FDI Inflow in Northeast India: Policy Reforms, Trends and Prospects

 Keywords: Northeast India, FDI Inflow, Key Sectors, Potential Investment Opportunities

Date: 16 May, 2023

India is one of the fastest growing economies in the world and has emerged as a major foreign investment destination. With Foreign Direct Investment (FDI) inflows reaching close to a trillion US dollars over the past decade, the country’s global position in attracting foreign investment has increased significantly. 

However, regional disparity in attracting foreign investment remains imbalanced and highly inclined towards a few regions/states. From April 2000 to December 2022, India’s cumulative FDI inflow reached USD 903.94 billion. During the same period, Maharashtra received the highest cumulative FDI inflow at USD 49.93 billion (28%), followed by Karnataka USD 42.804 billion (24%), Gujarat USD 31.33 billion (17%), Delhi USD 23.77 billion (13%), and Tamil Nadu USD 8.22 billion (5%). These states receive almost 87% of the total FDI inflows, while investment in other states of India, especially, in the Northeast Region (NER) trails behind the rest of the country. 

This indicates a significant regional disparity in attracting foreign investment, which can create an unequal economic development across the country. Addressing this imbalance and promoting investment in underdeveloped regions can help to achieve a more balanced and inclusive economic growth in the country. 

Policy Reforms 

NER has the potential of becoming an investment hub. Recognising the untapped opportunities and the advantages the NER enjoys including social capital, skilled labour, rich natural resources, mega biodiversity, agriculture-friendly climate and potential energy supply hubs, the government has implemented several transformative reforms under the FDI policy for NER to promote economic growth and development in the region. 

These reforms include incentives of tax exemptions, subsidies and lower land prices to investors to set up businesses in the NER. FDI norms in the sectors of agriculture, construction and manufacturing among others have been eased to make it easier for investors to capitalise in the region. Several special economic zones (SEZs) with benefits such as tax exemptions, streamlined processes and improved infrastructure have been created in the NER to attract investors. The government has taken several steps to promote tourism in the NER including the development of tourist circuits and the promotion of adventure tourism to create new opportunities for investment in the sector. 

The government has also implemented several policies and initiatives like Northeast Industrial Development Scheme (NEIDS), Northeast Road Sector Development Scheme (NERSDS), Northeast Gas Grid, Northeast Power System Improvement Project (NPSIP) and Northeast Special Infrastructure Development Scheme (NSIDS) to attract investors and improve infrastructure development in the NER. 

The transformative reforms have created a more conducive environment for investment in the NER and have contributed to the region's economic growth and development. Out of India’s total FDI inflows of USD 179.04 billion from October 2019 to December 2022, the combined inflow to the NER was USD 27.65 million. Assam received the highest FDI at USD 20.43 million followed by Arunachal Pradesh at USD 5.55 million, Meghalaya at USD 1.10 million, Tripura at USD 0.56 and Nagaland at USD 0.01 million. Sectors that attracted major FDI inflows include energy, education and skill development. 

In recent years investors from Canada, Israel, Japan, Netherlands, Norway, Singapore, South Korea, Taiwan, the United States have expressed interest in agri-allied services, animal husbandry, auto and electric mobility, food processing, Oil and Gas, textiles and garments, tourism and hospitality in the region. 

Potential Investment Opportunities 

Collaboration in other sectors will be mutually beneficial for the NER and foreign investors. Investors can explore opportunities for value addition in specific high market potential commodities such as bamboo, spices, pineapple and agarwood by developing integrated value chains across raw material, infrastructure, food processing, marketing and advertising. 

The government provides various incentives and support mechanisms to promote the growth of the agri and allied sector in the region. Additionally, investors can collaborate with local farmers and cooperatives to source raw materials and build a sustainable supply chain which will simultaneously create employment opportunities for the local population while adding value to the produce. 

In 2022, tourists’ arrival in the NER was reported at 118.45 lakh domestic and 1.04 lakh foreign. The region offers a wide range of investment opportunities in the tourism industry including hospitality, wildlife and adventure, religious and spiritual pilgrimage, culture and heritage, river cruise, trekking, mountaineering, sports and eco-tourism. It has huge prospects for the development of tourism infrastructure such as roads, airports and other transportation facilities. 

Setting up hotels and resorts are also lucrative investment opportunities given the region’s natural beauty and diverse cultural heritage. Corporate retreat centres are also in demand as businesses increasingly seek unique locations for offsite meetings and team-building activities. 

The energy sector in the NER presents an attractive opportunity for investment with the potential to generate significant returns. The NER is endowed with abundant natural resources such as hydropower, solar power, wind power and biomass. Hydropower is a major source of energy in the NER with the region having an estimated potential of 58,971 MW. The renewable energy potential in NER is estimated to be 1,28,962 MW. As against this, only 4,834.58 MW renewable capacity has been installed in NER. 

The region has the potential to generate over 25,000 MW of solar power, which can be harnessed through large-scale solar power projects. It also has a high wind energy potential of over 10,000 MW. The states of Assam, Mizoram and Tripura have been identified as having the highest wind energy potential in the region. Biomass is another potential source of energy with a high biomass potential of over 1,300 MW. 

Education and skill development sectors in the NER have a lot of potential for growth and development. Support provided by foreign investors have been instrumental in building the capacity of educational institutions and improving the quality of education. Imparting skill development across sectors such as tourism, agriculture, food processing, healthcare, handloom and handicrafts, construction, automobile and others will help secure the latent abilities of youth from the region. 

Challenges 

The NER is becoming an attractive investment destination for both domestic and international companies. However, despite the region’s proximity to many countries, foreign investment inflows have been limited and its potential underutilized due to inherent bottlenecks. The region’s geographic isolation, limited connectivity, susceptibility to natural disasters and insurgency issues have hindered economic growth and development.  

To realize the potential of the NER, it is essential to improve market integration and connectivity, both physically and digitally. Addressing these bottlenecks requires a multi-faceted approach that involves government intervention, private sector participation and community engagement to create an enabling environment for economic growth and development in the region.

Arenla is Senior Investment Specialist, ASEAN Country Desk, Invest India in New Delhi. (The views expressed are those of the author and do not reflect the views of the organization)

Disclaimer: The views expressed above and the information available are those of the author/s and can therefore in no way be taken to reflect the position of Asian Confluence