Faster FDI approvals can help India benefit from ‘China Plus One’

FDI Inflows in India
India eyes $100 billion annual FDI approvals, but needs to streamline approval processes.

Currently, 46 foreign direct investment proposals are awaiting clearance from various government departments. The department for promotion of industry and internal trade has urged 17 departments to accelerate their decision-making processes. Although these proposals should have been processed within a 12-week period, they remain unresolved, hindering the country’s efforts to attract more FDI. The DPIIT has noted in a letter that delayed approvals have become a common issue in some departments that do not adhere to the timeline.

India has experienced a fall in FDI inflows from $84.8 billion in 2021-2022 to $71.3 billion in 2022-2023. During the first 10months of fiscal year 2023-24, inflows declined by 31% to $25.5 billion. According to an UNCTAD report, while major Asian developing economies have seen significant declines in FDI, they remain attractive for greenfield projects. Notably, China reported a rare 6% fall in FDI inflows, and India experienced a 47% drop but remained among the top five global destinations for greenfield projects.

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India fell from seventh to eighth place in the global FDI rankings, as per the 2023 UNCTAD World Investment Report. To boost foreign investment, strategic measures are needed. The finance ministry remains optimistic about an increase in investments this year, citing the general slowdown among developing countries. 

Delays in FDI approvals

The global economy has been undergoing significant shifts, influenced by geopolitical tensions, supply chain disruptions, and changing trade dynamics. These factors have had a profound impact on FDI flows worldwide, not just in India. The volatility of the global market, coupled with economic slowdowns in key economies, has prompted investors to be more cautious, impacting FDI decisions. Understanding these global trends is crucial for India as it seeks to position itself as a stable and promising destination amid worldwide uncertainties.

At a time when FDI is vital for economic growth, it is worrying that India faces delays in approval processes. The DPIIT has called for immediate action from relevant government bodies, including the ministry of finance’s department of economic affairs, to ensure timely approval of these proposals. Of the 46 proposals, 27 have received comments from the ministry of home affairs regarding security clearances, necessary for sectors like broadcasting, telecommunications, satellite, defence, and civil aviation. Proposals from countries sharing land borders with India require additional scrutiny.

The government is looking at $100 billion in FDI annually over the next five years. However, this goal cannot be achieved without efficient approval processes. Despite improvements, delays remain a significant issue.

To streamline foreign investment approvals, the government abolished the Foreign Investment Promotion Board (FIPB) in May 2017, allowing direct handling of FDI applications by relevant ministries and departments. This change, however, has led to some ongoing challenges with pending cases.

FDI plays a crucial role in economic development, and the BJP government has taken numerous steps over the past decade to remove procedural bottlenecks, enhance the ease of doing business, and reduce bureaucracy. Most sectors now permit 100% FDI under the automatic route, with exceptions for certain strategically important sectors.

Enhancing digital infrastructure is another critical area that can propel India’s attractiveness as an FDI destination. The government’s push towards digitalisation, including significant investments in digital infrastructure and services, aims to create a more connected and efficient economy. Initiatives like Digital India not only improve service delivery but also make India an appealing choice for tech-focused investments. This digital thrust is crucial for attracting investments in sectors such as IT, e-commerce, and startups, which are increasingly pivotal in the global investment landscape.

FTAs for FDIs

India is strategically positioned to benefit from the ‘China Plus One’ strategy as companies look for alternatives to Chinese manufacturing. By enhancing its infrastructure and supply chains, India can become a reliable global trade partner. Free Trade Agreements (FTAs) with European and UK economies, which are major players with existing investments in China, could encourage them to relocate operations to India.

India’s competitive labour costs and business-friendly policies make it an appealing investment destination. This is evident from significant investments by tech giants and manufacturing firms. Taiwan’s Innolux plans to invest $3-4 billion in LCD production over the next two years, in partnership with the Vedanta Group. Similarly, US chipmaker Micron is establishing a $2.7 billion semiconductor assembly plant in Gujarat, expected to be operational next year. Additionally, Tata Group’s acquisition of Wistron India in 2023 marked the first Indian company to assemble iPhones.

India has actively pursued FTAs, recently signing agreements with Mauritius, the United Arab Emirates, and Australia, seeking to position itself as a global trade leader. EastAsiaForum suggests that India should continue to sign FTAs to secure higher FDI inflows, diversify its import sources, and increase its participation in global value chains. Effective FTAs often boost FDI when partners are at different stages of development, a strategy that could further benefit India given the economic profiles of its recent FTA partners.