During the 1990s, India became one of the most dynamic Asian host countries for foreign direct investment (FDI), according to United Nations Conference on Trade and Development’s (UNCTAD’s) World Investment Directory 2000: Volume VII, Asia and the Pacific. During the decade, annual average FDI flows to India expanded more than six times, rising to $2.7 billion in 1995–98 and reaching a peak of $3.6 billion in 1997, from $470 million in 1991–94. FDI flows slowed once during the decade in 1998—the first time in 11 years—in the wake of that year’s financial crisis in Asia. India’s share in total flows to Asia and the Pacific during the period tripled to 3.3 percent from 1.1 percent, while the region’s share in world annual average flows decreased to 18 percent from 20 percent, the report says. Preliminary estimates for 1999 show that inflows have remained stable.
Features of India’s performance
During the decade, according to the report, a number of changes took place.
FDI flows to India were about half of those to Korea in the early 1990s, but during 1995–98 India almost caught up, with $2.7 billion in FDI compared with Korea’s $3.1 billion for that period.
From 1993 (and excluding 1998), the change in India’s position as FDI host is reflected in the ratio of FDI per $1,000 of GDP. For India, this ratio quadrupled from 1993 to 1997, and during 1993–97, India attracted more FDI than Korea.
FDI going into India’s large domestic market was predominantly from developed countries. In 1995, 86 percent of FDI stock was from developed countries, including the United Kingdom, the United States, and Germany, of which 24 percent came from the United States (which may be an underestimation, since some investments are routed through Mauritius).
The manufacturing sector attracted significant amounts of FDI. In 1995, it represented as much as 83 percent of total FDI to India.
FDI flows to selected countries in Asia and the Pacific
Why India’s dynamism?
The Indian government has made a concerted effort since the beginning of the 1990s to attract FDI. In 1991, India passed the New Industrial Policy Act, which introduced policy reforms and permitted the automatic approval of ventures with up to 51 percent of foreign equity in high-priority industries, the report explains.
The government has taken steps since the beginning of 2000 to liberalize further. Measures to attract FDI include
ending the state monopoly in insurance;
opening up banking and manufacturing industries to competition;
rapidly divesting public sector enterprises;
increasing stakes for foreign investors in such projects as chemicals and chemical products, electricity production and distribution, construction, transport and storage, and advertising; and
allowing wholly foreign-owned ventures in the mining and film industries.
In addition, India is moving to a system where most investment proposals are approved automatically, except for a short negative list, as long as the proposed foreign equity is within the specified ceiling. Foreign exchange controls have been relaxed, and mandatory licensing will be relaxed further, the report says. International trademarks are protected by legislation, and other legislation was passed to bring Indian patent law up to global standards.
India has also undertaken international measures to promote and protect FDI and foster economic cooperation. As of March 2000, India had concluded 37 bilateral investment treaties and 72 double taxation treaties. India also joined the Multilateral Investment Guarantee Agency in 1994.
According to a survey conducted by the Confederation of Indian Industry, investors are optimistic about the near-term business outlook. Their optimism, coupled with the government’s commitment to economic reform, makes India’s potential for higher FDI growth even greater.