Introduction
Foreign direct investment plays a vital role in the economic growth and globalization of countries. The FDI concept shows interest in one economy crossing borders with another economy to invest in small individual businesses and big national companies situated in foreign states. FDI is often seen as an essential part of the nation’s economic development. It brings with it different areas and skills like new technology, innovation, capital, experienced expertise, and growth opportunities.
Right now, India is known as a global country, and every country is trying to connect with India because of its skilled, talented, and hardworking population. So many different topics and discussions make direct investments easier. Firstly, India has updated their FDI policies known as “Sector Specific Limits” that some sectors have limits on the percentage of ownership or control that could be acquired by foreign investors and “Automatic Route or Government Route” that allows 100% FDI in most sectors through “automatic route,” which requires no government approval while reserving specific important sectors that require government approval. This approach will simplify regulations for doing business to encourage foreign investment. The route of investment is either an automatic or government-approved route. Because of the automatic route, there are more chances for growing IT sectors, infrastructure, construction, and multi-brand retail, which have certain limitations because of the government approval route. The present discussion on the FDI is because of the significant change in the FDI reforms and trends of the recent policy changes, which are opening the sectors through the “automatic route,” like space, civil aviation, and defence. Whenever any new policy or concept applies, then appear the challenges and limitations that come through regulatory hurdles, political risk, and taxation issues which is easier because of the “automatic route and government route.”. India can improve its FDI environment because it’s a growing economy that will boost tax revenues and economic activity.
Different aspects are going to be discussed.
Types of Foreign Direct Investment
Greenfield Investment
This investment creates new resources for setting up a business that gets support in the form of continuous capital. This investment helps to maintain and stabilize the condition of the company; that’s why it’s also known as starting from scratch. This investment helps to improve the employment and productivity of the business.
Mergers and Acquisition
This investment stabilized the position of the investor because, in the form of mergers and acquisitions, their company is already in existence. This investment is only for the purpose of running through a new context and ideology—acquisition of the company by taking over all control and assets of the company.
Brownfield Investment
In that investment, the investor put his money, which was already in operation or flowing into the market. In general terms, that industry or business has taken on lease or purchased the particular business with all rights. Mergers and acquisitions can be concluded in this, but different aspects of the Brownfield Investment need to be precise.
Horizontal Vs Vertical
In the form of horizontal investment refers to having the exact nature, product, and connectivity as one industry type. In this industry, the same chain of business exists; e.g., if an investor invested in the French pharmaceutical industry and another country, the area of pharmaceuticals for investment will be the same type of industry.
Vertical investments are made for different businesses that support each other; they can be manufactured in various forms. Suppose the raw material requires the first company, then the second company will manufacture that raw material, which makes the business and investment stronger.
India’s FDI Policies & Reforms
Sectors Specific Limits
The FDI goal is obvious: to invest in the development and economic growth of the country. That’s why India has implemented sectors like technology, manufacturing, and service sectors that have no limitation for investment because it is in favour of the country’s economic growth and development. This creates employment opportunities and new technologies that help to gain access to growth on a global level.
Restrictions
Why are there limits on specific sectors, like telecom, defence, real estate, and retail? The primary reason is protecting the country through securing and safeguarding particular sectors, which makes it impossible to lose interest in the government because of national interest. Â
The sectors in which 100% FDI is allowed through the automatic route
Agricultural and animal husbandry, the plantation sector, petroleum and natural gas, up to 49% defence manufacturing, broadcasting, civil aviation airports, construction and development, industrial parks, 49% private security agencies, up to 49% telecom, e-commerce activities, duty-free shops, railway infrastructure, asset reconstruction companies, up to 49% banking private sectors, credit information companies, 49% infrastructure companies in the securities markets, 49% insurance, 49% pension sector, 49% power exchanges, and financial service activities regulated by government agencies.Â
Through Government Route
Mining diamonds, gold, silver, titanium, and coal; above 49% defence manufacturing (in case of modern technology); 49% content broadcasting; 26% print media; 100% for any publications, books, scientific and technical; above 49% and up to 74% private security agencies; above 49% telecom; above 49% & up to 74% banking private sectors; 20% banking public sectors.
This is according to Indian government data, which allows the automatic route with restrictions and limitations through the government route.
Indian Investment Policies Automatic Route Vs Government Route
How does the automatic route simplify investment? – The activity that is performed in another state has a lot of restrictions, but what if you learn that there is no need for any prior permission before investing in another country? Yes, it is possible, which is done by India through the automatic route.
- That simplifies not only the process but also the critical activity, like investment, where you do not need any prior permission from the Indian government or any agencies to invest in a particular sector through the automatic route.
- Sectors requiring government approval—sectors that come under the interest of national security and protection that have limitations on telecom, real estate, retail, and defence.
- Recent Policy Changes (2022-2024 and 2025) – New sectors opened for 100% FDI—Now space is 100% FDI under the automatic route for space-related activity for development; manufacturing operations are now open field. Defence is the most sensitive sector to be known; it is not fully developed, but 74% is available if the investment is made in any new technology with certain limitations. The aviation sector has opened for investment with limitations and restrictions. The retail industry is open to the dependent type of retail operation and management. In that digital sector, 100% is open for investment.
- Relaxation in retail, manufacturing, and the digital sector—the main microeconomic build on these sectors, and that reason is the government thinking about economic growth and innovation and increased investment and more flexible business growth and creating opportunities with the intention to relax for these sectors.
Benefits of FDI in India
- Whenever investments come, they get invested efficiently through the automatic route to the social sector, where different fields of people get the opportunity to work and earn money, which not only creates jobs but also helps the country stabilize and grow the economy.
- FDI helps to improve power plants, roads, and communication networks. Foreign companies bring their innovations and technologies, which are not only useful for work but also manufactured in India by skilled engineers. Overall, it has developed India’s infrastructure and technology transfer system.
- The company wants to work on the global level. Hence, the investment makes global expansion easy through the unique product of global trade, creates relations, and provides business opportunities to work on a global level in different fields.
- In India, most local businesses and companies are there, and FDI benefits them by allowing them to work with experienced foreign companies. Working together will help us go the broad way and think globally, which will bring ideas and innovations and create a competitive market in India.
Conclusion
Foreign direct investment plays a vital role in growing the economy and global networking. India has updated FDI policies, which indicate clear specific sector limitations and the source, which is through the automatic route and government routes, which made it easier for the foreign investors to take the initiative in the country’s developments about ensuring the protection of the national interest. The automatic route simplifies the processing for foreign investors, which is more straightforward now that it requires prior permission from any government agencies, and they can invest in a broad sector of areas without any hesitation.
India gets a lot of benefits from FDI. It not only creates employment but also drives economic expansion and improves infrastructure, the transfer of technology, and innovation practices. This investment benefits local businesses by being recognized on the global level for their idea and uniqueness through trade and industry. This international connection strengthens India’s emerging markets. Despite all challenges, bureaucratic hurdles, political risk, and complex tax policies, which have a positive impact on the FDI.
As advanced Indian countries refine their investment policies and open up new sectors like space, civil, defence, and aviation. It is the beginning of becoming the top destination for foreign investment. With continued reforms and modernization, its economy is through the complete potential of FDI and on the way to creating sustainable development and creating more opportunities.
