FDI chasing “services sector” despite govt’s push to manufacturing

Despite the central government's push to boost manufacturing through the 'Make in India' initiative, foreign investors continue to chase bets in the services sector.

More about the News:

• According to “India Ratings and Research” (domestic rating agency), a bulk of the foreign direct investment (FDI) in manufacturing was not fresh investments.
• The flow of FDI remained tilted in the favour of the service sector.
• Efforts made by the government to attract more investments in the manufacturing sector through 'Make in India' campaign haven’t yielded.

What could be the possible reason?

• Fewer Complexities in the Service sector: Doing Business in the services sector is less complicated than doing business in the manufacturing sector in India.
• FDI is highly clustered around a few States: The foreign fund flows may not be helping the cause of broad-based development across the country.
  • Four States - Maharashtra (27.5%), Karnataka (23.9%), Gujarat (19.1%), and (Delhi 12.4%) – collectively accounted for 83% of the FDI between October 2019 and March 2022.

Comparative Data:

Top 5 FDI Sourcing Nation:

• Singapore: 27.01%
• USA: 17.94%
• Mauritius: 15.98%
• Netherlands: 7.86%
• Switzerland: 7.31%

Investors can make FDI in a number of ways.

• Some common ones include establishing a subsidiary in another country, acquiring or merging with an existing foreign company, or starting a joint venture partnership with a foreign company.
  • Apart from being a critical driver of economic growth, FDI has been a major non-debt financial resource for the economic development of India.
  • It is different from Foreign Portfolio Investment where the foreign entity merely buys stocks and bonds of a company.
  • FPI does not provide the investor with control over the business.

Routes of FDI:

Automatic Route:

• In this, the foreign entity does not require the prior approval of the government or the RBI (Reserve Bank of India).
• In India FDI up to 100% is allowed in non-critical sectors through the automatic route, not requiring security clearance from the Ministry of Home Affairs (MHA).
• Prior government approval or security clearance from MHA is required for investments in sensitive sectors such as defence, media, telecommunication, satellites, private security agencies, civil aviation, and mining, besides any investment from Pakistan and Bangladesh.

Government Route:

• In this, the foreign entity has to take the approval of the government.
  • The Foreign Investment Facilitation Portal (FIFP) facilitates the single window clearance of applications that are through the approval route. It is administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.

Initiatives to boost foreign investments in Manufacturing Sector:

• Production Linked Incentive (PLI) Schemes
• Make in India
• Investment Clearance Cell (ICC)
• One District One Product (ODOP)
• Setting up Special Economic Zones (SEZs)
• Flexibility in the labour laws