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FDI Impact on Development of Economy and Industries


Foreign Direct Investments refers to an investment form where a company or an Individual invests in countries situated abroad and it has been a big driver of economic growth and a consequential non-debt financial resource for the country. Even after the unpredictability of the pandemic, India remains a favourable destination for foreign Investments. This has been possible due to the supportive policy framework implemented by the government which includes the ease of FDI restrictions, economic Influence and a competitive business climate.


Gross FDI’s have increased from $82 billion in FY 2021 to $83 billion in FY 2022. The top

three industries which have attracted FDIs in the past year have been the computer software and hardware industry (highest FDI inflow of $14.46 billion), Automobile Industry ($6.99 billion dollars) and Construction activities (Inflow of $3.37 Billion). Source

India also had major FDI flows coming from Singapore at US$ 15.87 billion, followed by the US (US$ 10.54 billion), Mauritius (US$ 9.39 billion) and the Netherlands (US$ 4.62 billion). Source


The main reason why there’s a huge increase in FDIs in India over the years has been due to low wages, liberal FDI policies and a highly skilled workforce in the country

FDI norms have been eased in several sectors which include defence, PSU, Energy, Stock exchanges, service sector and more.


It has also helped to increase India’s foreign exchange reserves due to which the Reserve Bank of India has higher flexibility. Due to this the central bank can keep the forex rates stable which will in turn lead to favourable economic conditions for the country’s growth. FDI has also helped to achieve India’s climate goals as the renewable energy sector also attracted FDI of $1.18 billion in the first 9 months of 2021-22. Source

The government reviews the FDI policy constantly and makes necessary changes from time to time, to make sure that India remains an attractive and investor friendly destination. Most of the sectors in India are allowed to operate under the automatic route and in order to further liberalise the FDI policy for attracting more investments reforms have been taken under many sectors which include Coal mining, Digital Media, Civil Aviation, Defence, Insurance, Telecom, Contract Manufacturing and Single Brand Retail Trading.


Sectoral growth due to FDI


  1. Automobile Sector


India is the world’s largest tractor manufacturer, the 2nd largest Bus manufacturer, the largest two-wheeler and three wheeler manufacturer in the world, third largest manufacturer of heavy trucks and fourth largest automobiles. By 2026, India is predicted to be the third-largest automotive market globally in terms of volume. The Indian automobile sector’s contribution to India’s GDP was over 7% and it also created jobs for almost 19 million people in the country. Source

Pre pandemic the FDI inflow in the automobile sector received 2.8 billion but post pandemic the inflow reduced and it had received FDI worth 1.6 billion. This changed in 2022 January and the industry received FDI worth 4.9 billion in the first half of 2022.

This jump in investment flow coincides with increase in capital expenditure by domestic players mainly due to an all-time high finding of USD 444 million by EV tech startups in 2021. This includes Ola electric (USD 253 Million), BluSmart (USD 25 million), Simple Energy (USD 21 Million), Revolt (USD 20 Million) and Detel (USD 20 Million).


2. Construction Industry

The Construction Industry has seen an Inflow of $3.37 billion in FDI and by 2025 the construction market will emerge as the 3rd most significant globally. The construction output is expected to grow at 7.1% each year on an average. This will in turn help other Industries as well such as steel, technology and cement.

3. Defence Sector

In 2020 the Indian government announced to increase the FDI limit from 49 percent to 74 percent under the automatic route and up to 100 percent through the government route due to which India received FDI of 494 crores in the defence sector. India is one of the largest importers of arms globally and has estimated to spend around $130 billion in import of arms over the next 5 years. The government wants to reduce this dependence on imported military and has taken a step by issuing 584 defence licences to 358 private companies for setting up manufacturing units including 107 licences for weapons manufacturing.


4.Computer Software and Hardware Industry

Computer Software and Hardware Industry accounted for $14.6 billion of the FDI in India this year which was the highest inflow in FDI amongst all the sectors in India. This sector accounted for about 43 percent in the total $59.63 billion foreign inflows that India attracted in 2020-21. This sector has seen growth due to lockdown which happened in 2020 which made businesses to automate their processes. Due to this India SaaS (Software-as-a-service), hardware, software has witnessed a big push in India's FDI.

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