India, being a developing country and also being classified
as a newly industrialised country, has the seventh largest economy in the world
with 2.074 trillion USD nominal GDP and average growth rate of approximately 7%
annually. The long-term GDP growth rate of India was mainly stimulated by its
young population, corresponding low dependency ratio, investment rates and the
integration into the global economy.

During the years of 2010-2012 India was recognised
as the second most attractive destination for foreign direct investments after
China. Here we can list the advantages that India has to make itself an
important FDI destination for multinationals: political stability of the
country, low costs and taxes, high rates of return on investment, skilled and
competitive labour force. Also India has strengths in some significant areas
such as information technologies, chemicals and jewellery.

Foreign direct investments have played a vital role
in the development of India. And in present, foreign direct investments are
needed to maintain the pace of the rapid growth and development of economy. FDI
flows were initially very low due to regularity policy framework, but afterwards
there was a sharp rise in the amount of foreign direct investments in India as
a new policy and approach was implemented. The economy of India went through
several periods. During each of the period the country had a certain policy and
approach towards foreign direct investments, gradually becoming open for
foreign investors. Industrial policy reforms have gradually removed
restrictions on expansion of foreign companies and facilitated easy access to
foreign technology.

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Before 1947 the economy of India was under British
Raj. In 1947, after independence the country entered Pre-liberalisation period.
Domestic policy strongly emphasised on business regulation, and central
planning, whereas trade and foreign investment policies were relatively liberal.
This is the receptive attitude towards FDIs. However, during the years of 1968-
1980 the attitude was changed to a more restrictive one – strong control over
FDIs. In these years FDIs without technology were not allowed, also if the
skate was above 40% it was forbidden. From 1981 gradual liberalization started.
And starting from 1991, the country entered Post-liberalisation period. This
period was mainly characterized by the collapse of the Soviet Union. As the
countries of the Soviet Union were the main export partners of India, the
experts decreased resulting in a major balance-of-payments crisis. The
government started to find ways to recover the economy, for example asking for
a $1.8 billion bailout loan from the International Monetary Fund. Another way
was to get FDI inflows. It was time to create conditions to attract FDIs. The
country launched open door policy encouraging FDIs in core and infrastructure industries. Foreign
investment was introduced in 1991 under Foreign Exchange Management Act (FEMA).
However, India completely liberalised its FDI policy in 2005, allowing up to a
100% FDI stake in ventures of various sectors. (source – 10)

Today many foreign companies bring their capital to
India investing in the fastest growing and most attractive sectors of the
economy in order to take advantage of cheaper wages and changing business
environment of India. Now let’s see how the amount of FDI inflows to India
differed from year to year. (Chart 9)

In the chart below we can see FDI inflows from 1980
to 2016. In the initial stage, mainly in 1980s the inflows of FDI in India is
very low due to some restrictions, government policies as we already mentioned
above. So this chart can be divided into two parts – before 1991, that is
pre-liberalisation period, and after 1991, that is the post-liberalisation
period, when FDI inflows started to increase due to the awareness of the
importance of FDIs and the newly launched policies by the government. After is
there is a continuous boost in FDI inflows up to present. One of the biggest
boosts in FDI inflows to Indian economy was in 2006, when FDI inflows reached
from 7.3 billion USD of 2005 to 20 billion USD in 2016, that is nearly three
times more than in 2005 mainly because of the new policy in 2005, allowing up
to a 100% FDI stake in ventures of various sectors. Another notable boost was
after 2012 when the country extended reforms to oil, retail, defence, telecom
and other sectors. In 2016, FDI inflows to India reached their highest peak
ever – 46.4 billion USD at a time global FDI inflows fell, accounted for 2.1%
of India’s GDP. The reason is again the policy of the government. In 2014, the
government increased foreign investment upper limit from 26% to 49% in
insurance sector. It also launched Make in India initiative under which 25
sectors were liberalised from restrictions. In 2015 India overtook China


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