FDI – Foreign Direct Investment in India: Pros and Cons

A significant source of non-debt financial resources for economic development is regarded as foreign direct investment (FDI). A non-resident entity may invest in India, except for those industries or pursuits that are illegal. A person residing outside of India is permitted to hold either a Foreign Direct Investment (FDI) or a Foreign Portfolio Investment (FPI) in any specific Indian company.

 

What is FDI? 

 

An investment made by a company or an individual in one country into business interests situated in another country is known as a Foreign Direct Investment (FDI). A key factor in economic growth is FDI.

 

FDI, or "Foreign Direct Investment," refers to capital investments made by individuals residing outside of India. in either a 10% or more post-issue paid-up equity capital on a fully diluted basis of a listed Indian company OR in an unlisted Indian company.

 

When a company acquires majority ownership in a company in another nation, this is referred to as foreign direct investment (FDI). With FDI, foreign businesses are actively involved in regular operations in the host nation. This indicates that they are bringing more than just money; they are also bringing technology, knowledge, and skills.

 

An investor establishes foreign business operations or acquires foreign business assets, including acquiring ownership or controlling interest in a foreign company, in general. For India's economic growth, FDI is a significant source of funding. Following the crisis of 1991, economic liberalization began in India, and FDI has steadily increased ever since. India currently ranks first worldwide in the greenfield FDI ranking and is a member of the top 100 clubs for ease of doing business (EoDB). 

 

Routes by which India receives FDI:

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Routes by which India received FDI

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1. Automatic route: 

 

The RBI or Indian government's prior approval of the non-resident or Indian company for FDI is not necessary.

 

2. Government route:

 

 Approval from the government is required. Through the Foreign Investment Facilitation Portal, which enables single-window clearance, the company will need to apply. After consulting with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce, the appropriate ministry receives the application and either approves or rejects it. The Standard Operating Procedure (SOP) for processing applications under the current FDI policy will be published by DPIIT.

 

If an existing investment made by a person residing outside of India in the capital securities of a publicly traded Indian company falls below 10% of the fully diluted post-issue paid-up equity capital, the investment will still be regarded as FDI.

 

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Pros of FDI in India

 

The recipient nation gains from FDI in a variety of ways, including:

 

1. Boosted employment and economic expansion:

 

The most obvious benefit of FDI is the creation of jobs. It is also among the most significant factors for a country, especially a developing one, to seek out FDI. Both the manufacturing and services sectors benefit from increased FDI. This in turn generates jobs and lowers unemployment among the nation's educated youth as well as among skilled and unskilled labor. Increased employment results in higher incomes, giving the populace more purchasing power. The country's economy is strengthened by this.

 

2. Employment generation:

 

One of the biggest problems India is currently dealing with is the persistent plight of youth unemployment. Because new businesses are founded as a result of FDI, new jobs are created in the target nation. In India, it is generally accepted that growth in the manufacturing sector can lead to the creation of new jobs because the number of government jobs is low and cannot accommodate the country's large population of educated youth.

 

3. Product quality and technological advancements:

 

As the level of market competition rises, the company's manufactured goods get much better. The modern technologies that foreign businesses have introduced to India will give the country's industries the much-needed boost and increase their global competitiveness. Due to the lower prices of the goods made in their nation, consumers would also gain significantly. According to estimates, FDI would result in a 5–10% increase in consumer savings.

 

4. Development of Human Resources:

 

One of the less obvious benefits of FDI is this. Thus, it is frequently understated. The term "human capital" describes the workforce's expertise and knowledge. The education and human capital quotient of the nation is increased by the skills acquired and improved through training and experience. Human capital, once developed, is transferable. It may train human resources in other businesses, having a cascading effect.

 

5. Provision of technology and finance:

 

Businesses that are recipients have access to the most recent financial tools, technologies, and operational techniques from around the globe. The industry becomes more efficient and effective as a result of the gradual diffusion of newer, improved technologies and processes into the local economy.

 

6. Growth in exports:

 

Not all products made with FDI are intended for domestic use. Many of these goods are sold internationally. Increased FDI investors' exports from other nations are thanks in part to the establishment of 100% export-oriented units and economic zones.

 

7. Encouragement of Economic Growth:

 

This is yet another crucial benefit of FDI. FDI is a source of foreign capital and increased income for a nation. Local labor, supplies, and tools are used at least in part when building factories. Once the building is finished, the factory will hire some locals and continue to use products and services from the area. As a result, the workers at these factories have more money to spend. Thus, more jobs are produced. 

 

Additionally, the government will receive more tax revenue from these factories, which it can use to build and enhance its physical and financial infrastructure. 

 

Also Read | Financial System: Components and Functions

 

Cons of FDI

 

With some of the benefits, there are drawbacks too of the FDI in India, some of them have been listed below:

 

1. Cottage and small-scale industries disappear:

 

Due to the influx of FDI-produced goods onto the market, some products made in cottage and village industries as well as small-scale industries had to vanish from existence. Multinational soft drinks, for instance.

 

2. Trade Deficit: 

 

Trade Related Intellectual Property Rights and Trade Related Investment Measures limit the manufacturing of particular goods in other nations. These policies compel nations like India to use FDI to produce specific goods at a higher cost.

 

3. Inflation: 

 

The presence of foreign businesses in India, according to FDI skeptics, would lead to economic inflation. It is asserted that foreign businesses frequently spend a lot of money on advertising to draw in clients. The enormous sum of money spent on advertising is made up by raising the cost of the goods. As a result, the consumer is compelled to spend much more than is necessary. Companies gradually take over the market and take advantage of customers.

 

4. Creating a competitive market:

 

FDI aids in the development of a competitive environment and the dismantling of domestic monopolies by facilitating the entry of foreign businesses into the domestic market. A healthy competitive environment encourages innovation by pushing businesses to continuously improve their operations and product lines. Additionally, customers have access to a wider selection of products at affordable prices.

 

5. Contribution to pollution:

 

The nation's pollution problem is exacerbated by foreign direct investments. Some of the developed nations' industries that cause pollution have been relocated to developing nations. The automobile industry is the main victim. Since the majority of these have been relocated to developing nations, pollution has not affected them.

 

6. Cultural erosion:

 

Locals in every country where the FDls have established a foothold have gone through a cultural shock and adopted a different, foreign culture. Either the domestic culture vanishes, or it experiences a setback. The family unit, the social system, and the deterioration of the populace's value system are all affected by this. Human interactions are valued highly, but they currently suffer from the hi-fi way of life.

 

7. Currency Convertibility:

 

Foreign Direct Investments (FDIs) demand complete currency convertibility in developing nations as a requirement for investment. Many nations might not be able to do this because there might not be enough foreign currency reserves to support convertibility. Allowing FDIs in the absence of such a facility is risky because they may withdraw their investments as soon as they become unprofitable.

 

8. Corruption: 

 

Corruption is rife in India's political and administrative sectors. To secure a sizable share of the government's favors and the market, foreign companies will even bribe ministers and government officials. Many people have doubts about the advantages of FDI in India because of the connections between businesspeople, politicians, and bureaucrats as well as historical examples of high-profile corruption in the nation.

 

Summarizing:  

 

A multinational corporation can expand its influence and business operations by accessing new consumption and production markets in India through FDI. It can gain access to scarce resources like precious metals and fossil fuels, as well as skilled and unskilled labor, management know-how, and technologies. A company can lower its cost of production by using cheaper resources or purchasing raw materials directly from the source rather than from a third party thanks to FDI. A company that invests foreign direct investment will frequently receive a number 

 

This can happen when the recipient country permits tax benefits and deductions for organizations incurring FDI there, or when the home country permits tax deductions on foreign income. Additionally, this may occur if the recipient nation has a more advantageous tax structure than the home nation.

 

The Indian government changed its foreign direct investment policy in 2020 and made it necessary for businesses with a border with India to obtain government approval before investing. There is no "sunset clause" for the policy, and it was made to "deter 'opportunistic' takeovers and acquisitions during the pandemic," according to Reuters.

 

This is a change that I have been paying close attention to as the managing partner of a law firm with offices in India. Target businesses or projects in open economies that provide a skilled workforce and above-average growth prospects for the investor are typically taken into consideration by businesses or governments considering a foreign direct investment (FDI). The value of minimal government regulation is also common. FDI frequently involves more than just capital expenditures. It might also entail the provision of management, technology, and tools. The fact that foreign direct investment establishes effective control over the foreign company, or at the very least significant influence over its decision-making, is one of its key characteristics.