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