GD Topic Series : Is FDI Good or Bad for India - Part 1

Critical analysis of FDI in India

We all are familiar with the definition of FDI. The term FDI or Foreign Direct Investment, is a type of investment that includes the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Investors are granted management and voting rights if the level of ownership is greater than or equal to 10% of ordinary shares. Shares ownership amounting to less that the stated amount is termed portfolio investment and is not categorized as FDI.

Businesses that make foreign direct investments are often called multinational corporations (MNCs) or multinational enterprises (MNEs). A MNE may make a direct investment by creating a new foreign enterprise, which is called a Greenfield investment, or by the acquisition of a foreign firm, either called an acquisition or brownfield investment.

Economic reforms taken by the Indian government in 24 July 1991 makes the country as one of the prominent performer of global economics by placing INDIA As the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. INDIA has the 3rd largest pool of scientific & technical manpower. Even Government of India, has been trying hard to do way with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies. Recent investment opportunities are at peak in India.

Total FDI inflows into India in the period April 2000–November 2014 touched US$ 350,963 million. Total FDI inflows into India during the period April–November FY15 was US$ 18,884 million. Mauritius is again emerging as the largest source of FDI in India, accounting for an inflow of US$ 83,730 million in the April 2000-November 2014 period.

Now let us see that why FDI is Opposed by Local Indians / Indian community:

(a) Domestic companies fear that they may lose their ownership to overseas company

(b) Small enterprises fear that they may not be able to compete with world class large companies and may ultimately is edged out of business;

(c) Large giants of the world try to monopolize and take over the highly profitable sectors;

(d) Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

(e) Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

The question is that what the sectors are where India could attract foreign investment and whether it would be beneficial for the Indian economy or not. Some of the major economic sectors where India can attract investment are as follows:

• Telecommunications
• Apparels
• Information Technology
• Pharma
• Auto parts
• Jewelry
• Chemicals

Foreign direct investment (FDI) plays an extraordinary and rapid growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impact to economic development.    Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country.  The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment.In part 1 we saw the details and basic discussion about the FDI. In next part we will see how its beneficial or baneful and my views on the same. Keep reading!!

About the author: Sunil Sahu is an electronics and telecommunication engineer and a die heart defense aspirant. He loves cooking and has a vast knowledge about cars and their latest developments. Through this article he wants to help defense aspirants by presenting his critical views on the topic, on the forum so that collective exchange of thoughts can take place. (Edited and reviewed by Jayendra Pratap Singh)