Key Sectors for FDI in India: Manufacturing and Energy

May 28, 2013 Posted by India Briefing Reading Time: 4 minutes

May 28 – India is considered a foreign direct investment (FDI) “hot spot” and has seen FDI increase by 500 percent in the past decade. FDI reached US$33 billion during the 2012-13 fiscal year with India’s Finance Minister saying that the country is capable of handling as much as US$50 billion per year in FDI inflows.

This article will examine FDI into two sectors of India’s economy: manufacturing and energy.

Manufacturing

As rising labor costs constrain China’s manufacturing output, India is well positioned to become a larger player in the manufacturing game. In an effort to increase manufacturing investment and output in the country, India instituted the National Manufacturing Policy. This policy, the first of its kind in India, facilitates Public Private Partnerships (PPP) as a means to entice investment into the country’s National Investment and Manufacturing Zones (NIMZs).

The policy has several main objectives:

Facilitate manufacturing growth from 16 to 25 percent of the national GDP by 2022;
Increase the speed of employment in the manufacturing sector to generate 100 million additional jobs by 2022;
Create skilled labor through the establishment of skill development facilities;
Improve international competitiveness of Indian manufacturing through appropriate strategy support and development of cutting-edge industrial townships;
Ensure sustainable growth through energy efficiency, optimal utilization of natural resources and restoration of damaged eco-systems; and
100 percent FDI allowed in Special Economic Zones for manufacturing projects.

The manufacturing of products reserved for production by micro and small enterprises (MSE) are subject to special terms, including:

Sectoral regulations, including FDI caps and entry route requirements; and
The necessity for an industrial license if FDI is greater than 24 percent in a non-MSE enterprise that produces MSE reserved products.

Energy

As the fourth largest energy consumer, India faces many challenges when tasked with meeting domestic demand. The country currently relies on imports to meet the majority of its energy needs. Coal consumption is the largest source of energy in India, followed by oil and natural gas. Many investment opportunities will be available as India continues down the path of energy market liberalization and reform in an effort to balance its international energy trade.

Coal
Despite large domestic coal production, India still faces high domestic demand and must import coal to feed its needs. Furthermore, demand for coal is expected to grow as India’s population expands. To increase coal production, the Indian government has set up captive consumption coal blocks to dedicate land and resources to mining efforts.

The following are some of the vital points for investment in the coal sector:

FDI inflows up to 100 percent are permitted in the coal and lignite mining for captive consumption in the power generation sector
FDI inflows up to 74 percent are permitted for exploration and mining of captive consumption coal and lignite
FDI inflows up to 100 percent are permitted for coal processing plants as long as the processed coal is sold back to the supplying company
Foreign investors holding less than a 50 percent share in coal production units in India can invest in coal mining or other related activities through the automatic route, which does not require approval from the Foreign Investment Promotion Board

Petroleum and Natural Gas
India has seen record growth in its gas sector over the last few years, with refining and exports leading the charge. Domestic demand for the energy source is also expected to grow in 2013. India now permits up to 100 percent foreign direct investment into the petroleum and natural gas sector under the automatic approval route of the Reserve Bank of India.

The caps on FDI are as follows:

FDI up to 100 percent is permitted via the automatic route on petroleum product marketing. FDI in this sector is subject to the existing sectoral policy and regulatory framework in the oil marketing sector
FDI up to 100 percent is allowed on the automatic route in oil exploration in both small and medium-sized fields, subject to and under the policy of the government on private participation in: (1) exploration of oil and (2) the discovered fields of national oil companies
FDI up to 100 percent is permitted via the automatic route for petroleum product pipelines
FDI up to 100 percent is permitted for natural gas/liquefied natural gas pipelines with prior government approval
FDI up to 100 percent is permitted in market study and formulation, as well as setting up infrastructure for marketing in petroleum and natural gas sector

Electricity
India’s electricity capacity is the fifth largest in the world, but further investment is needed to provide stable electricity to the entire country. Blackouts are common and rural areas lack access to power supplies. Because of this, FDI policy for electricity is one of the most liberal of India’s foreign investment schemes.

FDI up to 100 percent for electricity generation, transmission, and distribution projects
No limit on project cost or minimum FDI contribution

Renewable Energy
The government of India allows 100 percent foreign direct investment in the renewable energy sector and has put in place policies conducive to attracting foreign companies to the market. These incentives include:

Governmental partnerships with cost-sharing schemes
Financial subsidies and waived excise and custom duties

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