In the current economic environment, there are no isolated economies anymore. All countries now function on a global level. And hence we have a strong global economy, where there are very few barriers to the flow of goods and money. This opens up avenues for international investments as well. Let us learn a bit more about the FDI in India.
What is Foreign Direct Investment?
Foreign Direct Investment is a self-explanatory term. FDI is when an investor from another country (foreign country) makes an investment in a business situated in the country. Now such an investor can be an individual, firm, company, etc.
Generally, the investor will acquire assets of the business or establishes business operations to get a controlling interest in the business in a foreign country. This is distinctly separate than buying the equity of foreign companies, i.e. portfolio investment.
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Now, there are mainly three types of Foreign Direct Investments – horizontal, vertical and conglomerate. A horizontal investment would entail opening up the same business in a foreign country.
And a vertical investment is when a slightly differentiated business is established in a foreign country. And conglomerate is when the investment is made even if the business is unrelated to its existing business.
FDI in India
Post the economic reforms of 1991, the FDI route to India became easier. Also, for a developing country sometimes domestic sources may not be enough. Hence, foreign capital can help fill the gaps between domestic savings and investment requirements.
FDI is one of the important tools of economic growth for a developing nation like India. So to boost the flow of foreign investment the process of liberalization is undertaken. However, liberalization of an economy always comes with regulations.
Routes for FDI
Basically, there are two routes for FDI in India. There is the Automatic Route, where no approval or authority is required by the private foreign investor. He can invest in any company it wishes with no need for government approval.
And then there is the Government Route. In this route, there is no investment without the prior approval of the Government of India.
Foreign Direct Investment in India does not have a uniform rate. Some industries allow 100% FDI, i.e. the entire funds of the business can be from foreign direct investment. The percentages vary from 26% to 49% to 51%. There are a few industries where FDI is strictly prohibited under any route. These industries are
- Atomic Energy Generation
- Any Gambling or Betting businesses
- Lotteries (online, private, government, etc)
- Investment in Chit Funds
- Nidhi Company
- Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
- Housing and Real Estate (except townships, commercial projects, etc)
- Trading in TDR’s
- Cigars, Cigarettes, or any related tobacco industry
There has always been opposing views about FDI in some sensitive industries like defence, insurance, media, etc. Because of the integrity of our democracy and the safety of our nation are at stake. So, for many such industries, the FDI limits are there. For example, defence industry allows only 49% FDI.
Solved Question for You
Q: ___ % of FDI is allowed in the Insurance sector.
Ans: The correct answer is A. 49% FDI is applicable in the Insurance industry via the Automatic Route.