India’s FDI Policy Framework for Investments

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