Cross border investments in India

Abstract

The Indian government started the process of liberalization, including the policies pertaining to foreign investment, in 1991. Since then the Indian regulatory environment for foreign investment has been consistently eased to make it increasingly investor-friendly. Prior to 2010, the Indian FDI policy framework comprised of multiple regulations under multiple statutes such as Foreign Exchange Management Act (FEMA), Reserve Bank of India (RBI) Circulars and Government of India press notes etc. All FDI related regulations were combined into one policy and the consolidated policy was released on April 1, 2010. At the time, the government committed to updating the FDI policy every six months. The second revision to the policy, i.e. the third Consolidated FDI policy was made effective from April 1, 2011.i ii This report can be divided into 3 logical sections. The first section presents our understanding of the FDI policy of India in a simple form. This also includes the salient features of Indian FDI policy, some aspects of how RBI monitors the foreign investment activities in the country and impact of foreign portfolio investments on Indian capital markets. For analysis of FDI policy, we have referred to the Consolidated FDI policy of India, several research papers on FDI policy and publications by accounting firms such as PricewaterhouseCoopers. The second section includes a brief analysis of FDI policy of China vis-à-vis that of India, including qualitative and quantitative comparisons. In order to analyze and explain the reasons for these differences, we categorize the determinants of FDI inflows into policy and non-policy differences. Each of these is analyzed in detail. The third section of the report consolidates the analysis and comes up with policy recommendations to improve the quantity as well as quality of FDI inflows into India.