Foreign Direct Investment in India Advantages and Disadvantages of FDI

What is Foreign Direct Investment in India?

India has experienced higher growth in foreign direct investment (FDI) since the New Economic Policy of 1991. 
Foreign Direct Investment in India definepedia

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Basically, according to the UN Conference on Trade & Development World Investment Report 2020. They said that India was the 9th largest recipient of FDI in 2019, with $51 billion of inflow during the year. 
The top 5 countries for FDI equity inflows into India in FY 2021-22
  1. Singapore (27.01%),
  2. USA (17.94%), 
  3. Mauritius (15.98%), 
  4. Netherlands (7.86%),  
  5. Switzerland (7.31%).
During FY 2021-22, the top five sectors receiving the highest FDI equity inflow were:
  • Computer Software & Hardware (24.60%) 
  • Services Sector (12.13%) 
  • Automobile Industry (11.89%) 
  • Trading (7.72%) 
  • Construction (Infrastructure) Activities (5.52%) 
The top five states receiving the highest FDI equity inflow during FY 2021-22 were:
  1. Karnataka (37.55%), 
  2. Maharashtra (26.26%), 
  3. Delhi (13.93%), 
  4. Tamil Nadu (5.10%),
  5. Haryana (4.76%) 
The legal, administrative, and compliance aspects of foreign investment in India are governed by the Foreign Exchange Management Act 1999 (FEMA). The Foreign Direct Investment (FDI) Policy, and regulations regulated under FEMA by the central bank (RBI). 

Routes for FDI in India

There are two routes for FDI in India: the Automatic Route and the Government Route .
  1. Automatic Route: Under this route, FDI is allowed without prior approval from the Government of India or the RBI .
  2. Government Route: Under this route, prior approval from the Government of India is required before investment. So, proposals for FDI under the Government route are considered by the respective Administrative Ministry/Department .

Initiatives to Increase FDI inflow

The Government of India has implemented several initiatives to increase FDI inflow. Such as the Make in India initiative, launched in September 2014, which liberalized FDI policies for 25 sectors.
So, in 2020, the government increased FDI in defense manufacturing under the automatic route from 49% to 74%. 
In April 2020, the government amended the existing consolidated FDI policy to restrict opportunistic takeovers or acquisitions of Indian companies from neighboring nations. 
The Department for Promotion of Industry and Internal Trade and Invest India developed the India Investment Grid (IIG) to facilitate foreign investments by providing a pan-India database of projects from Indian promoters.
However, it’s important to note that in April 2020, India changed its FDI policy to protect Indian companies from “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic,” according to the Department for Promotion of Industry and Internal Trade. 
While the new FDI policy does not restrict markets. So, it ensures that all FDI will now be under the scrutiny of the Ministry of Commerce and Industry.

Advantage and Disadvantage of FOREIGN DIRECT INVESTMENT 

Advantages of FDI in india:

  1. Creation of a Competitive Market: FDI facilitates entry of foreign organizations into the domestic marketplace, helping create a competitive environment and breaking domestic monopolies. This fosters innovation and provides consumers access to a wider range of competitively priced products.
  2. Access to Resources: FDI allows multinational corporations to access new consumption and production markets, limited resources, skilled and unskilled labor, management expertise, and technologies.
  3. Lower Cost of Production: FDI enables organizations to lower their cost of production by accessing cheaper resources, going directly to the source of raw materials, and benefiting from various tax advantages.
  4. Economic Benefits for Host Country: FDI offers advantages to both the investor and the host country by providing incentives that encourage both parties to engage in and allow FDI. These benefits are mainly economic.

Disadvantages of FDI in India:

  1. Displacement of Local Businesses: The entry of large firms. Such as Walmart, may displace local businesses that cannot compete with their lower prices.
  2. Profit Repatriation: Firms may not reinvest profits back into the host country, leading to large capital outflows.
  3. Negative Impact on Small Entrepreneurs: Small businesses and cottage industries may face extinction due to their inability to compete with multinational giants.
  4. Trade Deficit: Trade-related intellectual property rights and investment measures restrict the production of certain products in other countries, forcing countries like India to manufacture products at a higher cost through FDI.
  5. Inflation: Critics argue that the presence of foreign companies in India would result in inflation due to increased advertisement costs that are compensated by raising product prices.
  6. Limited Employment Generation: FDI may not significantly enhance job creation for illiterate and semi-literate people.
  7. Impact on Farmers: Critics argue that FDI would place farmers under the control of big foreign companies and prove detrimental to their interests.
  8. Corruption: Rampant political and bureaucratic corruption in India may lead to foreign companies bribing government officials and ministers to secure favors.
  9. Geo-Political Risks: Unchecked FDI can expose countries to foreign political influence, make them vulnerable to digital crime, and transfer control of domestic firms to foreign ones.



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