Foreign Direct Investment: Know Its Permitted and Prohibited Sectors in India

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Foreign Direct Investment: Know Its Permitted and Prohibited Sectors in India

India is amongst the top 100 countries in World Bank’s Ease of Doing Business Index 2020, positioned at 63rd rank. The credit for this goes to FDI policy in India. FDI full form is Foreign Direct Investment. The Foreign Direct Investment Policy of India provides a framework for enabling non-residents to make investments in Indian companies. 

Meaning of FDI

Foreign direct investment (FDI) meaning is investing in an asset in another nation, such that it gives control to the investor over the asset. FDI is a crucial component of international economic integration since it establishes long-term ties between economies; transfers technology across nations; encourages international trade; and has the Potential to drive economic development,

While FDI is allowed in most sectors, it is prohibited in certain sectors. Infrastructure, electronics, information technology, automobiles, pharmaceuticals, railroads, chemicals, textiles, airlines, and aerospace are a few industries in India that draw foreign direct investment. 

Foreigners may invest in Indian businesses in specific industries through the country's Foreign Direct Investment (FDI) policy under certain restrictions. The FDI policy framework is described in the Consolidated FDI Policy Circular published by the Department of Promotion of Industry and Internal Trade (DPIIT). 

FDI-Permitted Sectors as per FDI Policy

Foreign direct investors in India can make FDI under the following sectors:

100% Automatic route

The automatic route is a process for foreign direct investment (FDI) in India that allows investors to make investments without prior approval from the Reserve Bank of India (RBI) or the Government of India. The following sectors offer 100% automatic route:

• Agriculture & Animal Husbandry

• Air-Transport Services (Non Scheduled Air Transport Service / Helicopters services/ seaplane services requiring DGCA approval)

• Airports (Greenfield + Brownfield)

• Asset Reconstruction Companies

• Auto-components, Automobiles

• Biotechnology (Greenfield)

• Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services, Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs)

• Chemicals

• Coal & Lignite

• Construction Development

• Construction of Hospitals

• Credit Information Companies

• Duty Free Shops

• E-commerce Activities

• Electronic Systems

• Food Processing

• Gems & Jewellery

• Healthcare(Greenfield)

• Industrial Parks

• IT & BPM

• Leather

• Manufacturing

• Mining & Exploration of metals & non-metal ores

• Services under Civil Aviation Services such as Maintenance & Repair Organizations, Petroleum & Natural gas, Pharmaceuticals (Greenfield), Plantation sector, Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways, Single Brand Retail Trading, Textiles & Garments, Thermal Power, Tourism & Hospitality, White Label ATM Operations and Insurance & Insurance Intermediaries.

• Other Financial Services

Upto 100% Automatic route

The following sectors offer up to 100% automatic route:

• Insurance - upto 49%

• Medical Devices - upto 100%

• Pension - 49%

• Petroleum Refining (By PSUs) – 49%

• Power Exchanges – 49%

• Infrastructure Company in the Securities Market - 49%

Upto 100% FDI permitted under Government route

Indian Government allows up to 100% foreign direct investment (FDI) under government route in the following sectors:

• Banking (Public sector) – 20%

• Mining & Minerals separations of titanium bearing minerals and ores, Its value addition and integrated activities – 100%

• Multi-Brand Retail Trading – 51%

• Print Media (publications/ printing of scientific and technical magazines/speciality journals/ periodicals and facsimile edition of foreign newspapers) – 100%

• Print Media (publication of newspaper, periodicals and Indian editions of foreign magazines related to news & current affairs) – 26%

• Satellite (Establishment and operations) – 100%

• Broadcasting Content Services (FM Radio, uplinking of news and current affairs TV Channels)– 49%

• Uploading/Streaming of ‘News & Current affairs’ through digital media – 26%

• Investment by Foreign airlines – 49%

• Core Investment Company – 100%

• Food Products Retail Trading – 100%

Upto 100% FDI permitted under Automatic & Government

Up to 100% Foreign Direct Investment (FDI) is permitted in certain sectors in India under the Automatic Route and Government Route, including:

• Air transport services (Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline; Regional Air Transport Service) – upto 49% (auto) (Upto 100% under automatic route for NRIs) + above 49% and up to 74% (Govt.)

• Pharmaceuticals (Brownfield) – upto 74% (auto) + above 74% (Govt)

• Private Security Agencies – upto 79% (auto) + above 49% and up to 74% (Govt)

• Telecom Services – upto 49% (auto) + above 49% (Govt)

• Banking (Private sector) – upto 49% (auto) + above 49% and up to 74% (Govt)

• Biotechnology (brownfield) – upto 74% (auto) + above 74% (Govt)

• Defense – upto 74% (auto) + above 74% (Govt)

• Healthcare (Brownfield) – upto 74% (auto) + above 74% (Govt)

Prohibited Sectors for FDI

The following sectors are not permitted for making foreign direct investment:

• Lottery Business including Government/private lottery, online lotteries, etc.

• Gambling and Betting including casinos*

• Chit Funds

• Nidhi Company

• Trading in Transferable Development Rights (TDR)

• Real Estate Business or Construction of farm houses

• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

• Sectors not open to private sector investment such as atomic energy, railway operations.

Foreign Direct Investment Benefits

Foreign direct investment is advantageous to the recipient country due to the following reasons:

• One of the major advantages of foreign direct investment India is that it creates new job opportunities. This is especially beneficial for a nation which is still developing. Due to increased FDI, the manufacturing sector and services sector get a boost. Additionally, youth unemployment gets reduced. As employment increases income, the economy gets boosted.

• For a developing nation, development of underdeveloped regions is one of the most important advantages of foreign direct investment. India FDI investment makes it possible to turn the nation’s impoverished regions into industrial hubs. Consequently, this strengthens the local social economy. This procedure is best illustrated by the Hyundai facility in Sriperumbudur, Tamil Nadu, India.  

• One of the less evident benefits of FDI is the development of human resources. The workforce's expertise and knowledge are referred to as human capital. The nation's education and human capital quotient are raised by skills acquired and improved by training and experience. Human capital is movable after it has been developed. It can have a ripple effect by training human resources in other businesses.

• FDI facilitates the creation of a competitive environment as it helps in entry of foreign entities in the domestic market. This, in turn, breaks domestic monopolies. Consumers also get a wider variety of products which are priced at competitive prices.

• The latest technologies, operating procedures, and finance instruments from around the globe are made available to recipient companies. As newer, improved technologies and procedures are introduced, they gradually benefit the local economy and increase the industry's efficacy and efficiency. 

Conclusion

FDI policy in India allows foreign direct investors in India to purchase assets in India and have control over them. Foreign direct investment in India can be made in most sectors. Many sectors allow up to 100% FDI. However, there are a few prohibited sectors in which FDI cannot be made. 

Frequently Asked Questions (FAQs) about FDI Policies

Q1. What’s FDI?

A. FDI full form is Foreign Direct Investment. It means purchasing an asset in another nation, and having control over it.

Q2. What are the top 5 countries for FDI equity inflows into India?

A. Mauritius (25%), Singapore (23%), USA (9%), Netherland (7%) and Japan (6%) are the top 5 countries for FDI equity inflows into India (as of FY 2023-24).

Q3. When was FDI policy first introduced in India?

A. India's foreign direct investment policy was introduced in 1991, as part of the economic liberalization program of the Government of India.

Q4. Which Act governs FDI Policy in India?

A. The FDI policy in India is governed by the Foreign Exchange Management Act (FEMA) 1999.

Q5. What are foreign direct investment types?

A. Horizontal FDI, Vertical FDI, Conglomerate FDI and Platform FDI are different foreign direct investment types.

Post updated on: 18-10-2024

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