Foreign Direct Investment Laws

Foreign Direct Investment Laws: Impact on Indian Labour

This article on ‘Laws of Foreign Direct Investment and its Impact on Indian Labour’ was written by an intern at Legal Upanishad.


India adopted the liberalization policy in the year 1991 and allowed foreign countries and individuals to invest in the different sectors of India. Since then, India has Progressively changed its policies related to investment and due to these changes, it is today regarded as the most attractive place for foreign investment. The government has made several attempts to create a friendly business environment for overseas companies.

In addition, the government has repealed obsolete laws and replaced them with new ones, such as the Insolvency and Bankruptcy Code of 2016. As a result, India has risen dramatically in the World Bank’s ease of doing Business reports. It got the rank 63rd and advanced by a margin of 79 positions in the previous five years.

In this article, we are going to focus on the laws regulating foreign direct investment in India. We will also look at the effect of these investments on Indian labour. Whether these investments are allowing the Indian labourers to grow financially or they are hindering their growth? We will answer this question in this article.

What Is Foreign Direct Investment (FDI)?

When a corporation gains ownership of a business organization in any other country, this is known as a foreign direct investment (FDI). Foreign companies that participate in FDI are directly involved in the day-to-day activities of the countries in which they have invested. This means that they contribute more than simply money; they also bring technology, skills, and knowledge.

Need For Foreign Investment

Every economy must pass through numerous stages of growth as it advances along the path of development. Investment is the most important component of economic activity. Domestic investment is insufficient to support development. As a result, there is a high need for foreign investment in the form of FDI. No country can achieve optimal economic growth without the assistance of foreign capital.

Foreign capital in the form of FDI is critically needed to supplement the country’s economic objectives. It is the direct contribution made by foreign firms or states to the industry of another nation in order to guarantee a favorable business climate. Favorable foreign investment increases capital accumulation in the economy, which raises productivity, accumulated savings, effective demand, income level, and investment, finally leading to economic growth.

Laws Regulating FDI In India

The Indian foreign investment system is principally regulated by:

  • the Consolidated Foreign Direct Investment Policy, 2020 (FDI Policy)- it is released by the Department for Promotion of Industry and Internal Trade, Government of India (DPIIT), Ministry of Commerce and Industry, along with press notes issued by DPIIT to revise the FDI Policy; and
  • the Foreign Exchange Management Act of 1999 (FEMA) and its accompanying rules and regulations, such as the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules);
  • Under FEMA, the government of India (central government) issues rules, and the Reserve Bank of India (RBI) issues regulations (collectively known as the FDI Regulations).        

The FDI Regulations include sector-specific requirements, such as investment caps, and divide industries into two categories: automatic and government.

  1. Automatic route

Foreign investments using the automated method do not require prior approval from the RBI or the applicable government agency or ministry.

  1. Government route

Foreign investments through the government channel require prior clearance from the federal government or the RBI or both.

Foreign Direct Investment Laws
Laws of Foreign Direct Investment and its Impact on Indian Labour

Effect of Foreign Direct Investment on Indian Labour

After statistically examining the literature and data, it is possible to conclude that Foreign Direct Investment inflows have the greatest influence on India’s GDP. The economy is expected to expand by 23.6 percent, with a 1 percent rise in foreign direct investment inflows.

The findings on the impact of foreign direct investment on public, private, and total employment are unsatisfactory. Despite a huge quantity of FDI inflows into the economy, there is a small number of jobs produced in both the public and private sectors. Total employment levels have also grown by just approximately 4.1 percent, which is insufficient for the country’s overall growth. This explains the country’s ‘jobless growth.’ Even though the economy is expanding, there has been no change in employment levels, and hence no growth in per capita income.

The services sector receives the majority of FDI inflows, with manufacturing receiving slightly less. Because agricultural farming employs about 70% of the Indian population, there has been no increase in the levels of employment generation by FDI, resulting in ‘jobless growth.’ In reality, FDI inflows provide very few job opportunities in the country. When money is invested in the manufacturing industry, it is typically for improved technology and operating systems. The introduction of new machinery decreases the quantity of manual labour necessary, resulting in the unemployment of manual labourers.

Individuals with relatively strong educational degrees are required to work in the services industry, which limits job opportunities because India’s literacy rate is not at its peak. Foreign corporations typically choose to invest in states with a larger number of educational facilities because they want an individual with high educational degrees. There is little investment in the areas where there is no educational institution and in these areas, only the majority of the population lives. Due to this reason, Unemployment occurs which reduces per capita income, and leads to poverty in the country.


  1. The Government of India must employ a variety of policy initiatives to boost job development in India, with a focus on the organized sector.
  2. It should improve its monetary and fiscal policies to enhance its regulatory structure.
  3. India needs to develop a favorable business climate to attract more FDI in order to maintain a strong foreign exchange reserve since its importance in this global competitive village cannot be overstated.


The researchers have found that there is a favorable relationship between FDI and the Gross domestic product of India but not necessarily between FDI and labour. Primary is agricultural, secondary that is industrial, and tertiary is service are the three sectors of the Indian economy. The bulk of FDI-related firms is in the service and industrial sectors, which stimulates economic growth and generates employment in the country.

India is an agrarian economic country, and because there is minimum foreign investment in the primary that is agricultural sector, employment is unlikely to rise as expected, resulting in a growing but not significantly improved economy. One of the government’s key macroeconomic goals is to reduce unemployment and increase GDP. As a result, in addition to FDI, the government should priorities other programs that create employment opportunities and stimulate the economy.