Foreign Direct Investment (FDI) in India is booming – but more in some industries than others. We’re going to take you through the ins-and-outs of the seven most popular opportunities for FDI in India. We’re also going to take a look at any restrictions or requirements you may run into along the way.
What is FDI?
FDI is an investment into a company, made by someone in another country – a Chinese company buying a mining company in Australia, for example. Generally, investors are looking to achieve a controlling interest in the company (the accepted minimum threshold, set by the Organisation for Economic Co-operation and development, is 10%). FDI is common and has taken place in India since around 1991 with the introduction of the Foreign Exchange Management Act.
Limitations of FDI
Recent policy measures place some restrictions on FDI in specific industries, such as a 49% limit in the defence sector. Public sector banks sit at 20% and broadcasting services as well as print media allow 26%. This restricts “outsourcing” of important public services – particularly the media, to overseas investors. (http://www.makeinindia.com/policy/foreign-direct-investment/).
Many sectors, such as power generation and telecommunications have zero restrictions – meaning FDI can flourish.
Some industries, such as gambling and atomic power prohibit FDI entirely, likely due to the fact that such practices are heavily regulated and restricted by the government.
Make sure to research into current economic climate before considering any form of FDI. India currently sits at an inflation rate of around 6.4%, meaning that you’ll require a much higher rate of return to keep afloat above the “eroding” power of inflation. Other issues, such as political stability can also influence investment too – so be careful of this.
Invest in India – Business Opportunities
FDI in telecommunications makes up around 6.9% of FDI into India. As mentioned above, there is no cap on this industry, and it falls under the “automatic route” and therefore doesn’t require the approval of the Reserve Bank of India or the Government. However, establishing a telecommunication network requires excessive amounts of capital (Telenor – a competing FDI telecommunications firm has claimed to have spent two billion dollars on this) and there is serious competition in the industry, despite being a service in high demand.
While India has recently disallowed multi-brand retail trade, single brand retail is still a viable industry for FDI (it has no cap either, but requires government approval beyond 49% investment into a company). Retail typically offers a somewhat small upfront capital investment (compared to other options, such as telecommunications) and therefore has somewhat lower risk. Retail is a particularly difficult industry to gauge for FDI however – as different culture, tastes and preferences will either require additional investment in research or mitigate the lower risk associated with smaller initial investment. Retail appears to be growing reasonably as an industry too – keeping it a viable option for investors.
Construction is the second largest area for FDI in India, weighing in at nearly 10% of total foreign investment. The Indian Government has recently relaxed FDI rules for the sector in an effort to attract more housing, hotels and townships into the country. Minimum cash investments have been reduced to $5 million, enticing investors with less cash who are prepared to take on less risk – making it more ideal for foreign investors.
India possesses the fifth largest electricity generation capacity in the world, but this doesn’t stop it running a shortage. It follows that FDI into electricity currently allows for some great opportunities for those willing to invest the high start-up capital requirements into the industry. India does not cap FDI in electricity, with 3.88% of total FDI surfacing in this industry.
5. Computer Software/Hardware
In recent years the computer software and hardware industries have been one of the fastest growing sectors in the Indian economy, making up around 6% of FDI. This makes it a solid industry to invest in – especially since it faces no investment cap. Software in particular can be created easily on a small scale, with relatively small upfront investment.
6. Drugs and Pharmaceuticals
Drugs and Pharmaceuticals make up around 5.24% of FDI in India. The industry is uncapped, but taking over existing projects requires government approval. This has become a very popular route for FDI in recent years, particularly considering the fact that healthcare is an industry that grows steadily with the population.
The Automobile industry accounts for around 5% of all FDI in India. Japanese companies, particularly Suzuki and Honda, are large players in this field, so competition is stiff. There are no restrictions on automobile FDI, but high start-up costs are to be expected. Considering the common process of vehicle exports, India has become more of an “export hub” in this area, rather than producing for solely domestic purposes. The Automobile industry also looks set to increase in size in coming years as population grows globally.
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