DEST Practice 9

Foreign Direct Investment policy in India has undergone progressive liberalisation over the past three decades, evolving from a highly restrictive framework that required case-by-case government approval for most foreign investment proposals to a largely open regime in which foreign investors can invest in the overwhelming majority of sectors through the automatic route without prior government approval, subject to sectoral caps and conditionalities specified in the Consolidated FDI Policy issued periodically by the Department for Promotion of Industry and Internal Trade. The shift towards liberalisation of FDI policy reflects the recognition that foreign investment brings not only capital but also technology, management expertise, global market access, supply chain integration, and productivity improvements that complement domestic investment and accelerate economic development beyond what domestic savings alone could finance. The automatic route, under which foreign investment flows without prior approval up to the sectoral cap, covers sectors including manufacturing, services, infrastructure, real estate, pharmaceuticals, retail trading in single brand, e-commerce, logistics, and hospitality, while the government approval route requiring case-by-case review is reserved for sensitive sectors including defence above forty-nine percent, telecommunications above forty-nine percent, multi-brand retail, print media, satellite broadcasting, and investment from countries sharing land borders with India, which is subject to a mandatory approval requirement under national security grounds. Special Economic Zones, established under the Special Economic Zones Act of 2005, are geographically defined export processing enclaves in which enterprises receive a range of fiscal incentives including exemption from customs duties on imported inputs, exemption from central excise duty on domestic procurement, export promotion capital goods benefit, and tax holidays on profits from export activities, as well as infrastructure facilities and simplified regulatory procedures intended to create a competitive operating environment that attracts both domestic and foreign investment in export-oriented manufacturing and services. The policy framework for Special Economic Zones has been periodically revised to address concerns about revenue foregone, the availability of suitable land, and the level of administrative facilitation, with some adjustments made to fiscal incentives while maintaining the core concept of designated export processing enclaves with simplified procedures. India has concluded investment treaties and agreements with numerous countries and economic blocs that provide investors with guaranteed protections including fair and equitable treatment, most favoured nation treatment, protection against expropriation without adequate compensation, and access to international arbitration for dispute resolution, creating a stable and predictable legal environment for long-term foreign investment. The National Investment and Infrastructure Fund, a sovereign wealth fund-type entity managed by professional fund managers, mobilises domestic and international capital for investment in commercially viable infrastructure projects in sectors such as energy, roads, ports, airports, and urban infrastructure, channelling institutional investor appetite for infrastructure assets into productive investment in the country. The GIFT City International Financial Services Centre in Gujarat provides a globally competitive financial centre with favourable regulatory conditions, tax concessions, and institutional infrastructure that attracts international financial institutions, fund managers, insurance companies, and financial technology firms to establish operations on Indian soil, bringing global financial services capabilities closer to the domestic economy. Bilateral Investment Treaties, currently being renegotiated on the basis of India's model BIT of 2016 which incorporates lessons from disputes under earlier treaties, balance investor protection with the government's right to regulate in the public interest.