Syllabus: GS3/ Economy
Context
- The Government has put in place a policy framework for Foreign Direct Investment (FDI) that is transparent, predictable, and easily comprehensible.
What is Foreign Direct Investment (FDI) ?
- It refers to investments made by foreign entities (individuals or companies) in the business interests of another country, typically in the form of ownership or control of enterprises.
- At present, FDI is prohibited in lottery, gambling and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.
Routes for FDI in India
- Automatic Route: No prior approval is required.
- Investors need to inform the Reserve Bank of India (RBI) after making the investment.
- Most sectors, such as manufacturing and software, fall under this route.
- Government Approval Route: Requires prior approval from the concerned Ministry or Department.
- Sectors such as telecom, media, pharmaceuticals, and insurance fall under this route.
Key Features of FDI Policy Framework
- Automatic Route for FDI: More than 90% of FDI inflows occur through the automatic route, minimizing regulatory bottlenecks.
- Sectoral Liberalization: Recent policy relaxations in Defence, Insurance, Petroleum & Natural Gas, Telecom, and Space have improved investment opportunities.
- Insurance Sector Reforms: The Union Budget 2025 announced an increase in the sectoral cap for the insurance sector from 74% to 100%, provided the entire premium is invested in India.
- Competitive Federalism: The government promotes healthy competition through different initiatives to showcase positive business ecosystems and logistics performance across states and UTs.
- Business Reforms Action Plan (BRAP) rankings,
- Logistics Ease Across Different States (LEADS) report, and
- Investment Friendliness Index of States (announced in Union Budget 2025).
Importance of FDI
- Balance of Payments (BoP): FDI helps bridge the current account deficit by bringing in foreign capital.
- Currency Stability: Healthy inflows support the value of the rupee in global markets.
- Technology Transfer: FDI facilitates the transfer of advanced technologies and managerial skills, boosting productivity and competitiveness.
- Multiplier Effects: FDI has indirect positive impacts on related sectors, leading to increased production, exports, and employment generation.
Steps taken by Government
- Liberalized FDI Policy: Increased FDI limits in defense (74%), insurance (74%), and single-brand retail (100%).
- Production-Linked Incentive (PLI) Schemes: Launched in sectors like electronics, pharma, textiles, and automobiles to attract foreign investment.
- Infrastructure Development: Programs like Gati Shakti, Bharatmala, and Sagarmala focus on improving connectivity.
- Digital Ecosystem: Promotion of digital payments, e-governance, and technology-driven reforms.
Way Ahead
- Prioritize Infrastructure Capex: Ensure timely project execution and attract public-private partnerships (PPPs).
- Workforce Skilling: Collaborate with the private sector to upskill the workforce to meet industry demands.
- Strengthen R&D and Innovation: Promote research and development to enhance productivity and innovation in key sectors.
Source: PIB
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