Foreign Direct Investment (FDI) refers to investments made by an individual or company from another country into the Indian economy. This investment is typically directed towards unlisted Indian companies. When it comes to listed companies, FDI is permitted up to 10 percent or more of the company’s post-issue paid-up equity capital. Over the years, foreign capital inflows have grown due to favourable policies and a conducive business environment. The government has eased FDI regulations in critical sectors like finance, defence, telecommunications, and power exchanges.

 

FDI as a Driver of Economic Growth and Job Creation

Economy goes through stages of development on its path of economic development. A country would need external capital to provide the impetus for growth when domestic funds are not sufficient.

1. Job Creation through FDI

Foreign Direct Investment (FDI) directly contributes to job creation in by facilitating the establishment of new businesses and expanding existing ones. Foreign companies set up manufacturing plants, offices, and infrastructure, providing both direct and indirect employment. This includes skilled and unskilled jobs, ranging from factory workers to managerial positions. Additionally, foreign businesses often engage local suppliers, creating a network of jobs in various sectors, thereby fostering broader employment opportunities in the economy.

2. Economic Growth through FDI

FDI plays a crucial role in driving India’s economic growth by infusing capital into industries, which boosts production and productivity. The influx of foreign capital allows companies to modernize operations, adopt advanced technologies, and enhance efficiency. This, in turn, makes local industries more competitive. Furthermore, foreign investment strengthens integration into global supply chains, expanding export opportunities and improving trade relations. FDI also stimulates demand for goods and services, driving overall economic development and contributing to higher GDP growth.

Post the liberation reforms in 1991, India has opened its door to global phenomena of privatisation and globalisation which have made the nation competitive in the global market. India has reached a significant milestone in its economic development, with total foreign direct investment (FDI) inflows surpassing $1 trillion since April 2000. This achievement was further strengthened by a nearly 26% increase in FDI, reaching $42.1 billion in the first half of the current fiscal year. This growth highlights India’s growing attractiveness as a global investment hub, driven by supportive policies, a vibrant business environment, and enhanced international competitiveness.

FDI has been a key factor in India’s progress, providing substantial non-debt financial resources, enabling technology transfers, and generating employment opportunities. Programs such as “Make in India,” sectoral liberalization, and the implementation of the Goods and Services Tax (GST) have boosted investor confidence. Additionally, factors like competitive labour costs and strategic incentives continue to draw multinational corporations to invest in the country.

 

Impact of FDI on Technology Transfer and Innovation

Technology transfer is a key catalyst for innovation and economic development, particularly in a rapidly growing country like India. In an increasingly interconnected world, the sharing of knowledge, skills, and technologies across borders is crucial for driving progress. This exchange enables countries to access advanced technologies, enhance their industries, and improve overall productivity.

For India, technology transfer plays a vital role in accelerating innovation, improving competitiveness, and achieving sustainable economic growth. By adopting cutting-edge technologies, Indian businesses and industries can enhance their efficiency, reduce costs, and create higher-quality products, which are essential for competing on the global stage.

Additionally, technology transfer equips Indian businesses with the tools to adopt global best practices, improving competitiveness and strengthening India’s position in international markets. Moreover, the transfer of green technologies and renewable energy solutions helps address environmental challenges, supporting sustainable development goals and reducing India’s ecological footprint.

 

FDI and Infrastructure Development in India

FDI is crucial for infrastructure development in India as it brings in capital, advanced technology, and global expertise. Foreign investments help in building essential infrastructure like roads, ports, and energy facilities, which are vital for economic growth. Additionally, FDI improves efficiency, creates jobs, and enhances India’s connectivity, making it a more attractive destination for business and investment.

In the 2024 financial year, India’s infrastructure sector attracted foreign direct investment (FDI) equity inflows of around 4.2 billion U.S. dollars, marking a notable rise from previous years. The government’s “National Infrastructure Pipeline” initiative also encourages private and foreign investments in the infrastructure industry.

 

Key Reforms to Boost FDI and Enhance Business Environment in India in 2025

The Union Budget 2025 has increased the FDI sectoral cap in the insurance sector to 100% from 74%. The government is launching an Investment Friendliness Index of States to promote healthy competition among states for attracting investment. Additionally, Jan Vishwas 2.0 will be introduced to further improve the business environment.

India’s FDI policy, under the Consolidated FDI Policy, is designed to be transparent and investor friendly. Most sectors, excluding strategically sensitive ones, are open to 100% FDI through the automatic route, which accounts for over 90% of FDI inflows. Recent reforms in sectors like Defence, Insurance, Telecom, and Space have liberalized FDI limits. Notably, FDI in Defence is now allowed up to 74%, and the insurance sector’s cap has been raised to 100% for investments where premiums are entirely invested in India.

The government is also working to attract more FDI by removing regulatory barriers, improving infrastructure, and enhancing the ease of doing business. The Jan Vishwas Act has decriminalized 183 provisions, and the upcoming Jan Vishwas 2.0 aims to streamline the business environment. These efforts, along with initiatives like the Business Reforms Action Plan (BRAP) and the LEADS report, aim to create a positive investment climate and boost economic growth.