FDI i.e, Foreign Direct Investment is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. This does not include foreign investments in stock markets. Instead, FDI refers more specifically to the investment of foreign assets into domestic goods and services. So basically, it is the transfer of foreign assets into a country’s financial account. FDI can be done in four ways:
1. By acquisitions and mergers
2. By incorporating a wholly owned subsidiary
3. By being a part of a joint venture
4. By acquiring at least 10% shares in the domestic company
FDI is now permitted in the banking and insurance sector, telecommunications, electricity, private petrol refining, pharma, transport and infrastructure, tourism, airlines etc. But, is strictly banned from the Railways, atomic energy, lottery business and agriculture sector.
For the host country, FDI leads to inflow of equipment and technology along with increased employment opportunities. FDI improves consumer welfare through reduced cost, wider choice and improved quality. Not only this, it also provides competitive advantage and leads to innovation. And finally, FDI leads to export growth providing access to global markets for domestic producers.
Though India today stands as the largest democracy, it’s administrative as well as political setup has many flaws and shortcomings. The Indian system of administration and governance is impregnated with flaws like shortage of power, bureaucratic hassle and infrastructural deficiencies. Despite of all these political shortcomings, India is perceived to be one of the most lucrative grounds for investing, in the eyes of wealthy European as well as American investors.
Many major industrialists and business tycoons expanded their businesses to India with the boom of FDI. Some of the major foreign investment houses that have shown trust in Indian economy are, Edaw Ltd., Emaar group, CESMA International Pvt. Ltd., Keppel Land etc. Japanese and Korean firms and business houses like Suzuki, Hyundai, and Daichi have always trusted automobiles as well as pharma sectors of FDI. Many of the Indian sectors have thus benefited from these FDI’s and in turn have given lucrative returns to investors as well.
Some of the major factors that have continued transforming India into a potential heaven for FDI are:
Land, Large amount of land is available for entrepreneurs and foreign investors to set up their manufacturing units and corporate offices.
Raw material, India is a land of rich and abundantly found rare minerals, metals, alloys, and other raw materials.
Apart from this, India is the second most populous country in the world. This makes the availability of efficient and cheap man power pretty easy in India.
India’s economic policy reforms have played a critical role in the performance of Indian economy. Among other things the reforms have involved opening the economy, and making it more competitive. Yet, there are major impediments to larger FDI flows in India. In addition to India’s poor performance in terms of competitiveness, quality of infrastructure and skills and productivity of labour, there are several other factors that make India a less attractive ground for direct investment than the potential she has. Firstly, The FDI regime in India is still quite restrictive. As a consequence, with regard to cross border ventures, India ranks 71st in Global Competitiveness Report. Foreign ownership of between 51 and 100% of equity still requires a long procedure of government approval. Besides, the government needs to ease the restrictions on FDI outflows by non-financial Indian enterprises so as to allow these enterprises to enter into joint ventures and FDI arrangements with other countries. Secondly, There is a lack of clear cut and transparent sectoral policies for FDI. Thirdly, India’s tariff rates are still among the highest in the world, and continue to block India’s attractiveness as an export platform for labour intensive manufacturing production. Also, There is a lack of decision making power with the state governments. The reform process so far was mainly concentrated at the central level. India is yet to free up it’s state governments sufficiently so that they can add much greater dynamism to the reforms. Greater freedom to states will help foster greater competition among themselves. Brazil, China and Russia are examples where regional governments take the lead in pushing reforms and prompting further actions by central government. High corporate tax rate is another barrier. Corporate tax rates in East Asia are generally in the range of 15-30% compared with a rate of 40% for foreign companies in India. High corporate tax rate is definitely a major disincentive to foreign corporate investment in India.
And lastly, No liberalization in exit barriers. While the reforms implemented so far have helped remove the entry barriers, the liberalization of exit barriers is yet to take place. It is a major deterrent to large volumes of FDI flowing to India. While it would be incorrect to to ignore the need and potential merit of certain safeguards, it is also important to recognize that safeguards if wrongly designed or poorly enforced would turn into barriers. Present framework does not allow the firms to undertake restructuring.
The government has an opportunity to utilize the liberalization for achieving some of its own targets, improve its infrastructure, access sophisticated technologies, and generate employment. FDI would lead to more comprehensive integration of India into the world wide market and it is imperative for government to promote this for overall economic development and social welfare of the country. If done in the right manner, Foreign Direct Investment can prove to be a boon.