The Foreign Direct Investment [FDI]

In News

• Recently, the centre said that India has reported highest FDI inflow worth $83 billion in 2021-2022.

About the recent trend in FDI 

• In the Financial Year 2021-22 it touched a highest ever figure of $83.57 billion.
  • FDI increased by around 22% post-Covid from 2020 to 2022 at $171.84 billion, in comparison to the inflows of $141.10 billion reported pre-Covid from 2018 to 2020.
• Sector that received highest FDI: Computer software and hardware emerged as the top recipient sector of FDI equity inflows with an around 25% share, followed by the services and automobile sectors, both at 12%.
  • FDI equity inflows in manufacturing rose 76% in FY22.
• State specific data: The major recipient States of FDI equity inflows were Karnataka 53%, Delhi 17%, and Maharashtra 17%.
• Country specific data: Singapore was the topmost investor in India accounting for 27% of the FDI, followed by the US at 18% and Mauritius at 16%.
• Significance: India is rapidly emerging as a preferred country for foreign investments in the manufacturing sector.
  • The country’s foreign investment inflows increased 20-fold since the financial year 2003-04 when it recorded mere $4.3 billion.

Forign Direct Investment

• It refers to the conditions when a company or investor takes ownership and controls operation in a business entity in another country.
• With FDI, foreign companies are directly involved with day-to-day operations in the other country which implies that along with bringing money, they also bring knowledge, skills and technology.
• It is an important non-debt monetary source for India’s economic development.
  • Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country.
• FDI Routes
  • Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB).
  • Automatic Route: For investment in business sectors that do not require prior approval from the government.
• Categories
  • Horizontal: It refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country.
  • Vertical: It is the one in which different but related business activities from the investor’s main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company.
  • Conglomerate: It is one where a company or individual makes foreign investment in a business that is unrelated to its existing business in its home country. 

Advantages of FDI

• Increase in Economic growth: One of the benefits of FDI is the creation of jobs. A developing nation is always on the lookout to attract heavy foreign investments as it leads to an overall improvement in the way an economy functions.
• Development of human capital: Every entity intending to grow its business through foreign investments invests a part of its capital in developing the required human resource.
• Technology: Foreign companies derive enormous benefits from FDI through improved technology and tools. Newer and improved operational practices are adopted to make the vision a reality.
• Rise in exports: The FDI usually does produce goods keeping the global markets in mind, and therefore the goods produced by them are export compatible. This leads to an increase in exports, and it is achieved by creating 100% export-oriented units.
• Facilitates the stability in the exchange rate: If the economy successfully maintains a constant flow of foreign capital through FDI, it simply translates into a flow of regular foreign exchange in the country. This flow will help build a growing foreign exchange reserve, ultimately stabilising the exchange rates, which the Central Bank maintains.
• FDI leads to the creation of a Competitive Market: it facilitates the entry of foreign entities into the local marketplace. This move helps to build and sustain a healthy competitive environment.
• Helps in combating climate change: Due to the mounting issues surrounding climate change, the United Nations has encouraged the route of foreign direct investments, realising that it will help fight the problems.

Disadvantages of FDI

• Not suitable for strategically important industries: Countries should not allow foreign ownership of companies in strategically important industries. That could lower the comparative advantage of the nation.
• Investors have less moral attachment: Foreign investors might strip the business of its value without adding any. They could sell unprofitable portions of the company to local, less sophisticated investors.
• Unethical access to local markets: They can use the company’s collateral to get low-cost, local loans. Instead of reinvesting it, they lend the funds back to the parent company.
• Hindrance of domestic investment: Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local companies start losing interest to invest in their domestic products.
• The risk from political changes: Other countries’ political movements can be changed constantly which could hamper the investors.
• Poor performance: Multinationals have been criticised for poor working conditions in foreign factories.

Government Initiatives to Boost FDI

• The Government of India aims to achieve USD 100 billion worth of FDI inflows in the following two years, making India the top recipient of Greenfield FDI Inflows in the world.
• Proposal to commence the auctioning of 5G spectrum.
• National E-Commerce Policy (draft) to encourage FDI in the marketplace model of e-commerce to ensure a level playing field for all participants.
• Revised FDI rules to e-commerce allowing 100 per cent FDI in the marketplace-based model of e-commerce.
• Launch of National Digital Communications Policy, 2018 with a target of increasing FDI inflows in the telecommunications sector to USD 100 billion by 2022.
• Removal of the need for government approval for FDI up to an extent of 100 per cent in Real Estate Broking Services.
• Strengthening the single-window clearance system for fast-tracking approval processes for Japanese investors in India.
• Doing away with the approval of the Department of Revenue and mandating clearance of all proposals requiring approval within 10 weeks after the receipt of application.
• The Government introduced a Production Linked Incentive (PLI) scheme for the various sectors that gives large impetus to the FDI inflow.

Way forward

• Government has put in place a liberal and transparent policy for FDI, wherein most of the sectors are open to FDI under the automatic route.
• The government had undertaken reforms in sectors such as coal mining, contract manufacturing, digital media, single brand retail trading, civil aviation, defence, insurance and telecom.

Source:TH