Why India is one of the Most Favourite Nations for FDI? (2024)

Since economic liberalization in 1991, the Government of India has made significant changes in Foreign Direct Investment Policy to attract foreign companies to invest in India. For a developing country like India, FDI plays a crucial role in the economic growth of the country. FDI enables the Government to overhaul the public infrastructure, introduce cutting-edge technology in the existing system, and create employment opportunities for the people of the country. Over the year, successive governments in India have realized the potential of foreign investment and Liberalized FDI policies.

If we see the stats related to Foreign Direct Investment in India, Foreign Direct Investment (FDI) flows increased from $189.51 billion in 2009-10 to 2013-14 to $283.90 billion (2014-15 to 2018-19). Maximum foreign companies invested money in the service sectors of the country, which is US$ 7.85 billion for the fiscal year 2019, followed by computer software and hardware at US$ 7.67 billion, telecommunications sector at US$ 4.44 billion, and trading at US$ 4.57 billion. With over one trillion rupees, Singapore is the top investor in the country, followed by Mauritius (571 billion rupees) and the Netherlands (270 billion rupees). The Indian Government is also adopting proactive steps to achieve the goal of 100 billion U.S. dollars’ worth of FDI inflows by 2020.

Now the question arises, why FDI in India is gaining so momentum when the global FDI is almost flat for now. Below are some factors which are making India a favourite destination for Foreign Direct Investment.

The Government has reformed policies in FDI

Since economic liberalization in 1991, the Government of India has taken significant steps to liberalize the policies related to FDI in India. Resultant, over the years India emerged as a preferred destination for FDI. In the year 2000, the Government allowed 100% FDI under automatic root for most of the activities. Since then, the Government gradually simplified FDI policies in India and opened more sectors for foreign investment. In August 2020, the Government reformed FDI policy of 2017 and permitted 100% FDI in the coal mining activities. Before this, in May 2020 the Government increased FDI in defense manufacturing under the automatic route from 49% to 74%.

In the General budget 2020, the Government of India abolished the Dividend Distribution Tax (DDT). Which is a huge relief for foreign investors. Under the Dividend Distribution Tax (DDT) or Tax on Dividend, the foreign companies operating in India were liable to pay DDT at the rate of 20.56% on earning dividend, besides corporate tax levies that amount around 35%, which was a quite difficult deal for the foreign companies and this was a major bottleneck for them to invest in India. Therefore, to ensure the smooth entry for FDI in India, the Government of India abolished it.

Due to the multiple economic reforms, India is making a strong presence in the sphere of global business. According to the World Bank's Ease of Doing Business 2020 report, India jumps to 63 position among 190 nations in the world. According to the global business perspective, this is a very positive sign for FDI in India, this means in future India will witness massive foreign investment.

With an average age of 29, India is blessed to have a skilled and young workforce. Where leading economies like Europe, the US, South Korea, and Japan are facing a crisis of young and dynamic working professionals; the same India has young and dexterous professionals. This means the Indian workforce will remain active and productive for a long time. And foreign companies look for a skilled and young workforce, who can serve their companies for a long time. Resultant, foreign companies are entering India.

Favourable land rates are also stimulating FDI in India. Due to the COVID-19 pandemic, China is no more trusted place. Now foreign companies are looking for an alternative manufacturing hub and want to diversify their supply chain. India’s favourable land price and inexpensive skilled manpower influencing foreign institutional investors to invest in India. This is also a great chance for India to become a manufacturing hub for the world.

India is popular in the world for its political stability and democratic policies. Therefore, Foreign institutional investors who invest in India, experience a safe and promising business environment.

In the last six years, the earning of every Indian is increased by 30%, which is also a positive sign for FDI in India. When the earning of people will increase, they will also look for international brands to fulfil their needs. Resultant, when product consumption will increase, the profit of companies will increase automatically.

Assuredly, Foreign Direct Investment plays a crucial role in the economic growth of the country since they enhance employment opportunities, technical knowledge base, and provide non-debt financial resources. But to ensure the success of Foreign Direct investment and to monitor the activities of foreign companies, India needs a robust FDI regulatory body. Because national security is also important. As the Government is relaxing FDI policies, it is also mandatory to maintain a balance between economic activities and national security.