Restrictions on Foreign Direct Investment in India need to be rethought to ensure a competitive economy

Conceptually, however, to support economic growth, making it easier to do business in India is important. Foreign direct investment (FDI) also plays a key role in this, acting as a catalyst for growth, innovation and job creation. However, restrictive FDI policies in key sectors are holding back India’s economic growth. Addressing these challenges is essential for the country to unleash the full potential of its economy.

Foreign direct investment is a key driver of growth and positive social outcomes: FDI is more than just capital inflow; it brings with it technology, know-how and global best practices that are essential for the development of various industries. It also creates jobs, increases exports and improves the overall competitiveness of the economy. Countries that have welcomed FDI have witnessed significant economic transformations and India should be no exception.

In the insurance sector, the Indian government maintains restrictions on foreign investment that limit the ability of foreign companies to fully participate in the market. While the intention behind the 74% equity limit (raised from 49% in 2021) on foreign participation in the sector may be to protect domestic insurers, it also leads to lower levels of competition and innovation.

The cap means foreign players can’t fully control Indian units, so it also holds back the capital and expertise they bring. Ultimately, this translates into less choice for consumers and could result in higher premiums, as local insurers may not feel any pressure to offer competitive risk coverage or diversify their product offerings. A lower GST rate could bring down premiums, but we would need more competition for the sector to evolve in a direction that better suits India’s needs.

On the other hand, the media and digital media sector in India continues to face significant restrictions on FDI. This restricts the entry of international media companies and reduces diversity of content. While Press Note 4 allows 26% FDI to digital platforms for news and current affairs, there is still ambiguity on the definition of “digital media” and the scope of entities covered; does this include social media platforms and search engines, for example?

Moreover, the lack of any distinction between content coming from India and abroad increases the regulatory challenges faced by global players operating in the country. Easing FDI restrictions in this sector could drive innovation, improve the quality of production and support global partnerships.

This would help diversify content and perspectives, and also boost the technological capabilities of local media houses. By addressing these gaps, India can attract more investment, increase job creation and strengthen its position in the global digital media ecosystem.

The e-commerce and retail ecosystem has FDI norms that are among the most complex in India. They need simplification.

This broad sector grapples with four different foreign direct investment (FDI) regimes: for inventory-based online operations, where no FDI is permitted; for online marketplaces, where 100% automatic FDI track is permitted; for single-brand retail, where up to 100% FDI is permitted without the need for government approval, provided, among other things, that 30% of the value of goods sold must be sourced locally from small units if FDI exceeds 51%; and for multi-brand retail, where 51% FDI is permitted (subject to approval), subject to similar local sourcing and other conditions, but e-commerce operations under this model are prohibited.

India needs to rationalise these norms to make it easier to do business in this sector, especially in retail, where complex sourcing regulations tend to discourage foreign investors.

While it is essential to support Indian industry and local businesses, this should not come at the cost of limiting consumer choice and innovation. The aim should be to achieve a balance that fosters a competitive environment without compromising the interests of citizens. While FDI restrictions are often intended to protect domestic industries, their detrimental impact on market outcomes must also be considered.

India Needs Bold Foreign Direct Investment Reforms:To make it easier to do business in India and achieve sustainable economic growth, we need to adopt a bold set of reforms that include easing FDI restrictions in key sectors. The benefits of this would be manifold, from greater job creation and technological advancement to increased productivity and improved global competitiveness.

As a country aspiring to become a $5 trillion economy in a few years, India cannot afford to let restrictive FDI policies hold it back. Welcoming foreign investment is not just about opening markets; it is about positioning India as a leader in the global economy, able to attract the best talent, technology and capital from around the world.

A more favourable environment for foreign direct investment will also help cement India’s position in the global supply chain, ensuring that the fruits of growth are better shared across all segments of society.

The time for half-measures is over. India now needs decisive action to help it realize its full economic potential.

The author is a member of parliament, Lok Sabha