FDI a Major Source For Quick Development

Sriram Chekuri writes about the importance of Foreign Direct Investments (FDI) for the economic development of India and suggests strategies which can help the country bring in FDI.

Foreign Direct Investment (FDI) is a major monetary source for economic development in many countries of the world. Foreign companies invest directly in fast-growing private auspicious businesses to take benefits of cheaper wages and the changing business environment. While India is one of the fastest-growing economies in the world, it has also emerged as one of the top destinations for foreign direct investments.

A large consumer base, growing disposable incomes, and expanding digital infrastructure are some of the key drivers in the evolving global preference for investing in India. Indeed, foreign direct investments are an essential driver of a country's economy since they boost the job market, and the technical knowledge base and provide non-debt financial resources.

Economic liberalisation started in India in the wake of the 1991 economic crisis and since then FDI has steadily increased in India, subsequently generating more than one crore jobs. The Foreign Investment Promotion Board (FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017.

Over the years, successive governments in India have understood the potential of overseas investments and liberalised FDI policies. Out of the two routes automatic route allows investments without the need to obtain any approval or license from the government. Some of these sectors are air transport, healthcare, IT and BPM, manufacturing, and financial services.

The sectors that require prior approval of the government fall under the government approval route and include banking and the public sector, food products retail trading, print media, satellite, and others. There are currently nine sectors in which FDI is prohibited, including lottery, gambling, chit funds, real estate business, and cigarettes.

In fiscal year 2023, the computer and hardware sector received the highest FDI equity inflow, followed by the services sector. The Economic Survey for 2023, however, expected a rebound in FDI due to various programs and initiatives such as Production-linked incentives, PM Gatishakti, and export promotion through SEZs among others. The Centre's Jan Vishwas Bill introduced in December 2022 in the Indian parliament amends 42 laws to decriminalise 'minor' offences and is touted to reduce the compliance burden on individuals and businesses and ensure ease of doing business. A large number of FDI proposals are in the pipeline which as per experts suggests growth in the financial year 2024-25

Higher FDI inflows are directly correlated with higher employment in the country. This improves productivity including the quality of processes and supply chains towards achieving global quality standards.

In 2014, the government increased the foreign investment upper limit from 26 per cent to 49 per cent in the insurance sector. It also launched the 'Make in India' initiative in September 2014 under which the FDI policy for 25 sectors was liberalised further. In May 2020, the government increased FDI in defence manufacturing under the automatic route from 49 per cent to 74 per cent. In March 2020, the government permitted Non-Resident Indians (NRIs) to acquire up to 100 per cent stake in Air India. FDI inflow in the last nine financial years (2014-23: USD 596 billion) has increased by 100 per cent over the previous nine financial years (2005-14: USD 298 billion) and is nearly 65 per cent of the total FDI reported in the last 23 years (USD 920 billion).

During FY 2022-23, the FDI inflow of India amounted to USD 71 billion reported. In the current financial year, 2023-24 (up to September 2023) FDI worth USD 33 billion has been reported. In 2022, India ranked 10th in the top destinations for foreign direct investment (FDI), a culmination of decades of economic and policy reforms. China's FDI totalled $33 billion on a net basis in 2023, which dropped around 80 per cent from 2022, the lowest since 1993, according to the State Administration of Foreign Exchange.

Policies of openness to FDI and international trade have enabled countries around the world to leapfrog economically over their neighbours. Many pundits claim that Hong Kong already resembles China's free-trade zone. A country's FDI can be both inward and outward. Inward are investments coming into the country and outward FDI are investments made by companies from that country into foreign companies in other countries.

The difference between inward and outward is called the net FDI inflow, similar to Balance of Payments which can be either positive or negative. Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores from scratch usually in an area where no previous facilities existed.

A brownfield FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an "unclean" business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area.

In most instances, governments seek to limit or control foreign direct investment to protect local industries and key resources (oil, minerals, etc.), preserve the national and local culture, protect segments of their domestic population, maintain political and economic independence, and manage or control economic growth.

An investor can make a foreign direct investment by expanding their business in a foreign country like Amazon opening a new headquarters in Hyderabad, India. Foreign direct investment offers an advantage to both the investor and the foreign host country. Benefits for business are market diversification, tax incentives, lower labour costs, preferential tariffs and subsidies, whereas the benefits for the host country - economic stimulation, development of human capital, increase in employment, and access to management expertise, skills, and technology.

Despite many benefits, there are still two main disadvantages to FDI, such as displacement of local businesses and profit repatriation. The entry of large firms, such as Walmart, may displace local businesses. Walmart is often criticised for driving out local businesses that cannot compete with its lower prices. In the case of profit repatriation, the primary concern is that firms will not reinvest profits back into the host country which leads to large capital outflows.

The Government of India has to follow countries like Hong Kong and Singapore who long ago realised that both global trade and FDI would help them grow exponentially and improve the standard of living for their citizens. As a result, Hong Kong (before its return to China) was one of the easiest places to set up a new company in the entire world.

Five solid strategies for attracting FDI to India

• Create a stable and predictable business environment
• Offer incentives and tax breaks
• Develop a skilled workforce
• Invest in infrastructure
• Build strong international relationships

By following these strategies, India can create an environment that is supportive of foreign investment and drive economic growth and development.