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Trade of India & FDI

Introduction

The integration of the domestic economy through the twin channels of trade and capital flows
has seen acceleration over the last two decades as India's GDP reached Rs 190.10 trillion (US$
2.72 trillion) in 2018-19. Simultaneously, the per capita income also nearly trebled during these
years. India's trade and external sector had a significant impact on the GDP growth as well as
expansion in per capita income.

• Total export from India (Merchandise and Services) stood at US$ 528.45 billion in 2019-
20, while total import was estimated at US$ 598.61 billion according to data from the
Ministry of Commerce & Industry.
• The merchandise export stood at US$ 314.31 billion in 2019-20, while that for import
touched US$ 467.19 billion in the same period.
• The estimated value of services export and import for 2019-20 stood at US$ 214.14
billion and US$ 131.41 billion, respectively.

According to Minister for Commerce and Industry, the government of India is keen to grow
export and provide more jobs for young, talented and well-educated people as well as for semi-
skilled and unskilled workforce in India.

About FDI (Foreign Direct Investment)

FDI is the net inflow of investment that involves

foreign funds into an enterprise operating in a
different country of origin from the financier. It is a
vital part of an open and real international economic
system and a major promoter to development.

• In cases of FDI, the investor's purpose is to

gain an effective voice in the management of an enterprise.
• In other words, companies making such direct investments have a significant degree of
influence and control over the company into which the investment is made.
• The foreign entity or group of associated entities that make an investment is termed as
"direct investor".
• The unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in
which direct investment is made is referred to as a "direct investment enterprise".
• FDI flow increased worldwide between 1980 and 1990 to a triple of normal value.
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Some degree of equity ownership is almost always considered to be associated with an effective
voice in the management of an enterprise. A threshold of 10 percent of equity ownership is
required to qualify an investor as a "foreign direct investor".

Need of FDI

• FDI serves as an important source to fulfil the gap between income and savings, in
technology up-gradation and efficient exploitation of natural resources along with the
development of basic infrastructure.
• It improves the balance of payment condition and helps the recipient firms to cope with
competition in better ways.
• FDI brings better technology and management, marketing networks and offers
competition.

FDI in India

• Foreign investment was introduced in 1991 under Foreign Exchange Management Act
(FEMA), driven by then FM Manmohan Singh.
• There are two routes by which India gets FDI.
1. Automatic route: By this route, FDI is allowed without prior approval by
Government or RBI.
2. Government route: Prior approval by the government is needed via this route.
The application needs to be made through Foreign Investment Facilitation Portal,
which will facilitate the single-window clearance of FDI application under Approval
Route.
3. NRI route: Special benefits for NRIs. For those non-resident Indians who want to
invest in India.

FDI permitted for different sectors in India

100% AUTOMATIC ROUTE

Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services under
civil aviation sector), 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,
Industrial Parks, IT & BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal
ores, Other Financial Services, Services under Civil Aviation Services such as Maintenance &
Repair Organizations, Petroleum & Natural gas, Pharmaceuticals, Plantation sector, Ports &
Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways, Single Brand Retail
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Trading, Textiles & Garments, Thermal Power, Tourism & Hospitality and White Label ATM
Operations

UPTO 100% AUTOMATIC ROUTE

• Infrastructure Company in the Securities Market - 49%
• Insurance - upto 49%
• Medical Devices - upto 100%
• Pension - 49%
• Petroleum Refining (By PSUs) – 49%
• Power Exchanges – 49%

UPTO 100% FDI PERMITTED UNDER GOVERNMENT ROUTE

• Banking & Public sector – 20%
• Broadcasting Content Services – 49%
• Core Investment Company – 100%
• Food Products Retail Trading – 100%
• 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 a facsimile edition of foreign newspapers) – 100%
• Print Media (publishing of newspaper, periodicals and Indian editions of foreign
magazines dealing with news & current affairs) – 26%
• Satellite (Establishment and operations) – 100%

UPTO 100% FDI PERMITTED UNDER AUTOMATIC & GOVERNMENT

• Airport transport services (scheduled air transport services, regional air transport
services) – upto 49% (auto) + above 49% (Govt.)
• Banking (Private sector) – upto 49% (auto) + above 49% (Govt)
• Biotechnology (brownfield) – upto 74% (auto) + above 74% (Govt)
• Defence – upto 74% (auto) + above 74% (Govt)
• Healthcare (Brownfield) – upto 74% (auto) + above 74% (Govt)
• Pharmaceuticals (Brownfield) – upto 74% (auto) + above 74% (Govt)
• Private Security Agencies – upto 74% (auto) + above 74% (Govt)
• Telecom Services – upto 49% (auto) + above 49% (Govt)
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LIST OF PROHIBITED SECTORS:

• Lottery Business including Government/ Private lottery, online lotteries etc.
• Chit Funds
• Trading in Transferable Development Rights (TDR)
• Manufacturing of Cigars, cheroots, cigarillos, and cigarettes (tobacco or tobacco
substitutes)
• Gambling and betting including casinos- Foreign technology collaboration in any form
including licensing for franchise, trademark, brand name, management contract is also
prohibited for Lottery Business and Gambling and Betting activities
• Nidhi Company
• Real Estate Business or Construction of Farm Houses- Real estate business shall not
include the development of town shops, construction of residential/ commercial
premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and
regulated under the SEBI (REITs) Regulations, 2014

Sectors which are not open to private sector investments – atomic energy, railway operations
(other than permitted activities mentioned under the consolidated FDI Policy).

Recent Data

• FDI equity inflow in India stood at US$ 36.79 billion during April-December 2019.

• Data for 2019-20 indicates that the service sector attracted the highest FDI equity
inflow of US$ 6.52 billion, followed by computer software and hardware at US$ 6.34
billion, telecommunications sector at US$ 4.29 billion and trading at US$ 3.52 billion.

• During 2019-20, India received the maximum FDI equity inflow from Singapore (US$
11.65 billion), followed by Mauritius (US$ 7.45 billion), the Netherlands (US$ 3.53
billion), Japan (US$ 2.80 billion) and the USA (US$ 2.79 billion).

• In terms of states, Maharashtra attracted the most FDI inflow followed by Delhi and
Karnataka.
Investments/ developments
Some of the significant FDI announcements made recently are as follows:

• In May 2020, private equity (PE) firm Vista Equity Partners announced an investment of
Rs 11,367 crore (US$ 1.61 billion) in Jio Platforms for a 2.32 per cent stake.
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• In May 2020, PE firm Silver Lake announced an investment of Rs 5,655.75 crore (US$
802.35 million) into Jio Platforms for 1.15 per cent stake.
• In April 2020, Facebook, Inc. announced an investment of Rs 43,574 crore (US$ 6.23
billion) into Jio Platforms for 9.99 per cent stake.
• In January 2020, Amazon India announced an investment of US$ 1 billion for digitizing
small and medium businesses and creating one million jobs by 2025.
• In January 2020, Mastercard announced its plans to invest up to US$ 1 billion in India
over the next five years to double its research and development effort in the Indian
market.
• In October 2019, French oil and gas giant, Total S.A., acquired 37.4 per cent stake in
Adani Gas Ltd for Rs 5,662 crore (US$ 810 million), making it the largest FDI in India’s
city gas distribution (CGD) sector.
• In August 2019, Reliance Industries (RIL) announced one of India's biggest FDI deals with
Saudi Aramco to buy a 20 per cent stake in Reliance's oil-to-chemicals (OTC) business at
an enterprise value of US$ 75 billion.

Government Initiatives

• In May 2020, the government increased FDI in Defence manufacturing under the
automatic route from 49 per cent to 74 per cent.

• In April 2020, the government amended existing consolidated FDI policy for restricting
opportunistic takeovers or acquisition of Indian companies from neighbouring nations.

• In March 2020, the government permitted non-resident Indians (NRIs) to acquire up to

100 per cent stake in Air India.

• In December 2019, the government permitted 26 per cent FDI in digital sectors.

• In August 2019, the government permitted 100 per cent FDI under the automatic route
in coal mining for open sale (as well as in developing allied infrastructure like
washeries).

• In Union Budget 2019-20, the government of India proposed opening FDI in aviation,
media (animation, AVGC) and insurance sectors in consultation with all stakeholders.

• 100 per cent FDI is permitted in insurance intermediaries. So far, FDI in the insurance
sector was capped at 49 per cent under the automatic route. Notably, FDI for insurance
companies is still capped at 49 per cent. The policy says an insurance intermediary that
has a majority shareholding of foreign investors will be incorporated as a limited
company under the provisions of the Companies Act, 2013.
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• As of February 2019, the Government of India has been working on a road map to
achieve its goal of US$ 100 billion worth of FDI inflow.

• In February 2019, the government of India released the Draft National E-Commerce
Policy to encourage FDI in the marketplace model of E-commerce. Further, it stated that
the FDI policy for the E-commerce sector was developed to ensure a level playing field
for all participants.

Types of Agreements in Trade

There are five types of agreements that we have in trade:

1. Partial Scope Agreement – Partial scope agreement allows for the trade between
countries over a small number of goods. "Partial Scope" which is not defined or
referred to in the WTO Agreement, means that the agreement covers only certain
products. Due to the Partial scope agreement, there is an advantage of market access,
overall production will increase, gains or profits will be high, and exporters are
encouraged to export more.

2. Free Trade Agreement – Free trade agreement is a preferential arrangement where

members will reduce tariffs on trade among themselves, whereas for the rest of the
world, they will impose their very own tariffs.

In free trade agreement, there can be a situation of Bypassing of Trade.

Bypassing of Trade: - It means that the country other than the country which shares a
trade agreement can take advantage of a free trade agreement. For example, India, Sri
Lanka and Myanmar are in the trade agreement with each other on a specified tax rate
say 5%, and China intervenes in Sri Lanka and Myanmar and exporting with a duty of say
2% with them, the duty India shares with China is of 15%, the products of China can
enter India through Myanmar at the tax rate of 7% (2%+5%), this process is known as
bypassing of trade. The effective rate of Import duty is less here.

3. Customs Union – It is a free trade agreement, wherein countries will have a common
external tariff schedule to import from other countries. For example: India, Sri Lanka
and Myanmar decide that they have common external tariff schedules to deal with
China, say 12%. For the purposes of this agreement, a customs territory shall be
understood to mean any territory with respect to which separate tariffs or other
regulations of commerce are maintained for a substantial part of the trade of such
territory with other territories.
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4. Common Market - A common market is the formal agreement where the groups are
formed among several countries in which each member country adopts
a common external tariff. Tariffs are a common element in the process of international
trading. It is a customs union where movements of factors of production (Land, Labour,
Capital and Enterprise) is relatively free amongst member countries.

5. Economic Union – It is a common market, where member countries coordinate on their

macro-economic and exchange rate policies. An economic union is a trade bloc which is
composed of a common market with the customs union. The participant countries have
both common policies on product regulation, freedom of movement of goods, services
and the factors of production (Land, Labour, Capital and Enterprise) and common
external trade policy.

Economic Survey 2019-20 analyses the impact of India's trade agreements on overall trade
balance:

• India's exports increased by 13.4 per cent for manufactured products and 10.9 per cent
for total merchandise
• Imports increased by 12.7 per cent for manufactured products and 8.6 per cent for total
merchandise.
• India gained 0.7 per cent increase in trade surplus per year for manufactured products
and 2.3 per cent per year for total merchandise.

Under trade facilitation, India improved its ranking from 143 in 2016 to 68 in 2019 under the
indicator, "Trading across Borders", monitored by World Bank in its Ease of Doing Business
Report.

India's Foreign Trade Policy (FTP) provides the basic framework of policy and strategy for
promoting exports and trade. It is periodically reviewed to adapt to the changing domestic and
international scenario.

The Department is also responsible for multilateral and bilateral commercial relations, special
economic zones (SEZs), state trading, export promotion and trade facilitation, and development
and regulation of certain export-oriented industries and commodities.

The current Foreign Trade Policy (2015-20) focusses on improving India's market share in existing
markets and products as well as exploring new products and new markets. India's Foreign Trade
Policy also envisages:

• helping exporters leverage benefits of GST,

• closely monitoring export performances,
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• improving ease of trading across borders,

• increasing realization from India's agriculture-based exports and promoting exports from
MSMEs and labour-intensive sectors.

The DoC has also sought to make states active partners in exports. As a consequence, state
governments are now actively developing export strategies based on the strengths of their
respective sectors.

Following are the highlights of the FTP:

● FTP 2015-20 provides a framework for increasing exports of goods and services as well as
generation of employment and increasing value addition in the country, in line with the
‘Make in India’ programme.
● The Policy aims to enable India to respond to the challenges of the external environment,
keeping in step with a rapidly evolving international trading architecture and make trade
a major contributor to the country’s economic growth and development.
● It aims to increase India’s export of merchandise and services from US $465 bn in 2013-
14 to approximately US$ 900 bn by the 2019-20 and to raise India’s share in the world
export from 2% to 3.5%.
● FTP 2015-20 introduces two new schemes, namely ‘Merchandise Exports from India
Scheme (MEIS)’ for export of specified goods to specified markets and ‘Services Exports
from India Scheme (SEIS)’ for increasing exports of notified services. Duty credit scrips
issued under MEIS and SEIS and the goods imported against these scrips are fully
transferable.
● Measures have been adopted to nudge procurement of capital goods from indigenous
manufacturers under the EPCG scheme by reducing specific export obligation to 75per
cent of the normal export obligation.
● Measures have been taken to give a boost to exports of defence and hi-tech items.
● E-Commerce exports of handloom products, books/periodicals, leather footwear, toys
and customised fashion garments through courier or foreign post office would also be
able to get the benefit of MEIS (for values up to INR 25,000).
● Manufacturers, who are also status holders, will now be able to self-certify their
manufactured goods in phases, as originating from India with a view to qualifying for
preferential treatment under various forms of bilateral and regional trade agreements.
This ‘Approved Exporter System’ will help the manufacturer exporters considerably in
getting fast access to international markets.
● A number of steps have been taken for encouraging manufacturing and exports under
100 per cent EOU/EHTP/STPI/BTP Schemes. The steps include a fast track clearance
facility for these units, permitting them to share infrastructure facilities, permitting inter-
unit transfer of goods and services, permitting them to set up warehouses near the port
of export and to use duty-free equipment for training purposes.
● 108 MSME clusters have been identified for focused interventions to boost exports.
Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised and repositioned to achieve
the objectives of ‘Skill India’.
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● Trade facilitation and enhancing the ease of doing business are the other major focus
areas in this new FTP. One of the major objectives of new FTP is to move towards
paperless working in a 24x7 environment.
● A new institution - Centre for Research in International Trade - is being established to
strengthen India's research capabilities in the area of international trade and also to
enable developing countries to articulate their views and concerns from a well-informed
position of strength.
● Two institutional mechanisms are being put in place- the board of trade for advisory role
and council for trade development (CTD) and promotion, which would have
representation from states and UT governments.

While the external environment has a major role to play in the success of export policies, it is also
critical to address constraints within India including infrastructure bottlenecks, high transaction
costs, complex procedures, constraints in manufacturing and inadequate diversification in India's
services exports. India is a signatory to the Trade Facilitation Agreement (TFA) at the WTO,
which will contribute to the simplification and lowering of transaction costs.

India is presently known as one of the most important players in the global economic
landscape. Its trade policies, government reforms and inherent economic strengths have
attributed to its standing as one of the most sought-after destinations for foreign investments
in the world. Also, technological, and infrastructural development being carried out across the
country augurs well for the trade and economic sector in the years to come.

The Government of India has been working on striking important deals with the Governments
of Japan, Australia, and China to increase contribution towards the economic development of
the country and growth in the global market.