Why Foreign Portfolio Investing Are Increasing Investment in the Indian markets, investing INR 26.5 Cr in Sept


Foreign portfolio investors (FPIs) were net buyers for the second month in a row in the Indian market with an investment of Rs 26,517 crore in September. Apart from being a critical driver of economic growth, Foreign Direct Investment (FDI) has been a significant non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges like tax exemptions, etc. For a country where foreign investment is being made, it also means achieving technical know-how and generating employment.

The Indian Government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The Government has taken many initiatives, such as relaxing FDI norms across sectors like defence, PSU oil refineries, telecom, power exchanges, and stock exchanges. According to the Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflow in India stood at USD 529.63 billion between April 2000 and March 2021, indicating that the Government’s efforts to improve ease of doing business and relaxing FDI norms have yielded results.

Computer software and hardware emerged as the top sectors attracting the maximum share of FDI equity inflow, at 44 per cent banks’ in FY21. Other leading sectors that were attractive to investors in FY21 were construction (infrastructure) activities, which received a 13 per cent share of FDI equity inflow, and the services sector with an eight per cent share. Finally, promising sectors recording more than a 100 per cent jump inequity in FY21 were rubber goods, retail trading, drugs and pharmaceuticals, automobile, and electrical equipment.

Currently, all FDI proposals for Indian space companies are subject to DoS approval. While a foreign investor can technically invest up to 100 per cent under the existing Indian space regulation, any such transaction requires approval by the Government first. Since June, space industry leaders have been formally requesting the Indian Government to permit FDI through the “automatic route” instead of requiring regulatory approval. With less stringent FDI approval rules, India could be poised to attract billions of dollars into the Indian space and satellite sectors. This could establish India as a significant player in the global space communication sector. The Policy as drafted permits more private activity in the space sector, including constructing ground stations, spaceports and manufacturing facilities to make satellites and launch vehicles. Specific mechanics for FDI are yet to be published.

A few companies recently received FDI and have been facilitating the fund into expansion not just in terms of products but also geographically. In June 2021, Urban Company, a home services marketplace, announced that it has raised Rs. 1,857 crore in a fundraising round led by Wellington Management, Prosus Ventures and Dragoneer. Moreover, in November 2020, Amazon Web Services (AWS) announced to invest USD 2.77 billion in Telangana to set up multiple data centres; this is the largest FDI in history of the state.

The Ease of Doing Business (EoDB) index is a ranking system established by the World Bank Group wherein the ‘higher rankings’ (a lower numerical value) indicate better, usually more superficial, regulations for businesses and stronger property rights protections. The Overall Rank of India in the Doing Business Report 2015 was 142 out of 190 economies. This has improved to 63rd position in the Doing Business Report 2020.

Since 2014, the aim has been to create a conducive business environment by streamlining the existing regulations and processes and eliminating unnecessary requirements and procedures. Three major initiatives are being pursued, focusing on the World Bank’s Ease of Doing Business, the State & District Reform Action Plan, and a systematic approach to minimize the regulatory compliance burden on businesses. The key driver for improving efficiency has been technology.

India is expected to attract foreign direct investments (FDI) of USD 120-160 billion per year by 2025, according to a CII and EY report. Over the past ten years, the country witnessed a 6.8% rise in GDP, with FDI increasing to 1.8%. In terms of attractiveness, investors ranked India third and 80% of investors have plans to invest in India in the next 2-3 years, while 25% reported investments worth USD 500 million.

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