India’s Foreign Investment Journey – Successes and Opportunities
Australia and India signed an economic cooperation agreement in 2022. Although a large market and fast-growing economy, India still receives lesser foreign investment than it should for a country and economy its size. Among the reasons are tax laws that don’t give investors as much transparency as they’d like, and a lack of practical skills among Indian graduates. The Indian government has identified these and other challenges investors face, and has commenced addressing them systemically. While there are several lucrative sectors for which foreign direct investment will increase, manufacturing is expected to continue to attract the biggest share. And as the economy has grown over the last few decades, India’s flourishing stock markets offer tremendous opportunities to foreign portfolio investors.
India emerged from British rule as an extremely impoverished nation, a situation that was only exacerbated by socialist and protectionist economic policies in the first four decades of independence. In 1991 a balance of payment crisis compelled the government to open the doors to foreign investment, which commenced a new chapter in India’s economic growth. Successive governments invested in economic enablers such as logistics infrastructure, power generation and industrial parks. Over USD 700 billion have flowed into the country as foreign direct investment. India today is the world's fifth largest economy. It is also the fastest growing major economy, estimated to become the world's third largest economy in 2027.
Manufacturing, information technology services, financial services, telecommunications and retail and wholesale trade are the top sectors for foreign investment in India. The USA, the UK, Japan and Germany are among the top investing major economies. While Australia’s investments in India have been longer term, it invests a very small part of its foreign investments in India. This, however, may be changing, with Australia and India having signed an economic cooperation agreement in 2022, and government-level talks in progress for further deepening and broadening economic ties.
Although a large market and fast-growing economy, India still receives lesser foreign investment than it should for a country and economy its size. Among the reasons are India’s evolving tax laws that don’t give investors as much transparency upfront as they’d like. Secondly, a large percentage of India’s graduates do not have practical industry skills that employers want. The Indian government has identified these and other challenges investors face, and has commenced addressing them systemically.
Over the last ten years the government has invested in infrastructure across the country on an unprecedented scale. While investing in building infrastructure such as highways, airports, industrial parks, is one avenue for foreign investors, once established, these also making running businesses more productive and economical. The government also runs initiatives like Make in India for incentivising manufacturing, Atmanirbhar Bharat (self-reliant India) which looks at holistically strengthening the economy and Invest India, a digital platform to guide investors. Several states offer further incentives to investors based on sector. In addition, the government is focusing on providing industry exposure to graduating students even as a ministry has been established to address India’s current and future skills requirements.
As the economy has grown over the last few decades, India’s flourishing stock markets offer tremendous opportunities to foreign portfolio investors. Here too, large economies like USA, Japan and France are among major investors. There’s a growing interest in Australia in portfolio investments in India. AustralianSuper and Australian Retirement Trust are looking at growing their investments overseas, including in India.
Aspirations and opportunities
During early decades following India’s independence in 1947, the country followed socialist and protectionist economic policies that prevented establishment of a free market, reserved some sectors only for government investment and taxed businesses heavily. With the government’s lack of driving enterprise and expertise in setting up and running companies, for nearly five decades India’s economy grew at a dismal rate. However, in 1991, marking a turning point in the country’s economic ideology, the government launched reforms aimed at attracting foreign investment. Since that year over USD 700 billion of foreign investment has poured in the country. Domestic investment too has grown tremendously.
This growth story owes its success to governments replacing old growth-stunting policies with new ones that encourage and invite entrepreneurs from India and abroad. In parallel, India has invested heavily in critical enablers for economic growth – Infrastructure such as highways, railways, new airports, power generation and distribution and industrial parks, and upskilling tens of millions of young Indians for the job opportunities created.
The journey India commenced in 1991 has made it the fifth largest economy in the world. It is also the fastest growing major economy, expected to become the third largest in 2027. It has attracted longer term investments from major economies like USA, UK, France and Germany. Manufacturing, technology services, financial services, telecommunications and retail and wholesale trade receive the most foreign investment.
India aspires to become a developed country by 2047. To achieve this, among other factors, the country needs not just investment that generates largescale, sustainable employment and builds the country’s foreign exchange reserves, but also technology solutions for faster industrial growth, greater productivity, and protection of the environment. Several developed countries are well placed to offer these to India, even as investing in the country benefits them with availability of natural resources, inexpensive labour and skilled professionals. Although it still has progress to make in improving the experience of setting up and doing business, India presents promising investment opportunities.
Australia and India have significant commonalities – both are democracies and free markets. English – the spoken language in Australia – is well understood in urban India. Interestingly, there is also a strong alignment between the sectors Australia invests in abroad and those attracting the most foreign investment in India. One would have expected economic ties between the two to have strengthened over decades into a robust economic partnership today. Yet, an economic cooperation agreement between the two countries was signed in 2022, over 30 years after India opened up to foreign investment.
Australia has historically been a conservative investor in India. From 1991 (table 4.1) till 2020 Australia invested USD 3.52 billion (table 21) in India – a mere 0.58% of total FDI inflow in India during this period. In recent years India has ranked 20th in Australian investment outflow, just 0.6% of its total overseas investment. However, of late, Australia has started giving greater attention to India as an investment destination. Government-level discussions on broader and deeper economic cooperation have advanced in recent years, and the future appears promising for the two countries to become strong economic partners.
Historical background
In 1947, as it emerged from nearly two centuries of colonial extraction, India had per capita income of USD 60, down from USD 550 in 1500 (calculated at 1990 dollar value). But India also had indigenous private enterprise as well as several multinational corporations (MNCs) operating in the country. The country’s government could have promoted a free market economy as a means for gradual economic upliftment of its population. However, the government took upon itself to uplift the living conditions of the masses, to educate and to feed them. To achieve its broader welfare vision, several industrial sectors were identified exclusively for the government to invest in and run. It also nationalised 14 privately run banks. Over time several more government-run enterprises were set up. An environment discouraging private enterprise also deterred retention of foreign investment, impacting inflow of foreign exchange. Heavy regulation stifled private enterprise, which in turn, impacted exports, shrinking another channel for foreign exchange inflow. In 1973, starved for foreign exchange reserves, the government tightening control over use of foreign exchange with Foreign Exchange Regulation Act (FERA). This act made it harder for MNCs to operate in India, leading to over 50 exiting India in that decade.
India’s flawed macroeconomic policies sustained, leading the country to an unprecedented situation in 1991. According to former Reserve Bank of India governor, Bimal Jalan, the policies permitted “an expansion of internal demand for the home market without generating adequate exports during a period when external environment for aid to India was deteriorating.” According to Shankar Acharya, Senior Research Fellow, Stanford University, there was “growing recourse to various forms of external borrowing to finance a series of large trade and current account deficits in the latter half of the eighties.”
Flawed policies led to India having an average trade deficit of 3% in the latter half of the 1980s. Instead of crafting and implementing exports-oriented policies to reduce this deficit and bring in foreign exchange, the government relied on external financial assistance, commercial borrowings, and NRI deposits. However, with India not having a reliable means to repay its borrowings, increasingly, global institutions shied away from giving India more funding. By December 1990, external borrowings were largely unavailable for India. A month later foreign exchange reserves dropped below USD 1 billion. The government's initial responses – seeking IMF financing and taking steps to reduce imports—were unsustainable. India was on the verge of defaulting on its payments.
To tide over this unprecedented crisis the government was compelled to open India to foreign investment. Although initially driven more by compulsion than conviction, this change in economic policy put India on a never-before growth trajectory. Initiated by the Indian National Congress (INC) led government (the one wedded to socialism up until 1991), bolder reforms based on conviction and increasing clarity of vision have been implemented by successive governments.
Significant economic reforms since 1991
For decades, Indian economic growth was shackled by the notorious ‘license raj’. The first step in the reforms journey was the Industrial Policy of 1991, which removed investment licensing for all but 18 industries. The list of 18 protected industries has since been trimmed to five, which include (i) arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; (ii) atomic substances; (iii) narcotics and psychotropic substances and hazardous chemicals; (iv) distillation and brewing of alcoholic drinks; and (v) cigarettes/cigars and manufactured tobacco substitutes, on grounds of security, health and environmental protection.
To prevent companies from monopolising the Indian market, the government introduced The Monopolies and Restrictive Trade Practices (MRTP) Act in 1969, which allowed government intervention in preventing what it interpreted as monopolistic. While some of its restrictions were removed in 1991, the act itself was repealed in 2002. In the same year, the Competition Act, 2002, was introduced with the objective of protecting interests of consumers. This has been progressively amended over the last 22 years to improve the experience of doing business in India.
Until the 1980s, nearly forty years after India gained independence, obtaining a landline phone involved waiting for several years. Telecom penetration was low and services unreliable. During the 1990s, the government took initial steps in permitting private participation to improve availability and quality of services. Next, the government set up Telecom Regulatory Authority of India (TRAI) in 1997. TRAI’s mission is to “create and nurture conditions for growth of telecommunications in the country in a manner and at a pace which will enable India to play a leading role in emerging global information society”. Subsequently, the National Telecom Policy, 1999, corporatised the Department of Telecommunications and revamped spectrum management. Thanks to reforms in the telecom sector, India today is the world’s second biggest, and growing, telecom market.
A growing economy is hungry for energy. The New Exploration Licensing Policy (NELP) was executed in 1999 to address the growing demand for oil and gas in the country. Its intention was to accelerate oil and gas exploration with advanced technology and evolved management practices. It also permitted 100% FDI in the sector. The Hydrocarbon Exploration and Licensing Policy (HELP) was launched in 2016 to further simplify aspects of private investment in the sector. The government has also permitted 100% FDI in the power and petroleum sectors.
The Insurance Regulatory and Development Authority of India (IRDAI) was set up in 2000 to regulate the insurance sector. FDI in this sector was increased to 49% in 2015. Meanwhile the Foreign Exchange Management Act (FEMA), 1999, replaced FERA. Its objective is to facilitate external trade and promote orderly development and maintenance of the foreign exchange market in India. Of course, as a country’s economic activity increases, so do opportunities for committing financial crimes. Following the Political Declaration made at the UN General Assembly in 1998, India enacted the Prevention of Money Laundering Act, 2002 (PMLA) to combat the threat of money laundering.
India’s judicial system is notorious for its slowness. To address this, particularly after opening the economy to foreign investment, the Arbitration and Conciliation Act, 1996, was introduced. This was amended in 2015, 2019 and most recently in 2021. These amendments have reformed the arbitration process in India, reducing the timeframe for arbitration and addressing corruption. Several economic offences in India were tried as criminal offences, leading to harsher punishments. In recent years 3400 such offences were decriminalised.
Labour law reforms are a political hot potato in India, with successive Union governments since 1991 having avoided them. However, of late some steps – including simplifying compliance, raising threshold for government approval for closure and addressing contract labour as fixed term employment – have been taken to strike a balance between enabling employment generation while protecting workers’ rights.
Historically, foreign investors have found the taxation landscape in India complex. A very significant reform – Goods and Services Tax (GST) – simplifying taxation for businesses operating in India, was implemented in 2017. The tax landscape was further rationalised with the introduction of General Anti-Avoidance Rules (GAAR).
Analysing inbound FDI by sector
While economic reforms have led to FDI inflow across sectors, manufacturing has attracted more foreign investment than any other, followed by computer services, financial services and communication services. Below are some factors that contributed to these sectors receiving high investment.
Source: RBI annual reports
Manufacturing
Availability of natural resources and inexpensive labour place India well for attracting investment in manufacturing. On its part, the government introduced policies to promote FDI in manufacturing. Following the 1991 Industrial Policy, several policy changes have been made, including automatic investment approvals, greater availability of power supply and simplified legal landscape (tax, foreign exchange, arbitration).
To enable the growth of manufacturing sector, successive governments have invested in logistics infrastructure. In 2001, the Indian government launched the Golden Quadrilateral, a network of highways connecting India’s four biggest cities – Delhi, Mumbai Chennai and Kolkata to complement the existing railways and highways network. Building over that infrastructure, over the last 10 years, India has spent more on logistics infrastructure than ever in the past.
Computer services
Decades of investment in technical education have given India a large talent pool that has serviced organisations globally. To accelerate this sector’s growth the government introduced the Information Technology Act, 2000 along with incentives such as reduction of trade barriers and elimination of import duties. It further incentivised investment by setting up Software Technology Parks (STPs), Export-oriented Units (EOUs) and Special Economic Zones (SEZs), bundling several benefits with setting up operations in an STP, SEZ or being a 100% EOU (the last two are not limited to the IT/ITES industry).
Financial services
A growing economy has resulted in a growing number of organisations and individuals needing varied financial services. This has led to organic growth in the financial services industry. The FDI Policy has also incentivised foreign investment in financial services by rationalising government approvals, allowing up to 100% FDI.
Communication services
The government allows 100% FDI in telecom ventures. Thanks to such incentives and operators making services in India increasingly affordable, the communication sector has grown dramatically over the last 20 years. When India opened this sector to foreign investment, several telecom services providers commenced operations. However, over time privately held services have since been consolidated under three operators – Bharti Airtel, Reliance Jio and Vodafone Idea – collectively holding over 90% share of the consumer telecom market. Although the first two are Indian companies, given their positions in the Indian market and easing of FDI regulations, they have attracted foreign investment.
Analysing inbound FDI by country
Analysing FDI in India by country also gives interesting insights. The chart below depicts the top ten investing countries in India from 2006 till 2023.
Source: RBI annual reports
Among the top ten investing countries in India, Mauritius, Singapore, Netherlands, Cyprus and Cayman Islands are tax havens. India has signed a Tax Information Exchange Agreement (TIEA) with Cayman Islands and Double Taxation Avoidance Agreements (DTAAs) with the remaining four countries. Though these agreements may have incentivised investment in India, much of their investment flowing into India is believed to have been round-tripped from other countries. However, the remaining four countries – USA, Japan, UK and Germany are large, developed economies that have direct business interests in India.
American corporate giants such as Apple and GE have invested in manufacturing in India. Technology conglomerates like Google and Microsoft have invested in India to leverage India’s large technical talent pool. Large banks such as JP Morgan Chase and Goldman Sachs have set up global capability centres (GCCs).
Japan too is heavily invested in manufacturing and financial services in India. It is also investing to uplift the country’s highways construction and railways.
The United Kingdom has invested in sectors such as retail, financial services and telecommunications. Germany has invested over USD 10 billion in India since 2006 in a variety of sectors including engineering, manufacturing and construction.
Collectively, these countries and several others have longer-term investments in India, having leveraged an increasingly investment-friendly environment and available workforce, even as their business interests intersect with India’s growing needs such as technology, infrastructure, financial services and consumer goods.
Australia’s business interests in India
Australia has historical, cultural, political and economic ties with United States and United Kingdom. These factors, along with the ease of doing business with them (globally ranked 6th and 8th respectively) have also made these two countries Australia’s biggest foreign investment destinations. Total Australian investment in these countries has crossed 50% in the last three years. Manufacturing, financial services and wholesale trade are the top three investment sectors by Australia in these countries. These are also three of the five most invested sectors by foreign investors in India.
By contrast, Australia’s investment in India has been 0.24% of total annual outbound FDI since 2000. Over the 1990s, total Australian FDI in India stood at USD 68.51 million. In the following decade it had jumped manyfold to USD 263.7 million (Table 4.1), and in the 2010s to USD 3.2 billion (Table 5). Between April 2000 and September 2023, Australia invested USD 1.38 billion in India. But even with this increased investment over decades, Australia is in 26th position in FDI inflows to India, and India the 20th in Australian total investment (over 2021-23) outflow. One factor contributing to low economic engagement between the two countries is India’s low rating in ease of doing business rankings, which at 62nd in the world is far lower than many other countries Australia invests in.
However, Australia is slowly giving greater attention to Asia. Between 2013 and 2024, its collective investment in the major Asian economies (China, Hong Kong, India, Japan, Republic of Korea, Taiwan and ASEAN countries) has doubled. Australia’s focus on India is also timely. The fifth largest economy today, India’s Gross Domestic Product (GDP) growth is estimated at over 7% for the next few years, which will make India the third largest economy in 2027.
Even though not large, Australian investment in India commenced a long time ago. Three of Australia’s large banks – Commonwealth, ANZ and Macquarie – have established financial services and GCCs in India. Among Australian banks, ANZ pioneered banking services and its GCC in India in the 1980s. Telstra was among the early telecommunications companies to enter the Indian market, and has established a GCC. BHP Billiton has a long-term investment in India for mineral exploration.
Environment for foreign investment in India today
India’s foreign investment enabling landscape has evolved considerably since India took its first steps in that direction. While every government in power since then has contributed to evolving the FDI environment, the biggest steps to have been taken by the Narendra Modi-led NDA, which has been in power since 2014. Their significant steps in enabling India’s economic rise are summarised below.
Major initiatives and incentives
An important FDI reform has been allowing up to 100% investment in some sectors without the union government’s or Reserve Bank of India’s (RBI) approval. This includes sectors such as manufacturing, computer and business process outsourcing, air transport, automobiles, construction, some financial services and renewable energy. Some other sectors such as banking, broadcasting, print media continue to require government approval for FDI. The FDI approval process itself has been rationalised, making investment in almost every sector easier.
Within months of coming to power in 2014, the NDA launched Make in India, an initiative that aspires to make India a manufacturing hub. Among the steps taken were overhaul of policies, enabling an environment of innovation, development of right workforce skills at national level and building supporting infrastructure.
The Indian government has also launched an award-winning digital platform, Invest India, to guide investors through their journey, which conducts research, identifies investment opportunities, aids in decision-making and showcases infrastructure investment opportunities on a platform. To further enhance the investment experience, the government offers a National Single Window System (NSWS), to guide investors based on the nature of their investments.
The Atmanirbhar Bharat (self-reliant India) initiative was launched in 2020 with the vision of strengthening India multidimensionally – including its economy, infrastructure, enabling technology and demand – in growing all of which FDI will play an important part. The government has introduced production-linked incentives (PLI) in 14 sectors to make manufacturing in India more competitive, and India has signed Free Trade Agreements (FTAs) with 13 countries, including Australia.
In its most recent budget (2024-25) the government has introduced several measures to give the economy a further boost. Corporate tax on foreign firms has been reduced, angel tax on startups has been abolished and scientific research and innovation has been given a boost. The budget announced time-bound land reforms intended to administer land effectively and efficiently and consequently, smooth out bumps in acquisition of available land.
Infrastructure
For realising the dream of unprecedented and sustained growth India needs enabling infrastructure. The government has envisioned the National Infrastructure Pipeline (NIP), which includes logistics and electricity generation and distribution. and telecommunications in its scope. The government has also initiated the National Industrial Corridor Development Programme (NICDP), which intends to develop interconnected industrial cities across the country. It has integrated with this is the development of ‘plug-and-play’ industrial parks to be set up in 100 cities.
India has invested tremendously on logistics infrastructure, both to improve quality of life and to support economic growth. There was a 60% growth of national highways from 2014 to 2023. Highway construction per day is the fastest ever India has seen. India’s railways network has been expanded and modernised at a faster pace and is now giving higher revenue than ever before. Building on the Golden Quadrilateral, India is progressing with the most ambitious road construction project, Bharatmala Pariyojana, which will build an extensive network of highways and expressways across every state, as well as border and coastal roads. On one hand private investment in highway construction is lucrative investment opportunity, with their build-operate-transfer model. On the other, an extensive highways network will accommodate a higher volume of traffic, improve goods delivery timelines and reduce cost of transportation.
India has also tapped its extensive rivers network to develop national waterways – considered among the most economical mode of transport. Sagarmala Programme, an initiative involving development of ports and shipping to tap India’s vast coastline, will leverage this natural resource, reducing logistics costs. The number of operational airports has also more than doubled in ten years.
Availability of skills now and in future
A substantial percentage of India’s population is below 50 years of age. This positions India well to offer labour at competitive wages. India also has a large skilled workforce, which can be employed in its services industries. However, industry requirements change with time. Existing services could evolve and altogether new services will be introduced. Not all academic institutions will adapt as quickly to address changing industry requirements. To better prepare young educated Indians for the professional world, India’s 2024-25 budget has introduced an internship programme for India’s top 500 companies, intended to skill 10 million youth in five years. Additionally, a ministry specifically to address India’s current and future skills requirements aims to skill the workforce on a large scale with speed and to high standards.
Investment environment at state level
On their part state governments too have played important roles in attracting foreign investment. Recent trends show that Maharashtra, Karnataka, Gujarat, Delhi and Tamil Nadu accounted for a whopping 88% of all FDI inflow.
Traditionally a highly industrialised state, Maharashtra has attracted 30% of total FDI inflow in the last 3 years. Its 2019 industrial policy offered subsidies on interest and power consumption, among others, to incentivise investment. It has also offered specific incentives by major sectors such as manufacturing, IT and biotechnology.
Karnataka has been the natural choice since the 1990s for large technology companies to set up offices. In recent years it has attracted 22% of total FDI to India. Their industrial policy for 2020-25 intends developing tie 2 and tier 3 cities as industrial hubs by incentivising investment there. Under the policy, the state offered subsidies based on production turnover. The state is focusing on promoting manufacturing, IT, electric vehicles and logistics.
Gujarat, home to the highly entrepreneurial Gujarati community, has been the third most invested in state, with 17% of total FDI in recent years. Gujarat offers incentives based on factors such as the size of an enterprise, their involvement in development of sector infrastructure, employment generation and the type of sector or subsector (sunrise, core or thrust). It is also the highest exporting state in India, with petroleum products, polished diamonds, machinery and engineering products being among its top exports.
Challenges of investing in India
The Union and state governments have pulled out numerous stops to attract foreign investment. Yet India continues to attract a small fraction of total global FDI inflow. Additionally, over 2700 MNCs withdrew from India between 2014 and 2021.
‘Enforcement of contracts’ is among the factors impacting confidence of foreign investors. During early days of India’s reforms journey, the government signed several bilateral investment treaties according to which investors could resort to international arbitration. That clause was invoked in some cases, where international arbitration cost the government. subsequently, the government introduced a ‘model treaty’ in 2016 which made it harder for investors to resort to international arbitration. Following this, the government terminated over 90% of previous investment treaties, with the intention of modeling them on the new template – a situation some investors may not be comfortable with. At the same time, India has attempted to raise confidence in its own legal system by progressively amending its Arbitration and Conciliation Act.
Foreign investors do consider the tax environment in India complicated and not without surprises. A couple of prominent examples are Vodafone being asked in 2012 to pay tax retrospectively, and, more recently, India’s supreme court allowing tax to be collected retrospectively from mining companies. While this suggests scope for further evolution of India’s tax framework, over the last few years India has simplified its tax landscape by introducing GST in 2017 and reducing corporate tax and signing Double Taxation Avoidance Agreements (DTAAs) with over 90 countries.
While India has a demographic advantage with 65% of its population being below 35 years of age, only 51% fresh graduates are considered immediately employable. At present industries fill this gap by investing in training recruited graduates. However, the government has a longer term objective of correcting this by revamping the entire education system with the National Education Policy (NEP).
Foreign investment opportunities in India today
The Indian government aspires to transform India into a developed country by 2047, the year that marks 100 years of independence. This will require the economy to grow year after year at a high rate for the next 20 years. Substantially higher and ongoing foreign investment will be a key requirement for this ambition to be realised. India needs to generate sustainable employment in every sector, the most in manufacturing.
As highlighted above, manufacturing is the most-invested-in sector by foreign investors. The FDI Policy permits 100% FDI under ‘automatic’ approval route for almost all manufacturing. The Indian government offers several incentives to EOUs and SEZs. The PLI scheme offers further benefits. Above these, some states offer their own incentives. With all these benefits and a large, young, workforce, India is well placed for foreign investment in manufacturing across industries.
India also needs several enablers, such as supporting infrastructure. While the government has invested impressively in logistics infrastructure, there’s much ongoing investment needed. NIP opens several avenues for foreign investors via the Public Private Participation (PPP) mode. The FDI Policy has permitted 100% FDI in sectors such as building and maintaining railway and highways infrastructure. Given high volumes of passenger and freight traffic in India, this too is a lucrative opportunity for foreign investors. A 100% FDI is also permitted in civil airport construction and air transport services. Several Indian airports are being run using the PPP model. Air traffic too has steadily increased in India, making these investment opportunities promising.
India has an established IT/IT-enabled services ecosystem and already has a large cohort of Artificial Intelligence (AI) and machine learning engineers. With about 1600 GCCs as of 2023, India’s technology services have been a tremendous success story for organisations from across the world. With a large and growing quality technology talent pool and English-speaking population, India is a fertile ground for global organisations to set up new GCCs or expand current operations.
As Indian and foreign companies grow in India, they will need rich and seamless financial services across global locations. Additionally, with growing individual prosperity comes a greater need for finances to be managed. Financial services are already the third largest sector receiving FDI. The market for sophisticated institutional and retail products will continue to grow in urban India, creating more opportunity for foreign investment.
Retail and wholesale trade is the fifth most invested sector by foreign investors. With greater disposable income at hand in large and mid-sized Indian cities, this segment will have healthy growth in the foreseeable future. India also permits 100% FDI in single brand retail and wholesale businesses.
In its journey to become a developed country, India needs to increase its power generation capacity, even as it must increasingly depend on clean energy. India intends to ramp up its clean energy generation to 50% from the present 43% – another good business opportunity for international investors.
Australia’s overseas investment in 2022 was 7.35% of its GDP, far higher than that of several other developed economies, although much of this investment is in USA and UK. In recent years Australia’s biggest FDI outflow (Table 17) has been in manufacturing and financial services. With these sectors being the first and third most invested by foreign investors, there’s already a strong alignment between Australian and Indian investment outflow/inflow interests, which can be leveraged for mutual benefit. In addition to all the above opportunities, there are other investments Australia is well positioned to make in India.
Australia is among the world’s top five mineral rich countries. Its mining industry has adopted technology solutions such as AI and data analytics for optimising exploration, and autonomous haul trucks, drone technology and AI for mining, all of which increase productivity, improve yield and human safety. Less than 30% of India’s potential mining areas have been explored, leaving tremendous potential for exploration and mining. It is estimated that India is sitting on 80 billion tonnes of untapped minerals. Mining is the third most invested in sector overseas by Australian investors. With Australia‘s expertise in exploration and mining, and India’s untapped mineral wealth, there considerable potential for both countries to benefit.
Additionally, with its technological advancement in clean energy generation, India’s clean energy goals offer another good business opportunity for Australia.
Foreign portfolio investment in India
Like FDI, foreign portfolio investment (FPI) is a key source of investment capital, especially for developing countries. FPI makes it easier and less expensive for companies to raise capital to fulfil growth strategies. Successfully implemented strategies give investors healthy returns. FPI also makes capital available to the government, to finance investment-heavy development initiatives.
India’s portfolio investment offerings
India’s regulator, Securities and Exchange Board of India (SEBI), introduced FPI with equity and debt products from 1992. Over the years there has been a healthy inflow of foreign investment in these products. Data over the last 20 years shows that from total FPI India received, 73% was in equity. Debt investments lagged at about 23%.
Subsequently, regulators diversified FPI with two other investment categories in the 2010s – hybrid and voluntary retention route (VRR) for debt products. Hybrid products include real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Over the next two decades India’s real estate sectors is expected to grow several times over. And as previously highlighted, India's current infrastructure growth is unprecedented and is expected to continue as the country strives to become a developed nation by 2047. These factors make REITs and InvITs attractive investment options. VRR products introduced for FPI encourage long term investments, while giving investors exemptions from some regulatory requirements and greater flexibility on choices of instruments.
With a steadily growing economy and rising economic activity, the country’s major stock exchanges too have performed well over the last three decades. National Stock Exchange’s Nifty has risen from 884 in 1998 to 24502 in 2024, and Bombay Stock Exchange’s Sensex from 3738 to 80604 over the same period. Thanks to the FPI products offered and the opportunities for healthy returns in both equity and debt products, for most years from 2002 to 2023 the country has witnessed net positive FPI inflow.
Analysing FPI investments in India
Globally, United States is a major destination for foreign portfolio investment. Several factors contribute to its strong appeal to foreign investors, including (i) the size and resilience of its economy, (ii) a strong regulatory framework, (iii) leading innovation across industries, (iv) political stability. The US also has evolved financial markets that offer a wide variety of investment instruments in equity and bonds. UK, France, Japan, Germany and China and among the other major economies that have attracted significant FPI.
While India’s FPI market is relatively new, over time it has got increasing attention from foreign portfolio investors. The top investing countries in FPI in India over the last 12 years are United States, followed by Mauritius and Singapore. Luxembourg, United Kingdom, Ireland, Canada, Japan and France are among the other major investors.
Over the last 5 years, Australia has invested AUD 220.8 billion in portfolio investments in US, followed by AUD 32.9 billion in UK. However, India, the fifth largest – and steadily growing – economy, has received limited investment from Australia even as its portfolio investment in India has slowly increased, crossing AUD 7 billion in 2016.
Potential for Australian portfolio investments in India
AustralianSuper and Australian Retirement Trust (ART) are the world’s 18th and 21st largest pension funds respectively. At total assets worth AUD 3.9 trillion as of March 2024, AustralianSuper, is the country’s biggest superannuation fund. At present it has 50% of its capital invested in foreign markets. ART has over 40% investment abroad, with large investments in UK and Europe. Both funds are looking at growing their investment footprints outside Australia, with AustralianSuper aiming at investing 70% of its funds overseas.
Australia’s interest in portfolio investment in India has grown in recent years. Prime minister level discussions between the two countries and a subsequent visit to India by a delegation in 2018 were followed by Australia-India ties being elevated to a Comprehensive Strategic Partnership intended to raise awareness on investment opportunities in India. Subsequently the Australian government committed to investing AUD 280 million to strengthen the two countries’ economic relationship. ANZ’s CEO, Shane Elliot too was upbeat when he spoke about India during his visit in 2023. ANZ is exploring enabling investment by Australian pension funds in India.
India needs substantial funding in infrastructure, which it intends arranging by a variety of channels, including asset monetisation and debt financing by foreign investors. With Australian funds’ growing appetite for investing overseas, investing in India’s FPI instruments could be a win-win for both countries.
India’s FPI environment today
India today offers investors products aligned with the country’s rapidly growing sectors, with some eased regulatory obligations. Reserve Bank of India (RBI) has also relaxed norms governing investment in debt securities. Earlier this year, JP Morgan Chase included Indian government bonds in its Global Bonds Index – Emerging Markets (GBI – EM). This is expected to further boost investors’ confidence in these bonds. Investing in government bonds will lead to increased availability of funding for growth-enabling infrastructure projects and lead to reduction in corporate borrowing costs. India’s FPI market is nowhere as old and established as the ones in US, UK or Germany. However, its economy is growing across sectors and faster than every other major economy, making it is an increasingly attractive destination for portfolio investments.
India’s growth is happening across sectors and is expected to continue, making the world’s 3rd largest economy in 2027. A developing country’s political environment directly impacts its decision-making abilities and, consequently, the rate of its economic growth. Over the 1990s, with low political stability, India took cautious steps towards inviting foreign investment. Higher political stability in the following decade led to higher foreign investment. From 2014 to 2024 India had the most stable government in decades. This period was also marked by several significant reforms, and consequently, India’s highest ever FDI and FPI inflows.
The Bharatiya Janata Party (the largest constituent of the present coalition government) not having secured a majority in the recently held election (unlike in the last two elections where it had absolute majorities) has made the present Indian government politically less stable than it was for the last ten years. However, all its partners in the government are broadly in sync over India’s economic growth policies. So, through this government's term until 2029, the direction and pace of economic reform are expected to continue as in the past, with further efforts to improve the overall business experience in the country.
While there are several lucrative sectors cited above for which foreign investment will increase, manufacturing is expected to continue to attract the biggest foreign and domestic investment. Accordingly, the government intends given it a further boost based on its most recent budget. Complementing this is India’s unprecedent focus on infrastructure development – estimated to be USD 1.721 trillion.
Australia is already investing in manufacturing, financial services in other countries – among the top foreign investment sectors in India. Australian expertise in mining and clean energy generation industries can also benefit India. With existing and evolving economic partnerships such as the Australia India Business Council and ongoing discussions on Comprehensive Economic Cooperation Agreement (CECA), and with close alignment of investment interests this is a relationship ready to be taken to the next level.
Vikram K. Malkani is a technology professional based in Bengaluru. His writing is rooted in data analysis and focuses on technology-enabled socioeconomic development in India.