FDI in India

Foreign Direct Investment In India

What is FDI(Foreign Direct Investment)?

FDI, a subset of international factor movements, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country.[https://en.wikipedia.org/wiki/Foreign_direct_investment]

There are many industries in a country and for various reasons there are many rules pertaining for FDI in the various industries, varying from country to country.

FDI History in India

The policies in economy made by leaders post independence were motivated mostly by the state of the nation in the previous few hundred years. It aimed at creating a protective space for the country to progress internally. Foreign investments were not seen as a requirement. The Indian currency was inconvertible. Economic progress was slow. China also had closed economy initially. This was a general idea among the developing nations.

The most significant economic liberalisation happened in India in 1991 driven by Dr. Manmohan Singh. Many license restrictions were done away with and India was finally opening up to the world for trade and investments.

 It is important to know that the economic reform of 1991 was not completely voluntary.

The economic crisis prevailing at the time and the IMF bailout were the major factors driving India towards the economic reforms.

A lot of privatisation occured over time and reforms continued. The percentage of FDI in various sectors kept increasing over time. India's GDP took major plunges from 1991 to 20015. from less that 2% to over 7%. In 2015 India outpaced China's GDP growth.

Current FDI policies and industries in India.

Methods of FDI : Automatic route- no prior govt. or RBI approval required and government route - prior govt and RBI approval required.

A comprehensive list of which industry in India is allowed how much FDI through which route is available here : http://www.makeinindia.com/policy/foreign-direct-investment

In the last few years budgets many industries have been allowed larger shares of FDI. 

[https://www.ibef.org/economy/foreign-direct-investment.aspx]

The complete list of industries and allowed shares : https://static.investindia.gov.in/2019-09/FDI%20Policy%202019%20revised_19%20Sept%202019.pdf

Effects of FDI in INDIA

Something quite evident from all the data is that India is developing at a faster rater with increased FDI. India is becoming a major part of the world economics. Industries are getting a global outlook and privatization is on the rise. New industrial centers and economic zones are created. Jobs are created. 

The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign exchange. This in turn ensures stable exchange rates.[1]

FDI also enables an organisation to lower its cost of production- by accessing cheaper resources, or going directly to the source of raw materials rather than buying them from third parties.[1]

However, there are certain other aspects that need to be addressed.

The economic growth if not equal will only deepen the gap between the various economic strata of people. Income gap in India has widened over time.

The consumption among poor has not shown any significant increase. It is still the wealthiest creating consumption growth.

India is still reliable on the farming industry for its economy as well as life. Allowing unrestricted FDI in farming can be harmful for the already underpaid farming majority people of India.

The local markets may not be completely ready for global competition and can succumb to the competition creating more economic gaps among the people.

Polarization of FDI towards few industries can lead to dependence of nation on one particular nation. The balance must be ensured for holistic growth.

FDI can help improve the quality of materials produced in India but it does not necessarily ensure that the same quality products will be available for consumption in India at the same rate. Exports can lead to a compromise in what is available for consumption in the Indian markets.

There are many pros and cons to FDI in each sector separately. But the most affected for India is going to be the farming sector and the small shopkeepers. Self organisation can help in competing with FDI backed companies and also in attracting FDI while protecting the interest of the local people. However, lack of experience and support may not make it possible.

Future for India 

To progress, to prosper, FDI is required. Along with that understanding its impact on each sector while drafting the rules is also required. FDI must not be completely motivated by monetary benefits or political agenda. The approach should be to protect and prosper.