entities and should conform to parameters such as
Trade Policy minimum maturity, permitted and non-permitted end-uses, maximum all-in-
cost ceiling, etc. The parameters apply in totality and not on a stand alone
basis. RBI further prescribes the framework for raising loans through ECB.
The ECB Framework enables permitted resident entities to borrow from
recognised non-resident entities in the following forms:
i) Loans including bank loans;
ii) Securitised instruments (e.g. floating rate notes and fixed rate bonds,
non-convertible, optionally convertible or partially convertible
preference shares / debentures);
iii) Buyers’ credit;
iv) Suppliers’ credit;
v) Foreign Currency Convertible Bonds (FCCBs);
vi) Financial Lease; and
vii) Foreign Currency Exchangeable Bonds (FCEBs)
However, ECB framework is not applicable in respect of the investment in

Non-convertible Debentures (NCDs) in India made by Registered Foreign
Portfolio Investors (RFPIs).
Commercial loans, which primarily take the form of bank loans issued to
foreign businesses or governments. External Assistance to India denotes
multilateral and bilateral loans received under the agreements between
Government of India and other Governments/International institutions and
repayments of such loans by India, except loan repayment to erstwhile
“Rupee area” countries that are covered under the Rupee Debt Service. This
also include Official Development Assistance (ODA), received by the
country from donor countries and International organisations e.g. UNO,
World Bank etc. The main objective of such aid is to promote the economic
development of the recipient countries.
20.3 FOREIGN INVESTMENT IN INDIA

20.3.1 Trends and Magnitude of FDI
At the time of opening of the Indian economy in 1991, foreign investment,
was small, a total of just $103 million. With the opening up of the economy,
it grew substantially and in 2006-07 reached $29.2 billion. In recent years,
FDI trend in Indian Economy is moving in upward direction that too rapidly.
FDI has emerged as the predominant source of external financing. The
attractiveness of India as a preferred investment destination could be
ascertained from the large increase in gross and net FDI inflows to India.
Gross inflow of foreign investment in India grew from $4.03 billion in 2000-
01 to $74.39 billion in 2019-20. In terms of net inflow of FDI to India
(inflow less outflow from India), this figure has grown from $3.27 billion in
2000-01 to $43.01 billion in 2019-20. FDI inflows have continued to be
buoyant in 2019-20. In both gross and net terms, FDI flows in 2019-20 were
58
$74.4 billion and 43.0 billion respectively, well above their respective levels Foreign Capital
in 2018-19. The significant increase in FDI inflows to India reflected the
impact of liberalisation of the economy since the early 1990s as well as
gradual opening up of the capital account. As part of the capital account
liberalisation, FDI was gradually allowed in almost all sectors, except a few
on grounds of strategic considerations, subject to compliance of sector
specific rules and regulations.
During the global financial crisis, when there was a significant deceleration
in global FDI flows the decline in FDI flows in 2009-10 to India was
relatively moderate on the back of strong rebound in domestic growth.
However, in subsequent year of 2010-11, gross FDI equity inflows to India
witnessed significant moderation. After the launch of Make in India in
September 2014, the trends in FDI have improved, showing a positive impact
on the foreign investors due to investor friendly signals from India. India has
jumped from 15th position in 2014 to 10th position in 2015 in the most trusted
nations for FDI. According to World Investment Report 2020, published by
UNCTAD, despite a slowdown in the global economy and growing global
investment concerns due to disruptions in supply chains, India was able to
sustain the pace of FDI in 2019-20 and was the 9th largest recipient country
globally in 2019. Economic Survey 2019-20 pointed out that continuous
liberalisation of FDI guidelines has been responsible for rising in flows of
foreign investment into the country.
Trends in Foreign Portfolio Investment (FPI)

Foreign Portfolio Investment (FPI) is the entry of funds into a country where
foreigners deposit money in a country's bank or make purchases in the
country’s stock and bond markets, sometimes for speculation. Portfolio
investments mainly include investment by foreign institutional investors
(FIIs), funds raised through of American Depository Receipts (ADRs) or
Global Depository Receipts (GDRs) by Indian companies and through
offshore funds. An increase innet FPI flows improves the Balance of
Payment (BoP) position and arises on account of cross-border transactions
involving debt or equity securities, other than those included in direct
investment or reserve assets. However, FPI is often referred to as “hot
money” because of its tendency to flee at the first signs of trouble in an
economy or improvement in investment attractiveness elsewhere in the
world, particularly in the US, at the hands of the Federal Reserve.
The Indian rules for foreign portfolio investments (FPIs) have undergone
several regulatory changes designed to ease investment in the last few years.
FPIs primarily consist of securities and other financial assets passively held
by foreign investors, generally for short-term speculation. Foreign portfolio
investment differs from foreign direct investment in that it does not give the
invest or direct ownership of financial assets.
FPIs in India have been volatile over the years. In 2008-09, 2015-16 and
2018-19, there was a net portfolio outflow from the country that was seen as
weakening of confidence of investors in India’s economy.
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External Sector and The net portfolio out flow in 2008-09 was $14.03 billion. This is when the
Trade Policy financial crisis hit the developed economies, and many financial institutions
would have withdrawn investments from India and other developing
countries, in order to strengthen their balance sheets at home. In 2015-16
foreign portfolio flows, remain vulnerable to bouts of global risk aversion
which resulted in outflow to the tune of $4.13 billion. Similarly, in 2018-19,
there was a net portfolio outflow of $0.62 billion from the country that was
seen as weakening of confidence of investors in India’s economy.
Trends in External Assistance to India

External assistance is composed of loans and grants. External assistance by
India - denotes aid extended by India to other foreign Governments under
various agreements and repayment of such loans. External Assistance to India
denotes multilateral and bilateral loans received under the agreements
between Government of India and other Governments/International
institutions and repayments of such loans by India, except loan repayment to
erstwhile Rupee area countries that are covered under the Rupee Debt
Service. However, most of the assistance in the initial periods of planning
were in the form of interest-bearing loans, while only a fraction was in the
form of outright grants. According to a position paper published by
Department of Economic Affairs, Ministry of Finance, Government of India
in March 2008.
“As per the extant policy, Government of India does not accept aid in areas
where it has substantial control. While bilateral aid is accepted only from G-
8 countries, the Russian Federation, and the EC, tied aid is not accepted at
all. Channelisation of external assistance from smaller partners (other than
those mentioned above), is only through multilateral organisations to
promote greater aid harmonisation. Further, all countries can provide
bilateral development assistance directly to autonomous institutions,
universities, NGOs, etc through a simplified procedure. Directing of external
assistance of smaller size towards the non-government sector allows this
sector to remain an effective channel for implementation of development
programmes and strengthens the civil society”.
Net Inflow of external assistance reached an all-time high of $4.72 billion in

2010-11 and a record low of $-3.33 billion in 2003-04 (Table 20.3 in
Appendix 20.2).
Trends in NRI Deposits / Outstanding

NRI deposits were first introduced in February 1970. The initial scheme was
a rupee denominated account, the Non-resident (External) Rupee Account
(NRE), with repatriable principal and interest. In November 1975, a foreign
currency denominated deposit facility, the Foreign Currency Non-resident
Account (FCNRA) was added. This deposit was also repatriable and was
made attractive to the banks through the RBI assuming the exchange rate
risk. Currently, there are three kinds of deposit accounts of Indian banks
where NRIs or PIOs (persons of Indian origin) can park their funds - NRE
(non-resident external-rupee account), NRO (non-resident ordinary rupee
60 account) and FCNR(B) (foreign currency non-resident bank account).
Deposits in NRE accounts are freely repatriable unlike NRO accounts. Both Foreign Capital
NRE and NRO accounts are rupee denominated. FCNR(B) are foreign
currency accounts - dollar, euro, and pound sterling accounts.
Notwithstanding positive accretions of deposits under Non-Resident

(External) Rupee (NRE) accounts; and Non-Resident Ordinary (NRO)
accounts, there was a net outflow of US$12.4 billion from non-resident
deposits during 2016-17, following a lumpy redemption of FCNR(B)
deposits raised by banks under the Reserve Bank’s special swap window
during September to November 2013.
Net flows into non-resident deposit account declined by 17 per cent in 2019-
20 as deposits under the Non-Resident (External) Rupee (NRE) accounts,
which accounted for the bulk of the inflows declined sharply. Softening of
term deposit rates and expectations of further depreciation of rupee amidst
global uncertainties partly moderated flows into this account. Among the
other two accounts, deposits in Non-Resident Ordinary Rupee (NRO)
accounts and the Foreign Currency Non-Resident (Banks) [FCNR (B)]
accounts remained at the previous year’s level
20.3.2 Sectoral Distribution of FDI

Sectoral Distribution of Equity FDI Inflows to India
From a sectoral perspective, FDI2 in India mainly flowed into services sector
(with a cumulative total of $132.8 billion — 69.5 per cent of total equity FDI
flow in the past five years from 2015-16 to 2019-20) followed by
manufacturing, $43.5 billion (around 22.83 per cent during) the same period.
Share of service in total equity FDI inflow to India increased from 62.6
percent ($22.6 billion) in 2015-16 to 77.8 per cent (28.3 billion) in 2017-18
and then declined to 74.2 per cent in 2019-20 ($31.6 billion). Within
manufacturing sector, automobile, chemicals (other than fertilizers) and drugs
& pharmaceuticals are the main sectors responsible for significant FDI.
The Service sector in India includes Financial, Banking, Insurance, Non-

Financial/Business, Outsourcing, Research and Development (R&D),
Courier, Tech, Testing and Analysis services. Within services, the top three
sectors which witnessed highest cumulative inflows of FDI during past five
years from 2015-16 to 2019-20 include communication services ($29.5
billion), financial services ($22.0 billion) and retail and wholesale trade
($20.5 billion).
The rise in FDI flows to India has been accompanied by strong regional
concentration. As per the data released by Department for Promotion of
Industry and Internal Trade (DPIIT)3, the top six states, viz., Maharashtra
(30.35 per cent), Karnataka (17.92 per cent), Delhi (16.6 per cent) Gujarat
2
in equity through SIA/FIPB and RBI routes only and excluding acquisition of
shares and equity capital of unincorporated bodies, as per Reserve Bank of India.
3
https://dipp.gov.in/sites/default/files/FDI_Factsheet_March20_28May_2020.pdf 61
External Sector and (11.05 per cent), Jharkhand (7.7 per cent) and Tamil Nadu (4.21 per cent)
Trade Policy
accounted for over 80 per cent of the FDI equity flows to India between
October 2019 to March 2020. The top two states, i.e., Maharashtra and
Karnataka accounted for over 45 per cent of FDI flows during this period.
Maharashtra alone accounted for over 30 per cent of FDI flows to India
during the same period.
Despite impressive growth rates achieved by most of the Indian states as well
as aggressive investment promotion policies pursued by various state
governments, the concentration of FDI flows across a few Indian states
continues to exist.
20.3.3 Countries of Origin of FDI in India

Countries of Origin of FDI Equity Inflows to India
Singapore and Mauritius remained the major source countries, accounting for
about 50 per cent of cumulative equity FDI flows during past five years from
2015-16 to 2019-20, followed by the Netherlands (8.4%), the US (7.6%),
Japan (6.5%) and the Cayman Islands (3.1%).
During 2019-20, India received the maximum FDI equity inflow from
Singapore (US$ 12.6 billion), followed by Mauritius (US$ 7.5 billion),
Netherlands (US$ 5.3 billion), Cayman Islands (US $3.5 billion), USA (US$
3.4 billion) and Japan (US$ 2.3 billion).
20.3.4 Evolution of Inward Foreign Capital Policy

The Indian growth story in the last three decades is a story of constant
renewal and finding new purpose to meet the goals and aspirations of a
billion people. The Indian economy has evolved and made significant
progress from a closed economy until the 1990s to a vibrant economy of
today. India’s policy on investment by foreign capital can also be divided into
two phases, pre- and post-1991. There has been a sea change in India’s
approach to foreign investment from the early 1990s when it began structural
economic reforms encompassing almost all the sectors of the economy.
Pre-Liberalisation Period (Pre-1991 Period)
Historically, an extremely cautious and selective approach was followed by

India while formulating Foreign Capital Policy. Import-substitution strategy
was preferred in implementing industrialisation framework. Protecting and
nurturing domestic industries was the primary goal. FDI through foreign
collaboration was welcomed in the areas of high technology and high
priorities to build national capability and discouraged in low technology
areas. The regulatory framework was driven by the enactment of Foreign
Exchange Regulation Act (FERA), 1973. Foreign equity holding in a joint
venture was allowed only up to 40 per cent. Subsequently, various
exemptions were extended to foreign companies engaged in export-oriented
businesses and high technology and high priority areas including allowing
equity holdings of over 40 per cent. As India continued to be highly
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protective, these measures did not add substantially to export Foreign Capital
competitiveness. Recognising these limitations, partial liberalisation in the
trade and investment policy was introduced in the 1980s with the objective of
enhancing export competitiveness, modernisation, and marketing of exports
through Trans-national Corporations (TNCs). The announcements of
Industrial Policy (1980 and 1982) and Technology Policy (1983) attempted
for a liberal attitude towards foreign investments in terms of changes in
policy directions. The policy was characterised by de-licensing of some of
the industrial rules and promotion of Indian manufacturing exports as well as
emphasising on modernisation of industries through liberalised imports of
capital goods and technology. This was supported by trade liberalisation
measures in the form of tariff reduction and shifting of large number of items
from import licensing to Open General Licensing (OGL).
Post-Liberalisation Period (Post 1991 Period)
Major shift occurred when India embarked upon economic liberalisation and
reforms programme in 1991 aiming to raise its growth potential and
integrating with the world economy. Industrial policy reforms gradually
removed restrictions on investment projects and business expansion on the
one hand and allowed increased access to foreign technology and funding on
the other. A series of measures that were directed towards liberalising foreign
investment included: (i) introduction of dual route of approval of FDI– RBI’s
automatic route and Government’s approval (SIA/FIPB) route, (ii) automatic
permission for technology agreements in high priority industries and removal
of restriction of FDI in low technology areas as well as liberalisation of
technology imports, (iii) permission to Non-resident Indians (NRIs) and
Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high
priorities sectors, (iv) hike in the foreign equity participation limits to 51 per
cent for existing companies and liberalisation of the use of foreign ‟brands
name’’ and (v) signing the Convention of Multilateral Investment Guarantee
Agency (MIGA) for protection of foreign investments. These efforts were
boosted by the enactment of Foreign Exchange Management Act (FEMA),
1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973]
which was less stringent. This along with the sequential financial sector
reforms paved way for greater capital account liberalisation in India. Table
20.1 summarises the evolutionary phases of India’s inward FDI policy
regime.
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External Sector and Table 20.1: Evolution of India’s Inward FDI Policy
Trade Policy
Policy Phase / Salient Features of Inward FDI Policy
Period
After • India’s policy with regard to foreign capital was
Independence formulated, for the first time, in the Industrial Policy
Resolution of April 1948.
• The government recognised participation of foreign
capital and enterprise, particularly as regards to
industrial technique and knowledge for rapid
industrialisation of the economy.
• There were no restrictions on the 100 per cent
ownership of Indian subsidiaries, but the authorities
exerted informed pressure on foreign companies to
sell part of their equity to local investors.
• The policy environment was sufficiently
unpredictable to discourage new entrants into India.
During 1960- • FDI policy of India was more restrictive due to the
1980s need to develop local industries.
• No FDI was allowed without transfer of technology.
• Renewals of foreign collaborations were restricted.
• Foreign Exchange Regulation Act, 1973 was
restricted to FDI in certain core or high priority
industries.
• Equity participation was restricted to 40 per cent.
• FDI regime was characterised by a cautious welcome
to foreign investments meaning retaining majority
domestic ownership and effective control in foreign
enterprises.
• Inward-looking, import substitution strategy of
economic development began, quota, permit, and
license regime prevailed all the way and was guided
and controlled by the bureaucracy.
• Development pattern was characterised by strong
centralised pharming, government ownership of
basic and key industries, excessive regulation and
control of private enterprise, trade protectionism
through tariff and non-tariff barriers.
1980s to 1990s • Attitude towards FDI was liberalised as a part of the
industrial policy resolutions.
• Inward looking regulatory regime continued until the
early 1980s.
• Government of India introduced a series of measures
through 1985-industrial policy, to reduce control on
industries, particularly large ones.
Since 1991 • Government started the process of liberalisation of
FDI policy in July 1991; the first-generation reforms
created conducive environment for foreign
investment in India. Foreign investment and
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technology collaboration was welcomed to obtain Foreign Capital
higher technology, to increase exports and to expand
the production base.
• Foreign Exchange Regulation Act (FERA), 1973
was replaced with Foreign Exchange Management
Act, 1999 (FEMA).
• Licensing and permit quota regime were eliminated,
and firms in all but a few sectors were allowed to
start operations without government approval.
• Automatic route for FDI is permitted.
• Except for certain specified activities, no prior
approval from exchange control authorities i.e.,
Reserve Bank of India is required.
• Many new sectors were thrown open for FDI.
• Eventually, FDI was permitted in virtually every
sector, except those of strategic concern such as
defence and transport.
• Approval mechanism for FDI was made simpler and
transparent.
• Two approval routes i.e., automatic route and
Foreign Investment Promotion Board (FIPB) route
was introduced.
• Capital account restrictions were eased to allow
Indian companies to raise capital abroad, by way of
Eurobonds and GDR/ADRs.
• Foreign companies were permitted to set up 100 per
cent subsidiaries in India.
• Focus shifted to opening of infrastructure, insurance
and service sector, liberalising royalty payment
regime and permitting royalty on trademarks and
brand names.
• Foreign equity was permitted up to 100 per cent in
roads, ports, harbours, bridges, and highways in
1999.
• In the year 2000, a paradigm shift occurred, wherein,
except for a negative list, all the remaining activities
were placed under the automatic route.
• From 2014 onwards, FDI regime was further
liberalised in the sectors like defence, mining,
insurance, pensions e-commerce, retail, and media
etc.
Source: Compiled from various reports published by RBI, Ministry of Finance
20.3.5 Key Measures Taken by India to Attract FDI

Advantage India: Key Facts
i) India has the world’s most liberal FDI rules with sectors like insurance,
defence, single brand retail, food processing, smart cities and space
technology opening up for foreign investment.
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External Sector and ii) India ranked 63rd out of 190 countries in World Bank’s Ease of Doing
Trade Policy business 2020 report, a significant improvement from the previous year’s
spot, when it ranked 77th.As such, India joined the list of 10 most
improved economies for the third year in a row.
iii) This has been possible as the government has continued to regularly
review FDI norms, basis the changing economic landscape and
geopolitical environment. All these proactive steps have borne fruit, as is
evident from the ever-increasing volumes of FDI inflows and first five
months of fiscal 2021 witnessed highest ever inflow of US$35.7 billion,
a 13 per cent increase from last year.
iv) Given India’s growing demographics, and huge e-commerce and
technological markets, activity in both areas are expected to grow in the
following years.
Over the years, systematic reforms have helped the Indian economy
withstand many a crisis. India is taking a holistic approach to address other
historical issues: for instance, it has already announced labour reforms to
allow more flexible labour related practices; power reforms (addressing high
industrial power tariffs) and port-linked industrial cluster policy (to resolve
the issue of scarcity of industrial land). Structural reforms within the
Agricultural sector, along with US$13 billion Agri-infra fund will be enablers
to attract FDI.
According to the survey conducted by Confederation of Indian Industry (CII)

and Ernst & Young (EY) on “FDI in India– Now, Next and Beyond, Reforms
and opportunities” India can expect to attract US$120 billion to US$160
billion of FDI annually by 2025 if it manages to increase the FDI to GDP
ratio between 3 per cent to 4 per cent range by 2025. This can aid in bringing
back India’s GDP growth rate to 7-8 per cent range. The above growth will
be stimulated by the recent structural reforms, raising of the FDI limits in
multiple sectors and the Atmanirbhar Bharat strategy of the Government of
India.
The Government has undertaken several structural reforms with a focus on

land, labour, liquidity, and law that will globally position India as an
attractive investment destination. Since the onset of the pandemic, it has
injected over Rs. 20 lakh crores stimulus for the economy. The sectors
covered include power, manufacturing, defence, land, education, mining, and
minerals.
Some of the important reforms that have been put in motion are:
i) Corporate tax rate for new manufacturing facilities at 15 per cent to
make it competitive vis-à-vis ASEAN countries.
ii) Abolition of Dividend Distribution tax on companies.

iii) Phased and graded duty structure to incentivise indigenous
manufacturing of intermediate and final goods e.g., Electric Vehicles.
iv) Production linked incentives of Rs. 197 thousand crores for 13 sectors.
66
v) Monetary incentives on incremental sales for a period of five years to Foreign Capital
offset disability manufacturing in India. Initial focus on high import
items (cell phones) and healthcare related products.
vi) Increase in FDI limit for defence production under automatic route from
49 per cent to 74 per cent.
vii) Expanded the definition (turnover and investment thresh holds) of

MSMEs to encourage MSMEs to grow.
viii) Consolidating over 100 labour laws into 4 codes with higher exemptions
for retrenchment and fewer registrations.
ix) Implementing a GIS system to provide information on industrial land

include plot-level information.
x) Enabling ease of doing business through faceless e-assessment for
taxation, decriminalisation of companies’ law and allowing for netting of
qualified Financial Contracts.
xi) Opening of commercial mining of coal and integrated licensing regime
for minerals mining.
xii) Airport Authority of India (AAI) has awarded 3 airports out of 6 bids for
Operation and Maintenance on Public Private Partnership (PPP) Basis.
xiii) Power Departments/ Utilities in Union Territories to be privatised. This

will improve operations and financial efficiency in Distribution and
provide a model for emulation by other utilities across the country.
xiv) New Public Sector and Enterprises Policy where all sectors are open to
private sector while public sector enterprises will play a role in defined
areas.
xv) “Atmanirbhar Bharat Rozgar Yojana” launched to incentivise creation of

new employment opportunities during the COVID recovery phase.
The reforms related to corporate tax cuts, labour, agriculture, Production

Linked Incentives (PLI) & Phased Manufacturing Plan (PMP), Micro Small
& Medium Enterprises (MSME), coal and mining etc. were the long-pending
demands of the industry and multilateral agencies. These reforms will help in
increasing not just the productive capacity of the economy, they will also
make the economy more efficient in use of the resources available.
20.3.6 Consolidated FDI Policy, 2020

India announced its latest consolidated foreign direct investment (FDI)
policy, which is in effect from October 15, 2020 (as per the official circular
released by the government). The Consolidated FDI Policy, 2020
incorporates restrictions notified earlier in the year on FDI coming in from
overseas entities or citizens belonging to neighbouring countries that share a
land border with India, including China, to prevent opportunistic takeovers of
firms.
67
External Sector and Key changes
Trade Policy
i) This Revised Policy supersedes all the press notes, press releases,
clarifications and/or circulars issued by the DPIIT, which were in force
as on 15 October 2020.
ii) The Revised Policy is aligned with the Implementation of the Foreign
Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules)
and Foreign Exchange Management (Mode of Payment and Reporting of
Non-Debt Instruments) Regulations, 2019 by incorporating all necessary
changes, including procedural instructions on payment of inward
remittance and reporting requirements.
iii) Government scrutiny of investments from India’s neighbouring countries
- An entity of a country, which shares a land border with India or where
the beneficial owner of an investment into India is situated in or is a
citizen of any such country– can invest only under the Government
approval route. The Revised Policy also included the scenario with
respect to transfer of ownership of an Indian entity, directly or indirectly,
resulting in the beneficial ownership falling within the
restriction/purview stated above. Therefore, any transfer of ownership
resulting into transfer of beneficial ownership to entities or citizens of
neighbouring countries sharing land borders will require government
approval.
iv) Revisions of sectoral caps: Annexure of this unit provides details of

various caps and entry route applicable for specific sectors.
Check Your Progress 1

1) State how foreign capital contributes to economic growth?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
2) What do you mean competitiveness of the economy? How does foreign
capital help to create healthy competitive environment in the economy?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
68
3) State the nature of technology gap faced by a developing economy. Foreign Capital
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
4) State various types of Foreign Capital.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
5) Distinguish between Foreign Direct Investment (FDI) and Foreign
Portfolio Investment.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
6) List the top sectors and country of origin responsible for FDI into India.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
7) State three important reforms introduced to attract FDI in India.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
20.4 CAPITAL OUTFLOW- OVERSEAS

FOREIGN DIRECT INVESTMENT
Here, we describe outflow of capital as the movement of assets out of a
country in terms of Overseas Foreign Direct Investment (OFDI). Reserve
69
External Sector and Bank of India (RBI) defines OFDI outside India as investments, either under
Trade Policy the Automatic Route or the Approval Route by way of contribution to the
capital or subscription to the Memorandum of a foreign entity or by way of
purchase of existing shares of a foreign entity either by market purchase or
private placement or through stock exchange. This signifies a long-term
interest in the foreign entity [Joint Venture (JV)/ Wholly Owned Subsidiary
(WOS)], but it does not include portfolio investment.
As per RBI, "JV / WOS" means a foreign entity formed, registered or

incorporated in accordance with the laws and regulations of the host country
in which the Indian party/Resident Indian makes a direct investment. A
foreign entity is termed as JV of the Indian Party/Resident Indian when there
are other foreign promoters holding the stake along with the Indian Party. In
case of WOS entire capital is held by the one or more Indian Party/Resident
Indian.
Overseas Foreign Direct Investment (OFDI) is divided into three categories

i.e. equity, loans and guarantee issued.
20.4.1 Drivers of India’s OFDI

One of the essential motives of Indian firms’ overseas direct investment has
been essentially to tap the host country markets, i.e. such investments have
been market-seeking. A detailed survey conducted by the Export-Import
Bank of India (Exim Bank)4 identifies number of factors that are responsible
for Indian businesses expedition abroad. Some of these include:
i) Regulatory changes in the FDI investment.

ii) Expending of existing market and increasing appetite to take risk by
Indian companies.
iii) Value addition through enhanced technical knowhow.
iv) Low factor cost advantages in the host country (as in natural resources).
v) If the interest rate in a foreign country is low as compare to India, there
would be greater incentive to borrow abroad and make direct
investments abroad.
vi) Depreciation of Indian currency will make it more attractive for Indian
companies to invest overseas in another currency.
vii) Saturation of the Indian market lead to the need to enhance their export-
competitiveness in third country markets.
viii) To exploit the domestic market potential in other countries.

However, a clear outcome that emerges from the Exim Bank survey is that
the overseas investment activities of Indian companies are essentially
motivated by a set of firm-specific objectives. It can be just a market entry
4
Outward Direct Investment from India: Trends, Objectives and Policy Perspectives,
70 Export-Import Bank of India, May 2014.
strategy or market entry plus strategy (e.g. accessing strategic asset)implying Foreign Capital
a multi-purpose intention of making an overseas investment.
20.4.2 Evolution of OFDI Policy in India

After independence and before the process of liberalisation and globalisation
of the economy in 1991-92, India followed a very restrictive and inward
looking OFDI policy regime. No cash remittance was allowed and
repatriation of dividend from the profits from overseas projects was
mandatory. To some extent, policy regime supported promoting OFDI
amongst developing countries under the overall objective of enhancing south-
south cooperation. During the period of 1960s to 1980s, Indian businesses
also preferred inward looking approach which is characterised by seeking
protection from foreign direct investment (FDI) and imports. During this
period, Indian businesses were highly dependent upon domestic markets and
operated with low technological capabilities, inadequate product quality and
low productivity.
With the gradual opening of the economy since 1991-92, regulatory regime
guiding India’s OFDI was witnessed gradual changes over the period of time.
Current OFDI policy orientation is now more or less region/country neutral.
This has encouraged large number of Indian firms to establish their foothold
in international markets, through acquisitions and investments in businesses.
Table 20.2 summarises the evolution of Indian policy regime towards OFDI.
Table 20.2: Overview of Evolution of India’s OFDI Policy Regime
Policy
Phase / Salient Features of OFDI Policy
Period
• The period of Economic Liberalisation in India
• “Guidelines Governing Indian Joint Ventures / Wholly
owned Subsidiaries Abroad” was introduced.
• ‘Automatic Route’ for overseas investments by Indian
entrepreneurs was introduced in 1992.
• Cash remittances were allowed for the first time.
However, the total value was restricted to US$ 2 million
Phase I with a cash component not exceeding US$ 0.5 million in
(1992-94) block of 3 years.
• Provided more operational freedom to investors, subject
to the condition that no additional financial transfers from
India was required.
• Removed the requirement of only minority equity
shareholding in JVs.
• Financial sector was excluded from the purview of
automatic approvals.
71
External Sector and • Aimed at providing a transparent policy framework for
Trade Policy
Indian investors to plan their business.
• Guidelines for Indian Direct Investment in Joint Ventures
and Wholly-owned Subsidiaries Abroad was suitably
amended to support the overseas investment by the Indian
businesses.
• Conception of Fast Track Route work relating to
approvals for overseas investment was transferred from
Ministry of Commerce to the Reserve Bank of India to
provide a single window clearance mechanism.
• Limits were raised from US$ 2 million to US$ 4 million
and linked to average export earnings of the preceding
three years.
• Above US$ 4 million, approvals were considered under
the normal route approved by a Special Committee.
• In 1997, limit of automatic approval was increased up to
US$15 Million.
Phase II • Investment proposals in excess of US$ 15 million were
(1995- considered by the Ministry of Finance with
1999) recommendations of the Special Committee and were
generally approved if the required resources were raised
through the global depository receipts (GDR) route.
• The exchange earners, other than exporters, were brought
under the fast track route in 1997.
• Permitted acquisitions of foreign companies.
• The condition that the amount of outward investment
should be repatriated in full by way of dividend, royalty,
etc. within a period of five years was done away.
• Investments in Nepal and Bhutan, in Indian currency,
increased up to INR. 120 crores.
• In 1999, annual ceiling of OFDI under fast track mode
was further increased to US$ 30 Million in SAARC
countries and Myanmar. For other countries, the ceiling
remained at $15 million.
• A series of measures to encourage software industry in
India to expand capacity: reduce costs, improve quality,
and invest abroad, were introduced.
• Implementation of the Foreign Exchange Management
Act (FEMA) in June 2000.
• Liberalisation under FEMA and thereafter scope of
Phase III outward FDI expanded significantly.
(2000 • 2002-Annual limit of investment under automatic
onwards) approval increased to US$ 100 Million to Indian corporate
with a proven track record for investment in overseas joint
ventures or wholly owned subsidiaries, even where the
investment is not in the same core activity as they are
72 engaged. They were also allowed to invest in such
ventures up to 100% of their net worth. Foreign Capital
• 2005: Automatic route for investment abroad was raised

to 200% of net worth.
• 2006:Done away with the requirement that only promoter
corporates could issue guarantee on behalf of JV/WOS.
Any Indian entity was permitted to issue guarantees.
• 2007: Automatic approval was made up to 300% of net
worth in June’ 07 and this limit was increased to 400% in
September’ 07.
• 2008: Permitted Indian private entities in the oil sector to
invest in unincorporated entities in oil sector up to 400%
of their net worth under the automatic route.
• 2013: Brought down the ceiling of automatic approval to
100% of net worth. However, provisions in the oil sector
remain unchanged.
Source: Compiled from Joseph (2019)5 and Reserve Bank of India
Currently, Overseas Foreign Direct Investment (OFDI) outside India is

governed by Foreign Exchange Management (Transfer or Issue of any
Foreign Security) (Amendment) Regulations, 2004 (‘FEMA Regulations’), as
amended from time to time.
Over the last two decades, overseas investment has become one of the key
mechanisms of Indian companies to establish their global operations. Indian
businesses are more open to the idea that their future growth would be
influenced not only through exports but also by establishing physical
presence overseas.
Permissible Sources for Funding Overseas Foreign Direct Investment

RBI allow funding for overseas direct investment can be made by one or
more of the following sources:
i) Withdrawal of foreign exchange from an AD bank (Authorised dealer

Category) in India.
ii) Swap of shares (refers to the acquisition of the shares of an overseas JV /
WOS by way of exchange of the shares of the Indian party).
iii) Capitalisation of exports and other dues and entitlements.
iv) Proceeds of External Commercial Borrowings / Foreign Currency
Convertible Bonds.
v) In exchange of ADRs / GDRs issued in accordance with the Scheme for
issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993 and the
guidelines issued by Government of India in the matter.
vi) Balances held in Exchange Earners Foreign Currency account of the
Indian Party maintained with an Authorised Dealer.
5
Joseph, Reji K.: Outward FDI from India: Review of Policy and Emerging Trends. 73
External Sector and vii) Proceeds of foreign currency funds raised through ADR / GDR issues.
Trade Policy
20.4.3 Trends and Magnitude of OFDI flows from India
In terms of flow of overseas investment, equity and loans would be relevant
as a very small proportion of guarantees are invoked which require the flow
of money. Table 20.7 (in appendix 20.2) shows that outward foreign direct
investment flows rose from US $ 677.7 million in 2000-01 to US$ 12.9
billion in 2019-20.
Cumulative OFDI for the period of 2000-01 to 2019-20 in the form of equity
and loans constitute 66.7 per cent and 30.6 per cent share respectively of the
total OFDI from India. Only 2.7 per cent of guarantee was actually invoked
during this period. Annual OFDI flows exhibited a growing trend till 2007-
08.The global financial crisis affected the flow of outward FDI from India in
2009-10. Thereafter, it shows mixed trend. The share of financing OFDI
through equities declined from 88.8 per cent in 2000-01 to 48.4 per cent in
2019-20, while share of loans in financing outward OFDI from India rose
from 10.4 per cent to 45.9 per cent during the corresponding period.
20.4.4 Sectoral Composition of OFDI flows from India

The sectoral pattern of cumulative outward FDI shows that during past five
years from 2015-16 to 2019-20, it has been mainly invested in financial,
insurance and business services (34.8 per cent) followed by manufacturing
sector (22.1 per cent), wholesale, retail trade, restaurants and hotels (12.5 per
cent) and agriculture and mining (12.0 per cent).
20.4.5 Destination-Wise OFDI flows from India

Table 20.9 (in Appendix 20.2) depicts destination-wise distribution of OFDI
from India during past five-year period from 2015-16 to 2019-20. Top ten
destination countries accounted for 79.6% share of India’s cumulative OFDI
during 2015-16 to 2019-20. Singapore (19.2%) has emerged as the top
destination of India’s cumulative OFDI during the same period followed by
Mauritius (16.3%), United States of America (13.1%), United Kingdom
(7.7%) and the Netherlands (7.6%).
The recent trend is showing that outward FDI form India is increasingly
flowing to developed countries. This reflects growing confidence of the
Indian corporate to expand their global footprints. Indian firms invest in
foreign shores primarily through mergers and acquisition (M&A). With rising
M&A activity, companies will get direct access to newer and more extensive
markets and better technologies, which would enable them to increase their
customer base and achieve a global reach.
According to the RBI Annual report 2019-20, outward direct investment by
Indian entities also remained robust as Indian entities continued to expand
their overseas business operations. Outward FDI was mainly in the form of
equity and loans to subsidiaries/ affiliated enterprises, primarily to Singapore,
the US, the UK, Mauritius, Switzerland, and the Netherlands, which
accounted for 75 per cent of total overseas investments during the period.
74
Most of these investments were made in the business services, manufacturing Foreign Capital
and restaurants and hotels sector.
According to the information published by India Brand Equity Foundation

(IBEF)6, some of the facts and figures with respect to major overseas
investments by Indian companies during 2019-20 were:
i) In 2019-20, India invested in 120 projects and created 5,429 new jobs in
the UK to become the second-largest source of foreign direct investment
(FDI).
ii) In 2020, Zerodha announced to introduce an option to invest in US

stocks on its platform.
iii) In August 2020, Axis Securities launched new platform to invest in US

stocks to meet the increasing interest of the Indian retail investors in the
US stock markets.
iv) In February 2020, Bharti Airtel invested US$ 978.92 million in its
wholly owned subsidiary in Mauritius.
v) In January 2020, Calleis Infrastructure invested US$ 81.12 million in its

wholly owned subsidiary in the UK.
vi) In December 2019, Indian Oil Corporation Limited’s (IOCL’s)
INDMAX refining technology was licensed to Naftna Industrija Srbije
(NIS) of Serbia for production of higher value products.
vii) In December 2019, memorandum of understanding (MoU) was signed
between National Small Industries Corporation (NSIC) and Aramco Asia
for developing the MSME Ecosystem in India in the Oil and Gas sector.
viii) In December 2019, Panacea Biotec bagged orders worth nearly Rs 1.7
billion (US$ 24.32 million) from UN agencies, including UNICEF, for
supply of Pentavalent vaccine.
ix) In December 2019, supply chain focused fintech firm, LivFin, raised
US$ 5 million of equity capital from German development finance
institution DEG.
x) In November 2019, PVR Cinemas, a leading multiplex chain, launched

its first property in Sri Lanka, marking its first international venture.
xi) In September 2019, Liquefied Natural Gas (LNG) importer Petronet

entered into an agreement with US LNG developer Tellurian Inc. and
invested US$ 2.5 billion.
xii) In September 2019, Reliance Power announced joint venture (JV) with
Japanese energy major JERA to jointly set up a 750-Megawatt (MW)
gas-based combined cycle power project (phase-1) at Meghnaghat in
Bangladesh.
6
https://www.ibef.org/economy/indian-investments-abroad seen on 28th Dec 2020. 75
External Sector and xiii) In September 2019, OYO acquired Copenhagen-based data science
Trade Policy firm Danamica. This marked the fast-growing lodging start-up to
expand its business in Europe.

1) State the important factors responsible for Capital Outflows.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
2) State the composition and destination of India’s Overseas Foreign Direct
Investment.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
3) What is the distinction between Joint Ventures (JVs) and Wholly Owned
Subsidiary (WOS)?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
4) State the important points of India’s OFDI Policy since 2000 onwards.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
20.5 LET US SUM UP

Foreign capital contributes to the economic growth of a developing economy
by bridging various gaps i.e. saving gap, foreign exchange gap, technological
gap, skilling gap etc. Foreign capital can be public through participation of
government agencies and through multilateral organisations (the World Bank,
ADB) or private. Again, foreign private capital is of two types — Foreign
direct investment and portfolio investment. Foreign capital has grown
substantially with opening-up of the economy. However, the total foreign
investment has become volatile due to portfolio investment. Several new
forms of investment (i.e. setting up of research centres by MNCs securing
access of raw materials, etc.) have emerged. Since 1991, Government of
India has taken various steps to liberalise the Indian economy. Thereafter,
India has been witnessing significant inflows of foreign direct investment
from various countries and across the sectors. In recent years, India’s global
ranking on “Ease of Doing Business” has been significantly improved on
account of various measures initiated by Government of India to facilitate
76
foreign investment in India. All these measures have helped India in Foreign Capital
becoming one of the attractive destinations for FDI.
Overseas investment is one of the foremost steps to enter the global

marketplace. The policy regime governing India’s outward FDI (OFDI) has
undergone significant change since 1991-92. In recent years, India has taken
necessary steps to make its presence felt in the global arena. Key motivations
of Indian firms for considering OFDI are to maximise gains in ways such as
promotion of exports, securing of energy resources, acquisition of
technology, strategically securing supply-chain and sourcing of raw materials
and intermediary goods. Investment outlook in some of the overseas market
looks positive. In recent years, outward FDI are mainly financed through
equity and loans. Overseas investment from India have undergone a
considerable change, not only in terms of magnitude but also in terms of
geographical spread and sectorial composition. Overseas investment by
Indian companies is expected to increase, backed by the growing appetite of
the Indian corporates to establish their footprints abroad and the liberal
regulatory regime, stable market conditions and considerable impact of the
investment on local economies.
Various studies have established that for Indian economy, foreign capital,
particularly FDI has had a positive impact. FDI inflow has helped
supplementing domestic capital, as well as bridging technology and skills
gaps of existing companies. It also helped to establish new companies. All of
these have contributed to economic growth of the Indian Economy.
20.6 KEY WORDS

Saving Gap : The difference between the required rate of
investment and the actual rate of saving
available in an economy.
Trade Gap : The difference between the expenditure of
foreign exchange and receipts of foreign
exchange in transactions of goods and services.
Multinational : A business organisation which owns or controls
Corporations income generation assets in more than one
country, and in so doing produces goods or
services outside its country of origin.
Foreign Direct : More generally refers to the value of the MNC’s
Investment investment in equity shares of an enterprise in a
foreign country.
Portfolio : Refers to equity holdings by a non-resident in
Investment the recipient country’s joint stock companies.
Overseas Foreign : Refers to the investments made in the overseas
Direct Investment entities by way of contribution to their capital or
subscription to the Memorandum of Association
of a foreign entity or by way of purchase of
existing shares of a foreign entity either by
77
External Sector and market purchase or private placement or through
Trade Policy stock exchange, but it does not include portfolio
investment.
20.7 ANSWERS OR HINTS TO CHECK YOUR

PROGRESS EXERCISES
1) See Section 20.1
2) See Section 20.1
3) See Section 20.1
4) See Section 20.2
5) See Sub-section 20.3.2
6) See Sub-sections 20.3.2 and 20.3.3
2) See Sub-sections 20.4.4 and 20.4.5
3) See Section 20.4
78
APPENDIX 20.1 Foreign Capital
Consolidated FDI Policy 2020 effective from 15th October 20207
PROHIBITED SECTORS
Inward FDI to India is prohibited in:
a) Lottery Business including Government/private lottery, online lotteries,
etc.
b) Gambling and Betting including casinos etc.
c) Chit funds
d) Nidhi company
e) Trading in Transferable Development Rights (TDRs)
f) Real Estate Business or Construction of Farmhouses
g) ‘Real estate businesses shall not include development of townships,
construction of residential /commercial premises, roads or bridges and
Real Estate Investment Trusts (REITs) registered and regulated under the
SEBI (REITs) Regulations 2014.
h) Manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco
or of tobacco substitutes.
i) Activities/sectors not open to private sector investment e.g.(I) Atomic
Energy and (II) Railway operations (other than permitted activities
mentioned under the consolidated FDI policy).
Foreign technology collaboration in any form including licensing for
franchise, trademark, brand name, management contract is also prohibited for
Lottery Business, Gambling and Betting activities.
Permitted Sectors
Table: Sector Specific Limits of Foreign Investment in India
Sector FDI Entry

Cap/Equity Route
AGRICULTURE
AGRICULTURE & ANIMAL HUSBANDRY
• Floriculture, Horticulture, and Cultivation of 100% Automatic
Vegetables & Mushrooms under controlled
conditions;
• Development and Production of seeds and
planting material;
• Animal Husbandry (including breeding of
dogs), Pisciculture, Aquaculture, Apiculture;
and
7
Department for Promotion of Industry and Internal Trade (FDI Division), Ministry of
Commerce & Industry, Government of India. 79
External Sector and • Services related to agro and allied sectors
Trade Policy
Note: Besides the above, FDI is not allowed in
any other agricultural sector/activity
PLANTATION SECTOR
• Tea sector including tea plantations 100% Automatic
• Coffee plantations
• Rubber plantations
• Cardamom plantations
• Palm oil tree plantations
• Olive oil tree plantations
Note: Besides the above, FDI is not allowed in

any other plantation sector/activity
Other condition:- Prior approval of the State
Government is required in case of any future
land use change.
MINING AND PETROLEUM & NATURAL GAS
MINING
Mining and Exploration of metal and non-metal 100% Automatic
ores including diamond, gold, silver, and precious
ores but excluding titanium bearing minerals and
its ores; subject to the Mines and Minerals
(Development & Regulation) Act, 1957.
Coal & Lignite 100% Automatic
• Coal and Lignite mining for captive
consumption by power projects, iron & steel
and cement units and other eligible activities
permitted under and subject to the provisions
of Coal Mines (Special Provisions) Act, 2015
and the Mines and Minerals (Development and
Regulation) Act, 1957.
• Setting up coal processing plants like
washeries subject to the condition that the
company shall not do coal mining and shall not
sell washed coal or sized coal from its coal
processing plants in the open market and shall
supply the washed or sized coal to those
parties who are supplying raw coal to coal
processing plants for washing or sizing.
• For sale of coal, coal mining activities
including associated processing infrastructure
subject to the provisions of Coal Mines
(Special Provisions) Act, 2015 and the Mines
and Minerals (Development and Regulation)
Act, 1957 as amended from time to time and
other relevant Acts on the subject.
80
Mining and mineral separation of titanium bearing 100% Government Foreign Capital
minerals and ores, its value addition, and
integrated activities.
• Mining and mineral separation of titanium

bearing minerals & ores, its value addition, and
integrated activities subject to sectoral
regulations and the Mines and Minerals
(Development and Regulation Act, 1957).
Petroleum & Natural Gas
• Exploration activities of oil and natural gas 100% Automatic
fields, infrastructure related to marketing of
petroleum products and natural gas, marketing
of natural gas and petroleum products,
petroleum product pipelines, natural
gas/pipelines, LNG Regasification
infrastructure, market study and formulation
and Petroleum refining in the private sector,
subject to the existing sectoral policy and
regulatory framework in the oil marketing
sector and the policy of the Government on
private participation in exploration of oil and
the discovered fields of national oil companies.
• Petroleum refining by the Public Sector 49% Automatic
Undertakings (PSU), without any
disinvestment or dilution of domestic equity in
the existing PSUs.
MANUFACTURING
• Subject to the provisions of the FDI policy, 100% Automatic
foreign investment in ‘manufacturing’ sector is
under automatic route. Manufacturing
activities may be either self-manufacturing by
the investee entity or contract manufacturing in
India through a legally tenable contract,
whether on Principal to Principal or Principal
to Agent basis. Further, a manufacturer is
permitted to sell its products manufactured in
India through wholesale and/or retail,
including through e-commerce, without
Government approval.
• Notwithstanding the FDI policy provisions on 100% Government

trading sector, 100% FDI under Government
approval route is allowed for retail trading,
including through e-commerce, in respect of
food products manufactured and/or produced
in India.
DEFENCE
81
External Sector and • Defence Industry subject to Industrial license 100% Automatic
Trade Policy up to 74%
under the Industries (Development and
Regulation) Act, 1951 and Manufacturing of Government
small arms and ammunition under the Arms route
Act, 1959 beyond
Note: Other Conditions Applicable as notified 74%
by the Govt of India wherever it
is likely to
result in
access to
modern
technology
or for other
reasons to
be recorded.
SERVICES SECTOR
BROADCASTING
Broadcasting Carriage Services 100% Automatic
• Teleports (setting up of up-linking HUBs/
Teleports);
• Direct to Home (DTH);
• Cable Networks (Multi-System operators
(MSOs) operating at National or State or
District level and undertaking upgradation of
networks towards digitalisation and
addressability);
• Mobile TV;
• Headend-in-the Sky Broadcasting Service
(HITS)
Cable Networks 100% Automatic
• (Other MSOs not undertaking upgradation of
networks towards digitalisation and
addressability and Local Cable Operators
(LCOs))
Note: Infusion of fresh foreign investment, beyond 49% in a company not
seeking license/permission from sectoral Ministry, resulting in change in
the ownership pattern or transfer of stake by existing investor to new
foreign investor, will require Government approval.
BROADCASTING CONTENT SERVICES
• Terrestrial Broadcasting FM (FM Radio), 49% Government
subject to such terms and conditions, as
specified from time to time, by Ministry of
Information & Broadcasting, for grant of
permission for setting up of FM Radio stations.
• Up-linking of ‘News & Current Affairs’ TV 49% Government
Channels
82
• Uploading/Streaming of News & Current 26% Government Foreign Capital
Affairs through Digital Media
• Up-linking of Non- ‘News & Current 100% Automatic
Affairs’ TV Channels/ Down-linking of TV
Channels
PRINT MEDIA
• Publishing of newspaper and periodicals 26% Government
dealing with news and current affairs
• Publication of Indian editions of foreign 26% Government
magazines dealing with news and current
affairs
• Publishing/printing of scientific and technical 100% Government
magazines/specialty journals/ periodicals,
subject to compliance with the legal
framework as applicable and guidelines issued
in this regard from time to time by Ministry of
Information and Broadcasting.
• Publication of facsimile edition of foreign 100% Government
newspapers
CIVIL AVIATION
AIRPORTS
• Greenfield projects 100% Automatic
• Existing projects 100% Automatic
AIR TRANSPORT SERVICES

(1) (a) Scheduled Air Transport Service*/ 100% Automatic
Domestic Scheduled Passenger Airline up to 49%
(Automatic
(b) Regional Air Transport Service up to 100%
for NRIs)
Government
route be 49%
(2) Non-Scheduled Air Transport Services 100% Automatic
(3) Helicopter services/seaplane services requiring 100% Automatic

DGCA approval
OTHER SERVICES UNDER CIVIL AVIATION SECTOR
(1) Ground Handling Services subject to sectoral 100% Automatic
regulations and security clearance
(2) Maintenance and Repair organisations; flying 100% Automatic
training institutes; and technical training
institutions.
CONSTRUCTION DEVELOPMENT: TOWNSHIPS, HOUSING,
BUILT-UP INFRASTRUCTURE
83
External Sector and • Construction-development projects (which 100% Automatic
Trade Policy
would include development of townships,
construction of residential/commercial
premises, roads or bridges, hotels, resorts,
hospitals, educational institutions, recreational
facilities, city and regional level infrastructure,
townships)
INDUSTRIAL PARKS
• Industrial Parks- new and existing 100% 100%
Automatic
SATELLITES- ESTABLISHMENT AND OPERATION
• Satellites- establishment and operation, subject 100% Government
to the sectoral guidelines of Department of
Space/ISRO
PRIVATE SECURITY AGENCIES
• Private Security Agencies 74% Automatic
up to 49%
Government
route beyond
49% and up
to 74%
TELECOM SERVICES
• Telecom Services (including Telecom 100% Automatic
Infrastructure Providers Category-I) All up to 49%
telecom services including Telecom
Infrastructure Providers Category-I, viz. Basic, Government
Cellular, United Access Services, Unified route
License (Access Services), Unified License, beyond 49%
National/International Long Distance,
Commercial V-Sat, Public Mobile Radio
Trunked Services (PMRTS), Global Mobile
Personal Communications Services (GMPCS),
All types of ISP licenses, Voice Mail/
Audiotex/UMS, Resale of IPLC, Mobile
Number Portability Services, Infrastructure
Provider Category-I (providing dark fibre,
right of way, duct space, tower) except Other
Service Providers
TRADING
• Cash & Carry Wholesale Trading/Wholesale 100% Automatic
Trading (including sourcing from MSEs)
E-COMMERCE ACTIVITIES
• E-commerce activities 100% Automatic
SINGLE BRAND PRODUCT RETAIL

TRADING
• Single Brand Product Retail Trading 100% Automatic
84
MULTI BRAND RETAIL TRADING Foreign Capital
• Multi Brand Retail Trading 51% Government
DUTY FREE SHOPS

Duty Free Shops 100% Automatic
• Note: Duty Free Shops would mean shops

set up in custom bonded area at
International Airports/International
Seaports and Land Custom Stations where
there is transit of international passengers.
• Foreign investment in Duty Free Shops is
subject to compliance of conditions stipulated
under the Customs Act, 1962 and other laws,
rules, and regulations.
• Duty Free Shop entity shall not engage into
any retail trading activity in the Domestic
Tariff Area of the country.
RAILWAY INFRASTRUCTURE
Railway Infrastructure 100% Automatic
• Construction, operation and maintenance of

the following:
(i) Suburban corridor projects through PPP,
(ii) High speed train projects, (iii) Dedicated
freight lines, (iv) Rolling stock including train
sets, and locomotives/coaches manufacturing
and maintenance facilities, (v) Railway
Electrification, (vi) Signalling systems, (vii)
Freight terminals, (viii) Passenger terminals,
(ix) Infrastructure in industrial park pertaining
to railway line/sidings including electrified
railway lines and connectivity to main railway
line and (x) Mass Rapid Transport Systems.
Note:
i) Foreign Direct Investment in the above mentioned activities open to private
sector participation including FDI is subject to sectoral guidelines of
Ministry of Railways.
ii) Proposals involving FDI beyond 49% in sensitive areas from security point
of view, will be brought by the Ministry of Railways before the Cabinet
Committee on Security (CCS) for consideration on a case to case basis.
FINANCIAL SERVICES
• Foreign investment in other financial services, other than those indicated
below, would require prior approval of the Government.
ASSET RECONSTRUCTION COMPANIES
85
External Sector and • Asset Reconstruction Company’ (ARC) 100% Automatic
Trade Policy
means a company registered with the Reserve
Bank of India under Section 3 of the
Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act).
BANKING- PRIVATE SECTOR
• Banking- Private Sector 74% Automatic
up to 49%
Government
route beyond
49% and
up to 74%.
BANKING- PUBLIC SECTOR
• Banking- Public Sector subject to Banking 20% Government
Companies (Acquisition and Transfer of
Undertakings) Acts 1970/80. This ceiling
(20%) is also applicable to the State Bank of
India and its associate Banks.
CREDIT INFORMATION COMPANIES (CIC)
• Credit Information Companies 100% Automatic
INFRASTRUCTURE COMPANY IN THE SECURITIES MARKET

• Infrastructure companies in Securities Markets, 49% Automatic
namely, stock exchanges, commodity
exchanges, depositories and clearing
corporations, in compliance with SEBI
Regulations
INSURANCE
• Insurance Company 49% Automatic
• Intermediaries or Insurance Intermediaries 100% Automatic

including: Insurance brokers, re-insurance
brokers, insurance consultants, corporate
agents, third party administrator, Surveyors
and Loss Assessors and such other entities, as
may be notified by the Insurance Regulatory
and Development Authority of India from time
to time.
PENSION SECTOR
• Pension Sector 49% Automatic
POWER EXCHANGES
• Power Exchanges registered under the Central 49% Automatic
Electricity Regulatory Commission (Power
Market) Regulations, 2010.
WHITE LABEL ATM OPERATIONS
86
• White Label ATM Operations 100% Automatic Foreign Capital
OTHER FINANCIAL SERVICES

• Financial Services activities regulated by 100% Automatic
financial sector regulators, viz., RBI, SEBI,
IRDA, PFRDA, NHB or any other financial
sector regulator as may be notified by the
Government of India.
PHARMACEUTICALS
• Greenfield 100% Automatic
• Brownfield 100% Automatic

up to 74%
Government
route
beyond 74%
87
External Sector and
Trade Policy
APPENDIX 20.2
Table 20.1: Foreign Investment Flows
Amount in US $ Million
Year Gross Repatriation/ Direct FDI by Net % growth

inflows/ Disinvestment Investment India FDI to over
Gross to India (Overseas India previous
Investments (2-3) Investment (4-5) year
to India by India)
1 2 3 4 5 6
2000-01 4031 0 4031 759 3272
2001-02 6130 5 6125 1391 4734 44.7%
2002-03 5095 59 5036 1819 3217 -32.0%
2003-04 4322 0 4322 1934 2388 -25.8%
2004-05 6052 65 5987 2274 3713 55.5%
2005-06 8962 61 8901 5867 3034 -18.3%
2006-07 22826 87 22739 15046 7693 153.6%
2007-08 34844 116 34729 18835 15893 106.6%
2008-09 41903 166 41738 19365 22372 40.8%
2009-10 37746 4637 33109 15143 17966 -19.7%
2010-11 36047 7018 29029 17195 11834 -34.1%
2011-12 46552 13599 32952 10892 22061 86.4%
2012-13 34298 7345 26953 7134 19819 -10.2%
2013-14 36047 5284 30763 9199 21564 8.8%
2014-15 45147 9864 35283 4031 31251 44.9%
2015-16 55559 10652 44907 8886 36021 15.3%
2016-17 60220 18005 42215 6603 35612 -1.1%
2017-18 60974 21544 39431 9144 30286 -15.0%
2018-19 62001 18699 43302 12590 30712 1.4%
2019-20 74390 18384 56006 12993 43013 40.1%
Notes:
1. Data on FDI have been revised since 2000-01 with expanded coverage to
approach international best practices.
2. Negative (-) sign indicates outflow.
3. Direct Investment data for 2006-07 include swap of shares of 310 Crore.
Source: Reserve Bank of India.
88
Table 20.2: Net Inflow of Portfolio Investment Foreign Capital
(Amount in US $ Million )
Offshore Portfolio % Growth

Net Portfolio
GDRs/ADRs FIIs Funds and Investment over
Year Investment
Others by India Previous
1 2 3 4 (1+2+3-4) Year
2004-05 613 8,686 16 24 9,291
2005-06 2,552 9,926 14 0 12,492 34.5%
2006-07 3,776 3,225 2 56 6,947 -44.4%
2007-08 6,645 20,328 298 -163 27,434 294.9%
2008-09 1,162 -15,017 0 177 -14,032 -151.1%
2009-10 3,328 29,048 0 -20 32,396 330.9%
2010-11 2,049 29,422 0 1,179 30,292 -6.5%
2011-12 597 16,813 0 238 17,171 -43.3%
2012-13 187 27,582 0 878 26,891 56.6%
2013-14 20 5,009 0 207 4,822 -82.1%
2014-15 1,271 40,923 0 -11 42,205 775.3%
2015-16 373 -4,016 0 487 -4,130 -109.8%
2016-17 0 7,766 0 154 7,612 284.3%
2017-18 0 22,165 0 50 22,115 190.5%
2018-19 1,820 -2,225 0 213 -618 -102.8%
2019-20 0 552 0 -851 1,403 327.1%
Source: Reserve Bank of India
Table 20.3: Net Inflow of External Assistance to India
(US $ million)
Net Inflow of Foreign % Growth over Previous
Year
Aid Year
2000-01 -537
2001-02 332 161.8%
2002-03 -3912 -1278.3%
2003-04 -3225 -17.6%
89
External Sector and 2004-05 952 129.5%
Trade Policy
2005-06 1545 62.3%
2006-07 1290 -16.5%
2007-08 1655 28.3%
2008-09 2179 31.7%
2009-10 3129 43.6%
2010-11 4720 50.8%
2011-12 2612 -44.7%
2012-13 910 -65.2%
2013-14 1500 64.8%
2014-15 1261 -15.9%
2015-16 1715 36.0%
2016-17 1734 1.1%
2017-18 2197 26.7%
2018-19 2337 6.4%
2019-20 2475 5.9%
Table 20.4: NRI Deposits Outstanding
(Value in US $ million, Growth in %)

Year % Growth over
Total
(end-March) Previous Year
2002 25174
2003 28529 13.3%
2004 33266 16.6%
2005 32975 -0.9%
2006 36282 10.0%
2007 41240 13.7%
2008 43672 5.9%
2009 41554 -4.8%
2010 47890 15.2%
2011 51682 7.9%
2012 58608 13.4%
2013 70822 20.8%
2014 103844 46.6%
90
Foreign Capital
2015 115163 10.9%
2016 126929 10.2%
2017 116867 -7.9%
2018 126182 8.0%
2019 130423 3.4%
2020 130581 0.1%
Notes: 1. The figures are outstanding as on last Friday of March.
2. The figures on NRI deposits are as reported by scheduled commercial
banks in India.
Source: Reserve Bank of India.
Table 20.5: Foreign Direct Investment Flows in Equity to India:

Industry-wise
(US$ million, Share in %)

Cumulative
Inflows
Sector/Industry 2015-16 2016-17 2017-18 2018-19 2019-20
(Apr 2015 to
March 2020)
Total FDI in
S. Equity (SIA/FIPB 36068 36317 37366 38744 42629 191124
No. & RBI Routes (100.0%) (100.0%) (100.0%) (100.0%) (100.0%) (100.0%)
only)
Sector-wise Inflows
8439 11972 7066 7919 8153 43549
1 Manufacturing
(23.4%) (33.0%) (18.9%) (20.4%) (19.1%) (22.8%)
22565 22064 28306 28255 31622 132812

2 Services
(62.6%) (60.8%) (77.8%) (72.9%) (74.2%) (69.5%)
Communication 2638 5876 8809 5365 6838 29526

2.1
Services (11.7%) (26.6%) (31.1%) (19.0%) (21.6%) (22.2%)
Retail & 3998 2771 4478 4311 4914 20472

2.2
Wholesale Trade (17.7%) (12.6%) (15.8%) (15.3%) (15.5%) (15.4%)
3547 3732 4070 6372 4326 22047

2.3 Financial Services
(15.7%) (16.9%) (14.4%) (22.6%) (13.7%) (16.6%)
4319 1937 3173 3453 4104 16986

2.4 Computer Services
(19.1%) (8.8%) (11.2%) (12.2%) (13.0%) (12.8%)
3031 2684 3005 2597 3684 15001

2.5 Business services
(13.4%) (12.2%) (10.6%) (9.2%) (11.7%) (11.3%)
Restaurants and 889 430 452 749 2546 5066

2.6
Hotels (3.9%) (1.9%) (1.6%) (2.7%) (8.1%) (3.8%)
1363 891 1267 1019 2333 6873

2.7 Transport
(6.0%) (4.0%) (4.5%) (3.6%) (7.4%) (5.2%)
91
External Sector and
Trade Policy
Electricity and
other energy
1364 1722 1870 2427 1906 9289
2.8 Generation,
(6.0%) (7.8%) (6.6%) (8.6%) (6.0%) (7.0%)
Distribution &
Transmission
Education,
394 205 347 736 528 2210
2.9 Research &
(1.7%) (0.9%) (1.2%) (2.6%) (1.7%) (1.7%)
Development
Miscellaneous 1022 1816 835 1226 443 5342

2.10
Services (4.5%) (8.2%) (2.9%) (4.3%) (1.4%) (4.0%)
4141 1564 1281 2009 1937 10932

3 Construction
(11.5%) (4.3%) (3.4%) (5.2%) (4.5%) (5.7%)
Real Estate 112 105 405 213 564 1399

4
Activities (0.3%) (0.3%) (1.1%) (0.5%) (1.3%) (0.7%)
596 141 82 247 217 1283

5 Mining
(1.7%) (0.4%) (0.2%) (0.6%) (0.5%) (0.7%)
215 470 226 102 137 1150

6 Others
(0.6%) (1.3%) (0.6%) (0.3%) (0.3%) (0.6%)
Figures in parenthesis represent share in percentage

Note: Includes FDI in Equity through SIA/FIPB and RBI routes only (excluding acquisition of shares
and equity capital of unincorporated bodies)
Table 20.6: Foreign Direct Investment Flows in Equity to India:

Country-wise
(Value in US$ million, Share in %)
Cumulative
Inflows
Source/Industry 2015-16 2016-17 2017-18 2018-19 2019-20
(Apr 2015 to
March 2020)
Total FDI in
Equity
36,068 36,317 37,366 38,744 42,629 1,91,124
(SIA/FIPB &
RBI routes only)
Country-wise Inflows
12479 6529 9273 14632 12612 55525

Singapore
(34.6%) (18.0%) (24.8%) (37.8%) (29.6%) (29.1%)
7452 13383 13415 6570 7498 48318

Mauritius
(20.7%) (36.9%) (35.9%) (17.0%) (17.6%) (25.3%)
2330 3234 2677 2519 5295 16055

Netherlands
(6.5%) (8.9%) (7.2%) (6.5%) (12.4%) (8.4%)
92
440 49 1140 863 3496 5988 Foreign Capital
Cayman Islands
(1.2%) (0.1%) (3.1%) (2.2%) (8.2%) (3.1%)
4124 2138 1973 2823 3401 14459

U.S.A.
(11.4%) (5.9%) (5.3%) (7.3%) (8.0%) (7.6%)
1818 4237 1313 2745 2308 12421

Japan
(5.0%) (11.7%) (3.5%) (7.1%) (5.4%) (6.5%)
392 487 403 375 1167 2824

France
(1.1%) (1.3%) (1.1%) (1.0%) (2.7%) (1.5%)
842 1301 716 1211 1125 5195

United Kingdom
(2.3%) (3.6%) (1.9%) (3.1%) (2.6%) (2.7%)
241 466 293 982 777 2759

South Korea
(0.7%) (1.3%) (0.8%) (2.5%) (1.8%) (1.4%)
344 134 1044 598 678 2798

Hongkong
(1.0%) (0.4%) (2.8%) (1.5%) (1.6%) (1.5%)
488 282 290 161 657 1878

Cyprus
(1.4%) (0.8%) (0.8%) (0.4%) (1.5%) (1.0%)
927 845 1095 817 443 4127

Germany
(2.6%) (2.3%) (2.9%) (2.1%) (1.0%) (2.2%)
57 172 213 56 388 886

Belgium
(0.2%) (0.5%) (0.6%) (0.1%) (0.9%) (0.5%)
961 645 408 853 323 3190

U.A.E.
(2.7%) (1.8%) (1.1%) (2.2%) (0.8%) (1.7%)
784 99 243 251 252 1629

Luxembourg
(2.2%) (0.3%) (0.7%) (0.6%) (0.6%) (0.9%)
203 212 21 290 250 976

UK Virgin Islands
(0.6%) (0.6%) (0.1%) (0.7%) (0.6%) (0.5%)
461 198 350 229 162 1400

China
(1.3%) (05%) (0.9%) (0.6%) (0.4%) (0.7%)
1725 1905 2498 2768 1796 10692

Others
(4.8%) (5.2%) (6.7%) (7.1%) (4.2%) (5.6%)
Figures in parenthesis represent share in percentage

Note: Includes FDI in Equity through SIA/FIPB and RBI routes only (excluding
acquisition of shares and equity capital of unincorporated bodies)
Table 20.7: Component-wise Break-up of OFDI
Value in $ Million, Share in %

Year Equity Loan Guarantee Actual OFDI Guarantee
(1) (2) Invoked Outflow Issued
(3) (1+2+3)
602.1 70.6 5.0 677.7

2000-01 112.6
(88.8%) (10.4%) (0.7%) (100.0%) 93
External Sector and 878.8 120.8 0.4 1000.0
Trade Policy 2001-02 155.9
(87.9%) (12.1%) (0.0%) (100.0%)
1746.3 102.1 0 1848.4
2002-03 139.6
(94.5%) (5.5%) (0.0%) (100.0%)
1250 316.6 0.0 1566.6
2003-04 440.5
(79.8%) (20.2%) (0.0%) (100.0%)
1482 513.2 0.0 1995.2
2004-05 316
(74.3%) (25.7%) (0.0%) (100.0%)
6657.8 1195.3 3.3 7856.4
2005-06 546.8
(84.7%) (15.2%) (0.0%) (100.0%)
12062.9 1247 0.0 13309.9
2006-07 2261
(90.6%) (9.4%) (0.0%) (100.0%)
15431.5 3075 0.0 18506.5
2007-08 6553.5
(83.4%) (16.6%) (0.0%) (100.0%)
10732.3 3333.2 0.0 14065.5
2008-09 3104.9
(76.3%) (23.7%) (0.0%) (100.0%)
6761.7 3602.8 24.2 10388.7
2009-10 7600.8
(65.1%) (34.7%) (0.2%) (100.0%)
9351.8 7346.9 52.5 16751.2
2010-11 27230.5
(55.8%) (43.9%) (0.3%) (100.0%)
6288.4 8325.2 0.0 14613.6
2011-12 16249.4
(43.0%) (57.0%) (0.0%) (100.0%)
5856.2 4351 0.0 10207.2
2012-13 16665.2
(57.4%) (42.6%) (0.0%) (100.0%)
10194.50 3725.50 64.90 13984.90
2013-14 22980.5
(72.9%) (26.6%) (0.5%) (100.0%)
3985.70 2852.90 35.70 6874.30
2014-15 24080.9
(58.0%) (41.5%) (0.5%) (100.0%)
8192.38 4096.99 74.19 12363.56
2015-16 22,914.61
(66.3%) (33.1%) (0.6%) (100.0%)
10480.23 4509.80 321.53 15311.56
2016-17 25,226.45
(68.4%) (29.5%) (2.1%) (100.0%)
10018.61 3529.43 3015.49 16563.53
2017-18 20,856.24
(60.5%) (21.3%) (18.2%) (100.0%)
8092.30 4221.43 1195.82 13509.55
2018-19 24,159.00
(59.9%) (31.2%) (8.9%) (100.0%)
6236.95 5907.25 736.07 12880.27
2019-20 22,252.48
(48.4%) (45.9%) (5.7%) (100.0%)
Cumulative
OFDI from 136302.47 62443.00 5529.10 204274.57
243846.88
2000-01 to (66.7%) (30.6%) (2.7%) (100.0%)
2019-20
Figures in parenthesis represent share percentage
Source: Compiled from Khan (2012), Joseph (2009), RBI-ODI and Department of
Economic Affairs
94
Table: 20.8: Sector-wise Composition of OFDI Outflow Foreign Capital
Value in US $ Million, Share in %
Cumulative
S. OFDI
Sectors 2015-16 2016-17 2017-18 2018-19 2019-20
No. (2015-16 to
2019-20)
Financial,
4245.69 4563.03 6743.56 5345.48 3687.43 24585.19
1 Insurance and
(34.3%) (29.8%) (40.7%) (39.6%) (28.6%) (34.8%)
Business Services
2457.4 3721.62 2993.95 3015.30 3430.14 15618.41

2 Manufacturing
(19.9%) (24.3%) (18.1%) (22.3%) (26.6%) (22.1%)
Wholesale, Retail
1441.09 2023.37 1270.78 1780.40 2322.85 8838.49
3 Trade, Restaurants
(11.7%) (13.2%) (7.7%) (13.2%) (18.0%) (12.5%)
and Hotels
Agriculture and 401.13 1751.31 3695.41 1998.87 641.58 8488.3

4
Mining (3.2%) (11.4%) (22.3%) (14.8%) (5.0%) (12.0%)
242.07 339.28 445.97 763.09 864.73 2655.14

5 Construction
(2.0%) (2.2%) (2.7%) (5.6%) (6.7%) (3.8%)
Electricity, Gas and 574.37 618.98 59.6 140.45 797.31 2190.71
6
Water (4.6%) (4.0%) (0.4%) (1.0%) (6.2%) (3.1%)
Community, Social
575.42 655.02 367.46 309.31 199.21 2106.42
7 and Personal
(4.7%) (4.3%) (2.2%) (2.3%) (1.5%) (3.0%)
Services
Transport, Storage
and 2372.02 1515.68 913.44 113.77 901.33 5816.24
8
Communication (19.2%) (9.9%) (5.5%) (0.8%) (7.0%) (8.2%)
Services
54.37 123.27 73.36 42.88 35.69 329.57

9 Miscellaneous
(0.4%) (0.8%) (0.4%) (0.3%) (0.3%) (0.5%)
12363.56 15311.56 16563.53 13509.55 12880.27 70628.47

Total
(100.0%) (100.0%) (100.0%) (100.0%) (100.0%) (100.0%)
Figures in parenthesis represent percentage
Source: Compiled from RBI-ODI and Department of Economic Affairs
95
External Sector and
Trade Policy
Table 20.9: Top Ten OFDI Destination Countries
Value in US $ Million, Share in %
Cumulative
S.
Country 2015-16 2016-17 2017-2018 2018-19 2019-20 OFDI (2015-
No.
16 to 2019-20)
1439.21 2892.72 2665.53 2846.06 3717.03 13560.55
1 Singapore
(11.6%) (18.9%) (16.1%) (21.1%) (28.9%) (19.2%)
3362.68 5091.96 1440.84 535.24 1052.05 11482.77

2 Mauritius
(27.2%) (33.3%) (8.7%) (4.0%) (8.2%) (16.3%)
United States 1648.36 1892.64 1256 2478.02 1976.33 9251.35

3
of America (13.3%) (12.4%) (7.6%) (18.3%) (15.3%) (13.1%)
United 642.13 1378.78 837.07 1442.27 1141.2 5441.45

4
Kingdom (5.2%) (9.0%) (5.1%) (10.7%) (8.9%) (7.7%)
1146.46 743.71 1143.34 1105.06 1232.56 5371.13

5 Netherlands
(9.3%) (4.9%) (6.9%) (8.2%) (9.6%) (7.6%)
United Arab 1750.29 888.01 644.33 734.86 439.54 4457.03

6
Emirates (14.2%) (5.8%) (3.9%) (5.4%) (3.4%) (6.3%)
677.91 491.71 484.06 498.86 636.46 2789

7 Switzerland
(5.5%) (3.2%) (2.9%) (3.7%) (4.9%) (3.9%)
222.64 311.57 409.83 525.06 590.46 2059.56

8 Russia
(1.8%) (2.0%) (2.5%) (3.9%) (4.6%) (2.9%)
Cayman 9.87 90.18 591.75 419.22 60 1171.02

9
Island (0.1%) (0.6%) (3.6%) (3.1%) (0.5%) (1.7%)
British
128.8 102.32 130.79 85.12 181.69 628.72
10 Virgin
(1.0%) (0.7%) (0.8%) (0.6%) (1.4%) (0.9%)
Islands
Total OFDI
11028.35 13883.6 9603.54 10669.77 11027.32 56212.58
to Top 10
(89.2%) (90.7%) (58.0%) (79.0%) (85.6%) (79.6%)
Countries
Total OFDI
12363.56 15311.56 16563.53 13509.55 12880.27 70628.47
(to All
(100.0%) (100.0%) (100.0%) (100.0%) (100.0%) (100.0%)
Countries)
Source: Compiled from RBI and Department of Economic Affairs
96

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UNIT 20 FOREIGN CAPITAL Foreign Capital

20.2 TYPES OF FOREIGN CAPITAL

iii) Debt Service Payment

RBI describes Foreign Portfolio Investment (FPI) as any investment made by

While FDI tends to be commonly undertaken by multinational corporations,

Calculations of FDI and FPI are typically measured as either a “flow”,

As per framework introduced by RBI, External Commercial Borrowings

However, ECB framework is not applicable in respect of the investment in

20.3 FOREIGN INVESTMENT IN INDIA

Trends in Foreign Portfolio Investment (FPI)

Trends in External Assistance to India

Net Inflow of external assistance reached an all-time high of $4.72 billion in

Trends in NRI Deposits / Outstanding

Notwithstanding positive accretions of deposits under Non-Resident

20.3.2 Sectoral Distribution of FDI

The Service sector in India includes Financial, Banking, Insurance, Non-

20.3.3 Countries of Origin of FDI in India

20.3.4 Evolution of Inward Foreign Capital Policy

Pre-Liberalisation Period (Pre-1991 Period)

Historically, an extremely cautious and selective approach was followed by

Post-Liberalisation Period (Post 1991 Period)

20.3.5 Key Measures Taken by India to Attract FDI

According to the survey conducted by Confederation of Indian Industry (CII)

The Government has undertaken several structural reforms with a focus on

ii) Abolition of Dividend Distribution tax on companies.

vii) Expanded the definition (turnover and investment thresh holds) of

ix) Implementing a GIS system to provide information on industrial land

xiii) Power Departments/ Utilities in Union Territories to be privatised. This

xv) “Atmanirbhar Bharat Rozgar Yojana” launched to incentivise creation of

The reforms related to corporate tax cuts, labour, agriculture, Production

20.3.6 Consolidated FDI Policy, 2020

iv) Revisions of sectoral caps: Annexure of this unit provides details of

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20.4 CAPITAL OUTFLOW- OVERSEAS

As per RBI, "JV / WOS" means a foreign entity formed, registered or

Overseas Foreign Direct Investment (OFDI) is divided into three categories

20.4.1 Drivers of India’s OFDI

i) Regulatory changes in the FDI investment.

viii) To exploit the domestic market potential in other countries.

20.4.2 Evolution of OFDI Policy in India

Table 20.2: Overview of Evolution of India’s OFDI Policy Regime

• 2005: Automatic route for investment abroad was raised

Source: Compiled from Joseph (2019)5 and Reserve Bank of India

Currently, Overseas Foreign Direct Investment (OFDI) outside India is

Permissible Sources for Funding Overseas Foreign Direct Investment

i) Withdrawal of foreign exchange from an AD bank (Authorised dealer

20.4.4 Sectoral Composition of OFDI flows from India

20.4.5 Destination-Wise OFDI flows from India

According to the information published by India Brand Equity Foundation

ii) In 2020, Zerodha announced to introduce an option to invest in US

iii) In August 2020, Axis Securities launched new platform to invest in US

v) In January 2020, Calleis Infrastructure invested US$ 81.12 million in its

x) In November 2019, PVR Cinemas, a leading multiplex chain, launched

xi) In September 2019, Liquefied Natural Gas (LNG) importer Petronet

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20.5 LET US SUM UP

Overseas investment is one of the foremost steps to enter the global

20.6 KEY WORDS

20.7 ANSWERS OR HINTS TO CHECK YOUR