FDI POLICY OF INDIA - Pradeep Kumar SS

Foreign Direct Investments policies and issues in India
Foreign Direct Investment (FDI) as the name suggests is the foreign capital invited into the
country because of various reasons such as lack of sufficient capital in the domestic industry,
lack of state of the art technology for the production of goods, or to just fill up the foreign
exchange reserves of a country in order to save it for emergency situations like BoP crisis or
exchage rate volatility. It is usually considered more stable than highly liquid foreign
institutional investments that come into the country.
With the dawn of new government in Delhi in 2014, there has been renewed vigour in
liberalisation and further opening up of our economy to the outside world. FDI is very
coveted fund in international economics as it not only brings capital but also improves the
efficiency at which goods are made, efficiency at the level of collection of raw materials,
enhances the overall level of competition in the market. India since independence has
followed an import substituted growth which is aimed at improving self-sufficiency and
reduce the dependency on foreign currency. Though it has achieved many milestones such as
setting up huge industries in core sectors, it has inculcated a culture of negligible competition
for the manufacturer in the market which led to gross inefficiencies, license raj, corruption
and mismanagement of supply chain systems. This situation has gradually resulted in a
position where most of these industries became a burden on the tax payers money instead of
other way around.
This situation ultimately attained unbearable levels in 1991 in the form of insurmountable
current account deficit, and India was at the door steps of IMF. This is a turning point in the
economic history of India where our country has started opening the doors for foreign capital
and tried to fill in gaps in our industrial policies. The NDA government has allowed FDI in
almost all sectors except for some strategic areas. It has even allowed 49% FDI in defence
under automatic route and up to 100% under government approval, 100% in brownfield
airports, eased local sourcing norms for single-brand retail.
It is laudable that government has opened up so many sectors but at that the same time, we as
responsible citizens have the necessity to analyse the various cause and effects of this
developments. Firstly it is agreeable that these policies bring in much needed foreign capital
into our country. In fact, India has received highest ever FDI of $55.4 billion in FY16 when
the world is still reeling under a slowdown. The money that was brought in not only served
for producing goods for domestic consumption but also for international export directly or
indirectly as we can see from the fact that India has become an export hub for many
international automobile companies. FDI also gives us some power over our exchange rates
where we can interfere if there is excess volatility. It has helped improve our productivity and
efficiency levels. In some sectors, it has generated employment whereas the opposite is true
in some cases. It helped bring the prices down and goods affordable for our billion plus
consumers and increased value for our money. FDI helped us reach higher indifference
curves where we have greater satisfaction for the products we consume.
As there are two sides of every coin, there are flip sides for FDI also. It has thrown many
small and medium industries out of business which resulted in unemployment. As the term
implies, it is a foreign capital, and it is associated with much uncertainty regarding the flow
of money. It tries to drive away the local competition by acquisitions and in a general sense
an excess of foreign capital especially into a small nation can lead to economic colonialism.
We can see the traces of economic colonialism in terms of dollarization where a country
accepts dollar as legal tender thereby forfeiting their autonomy in monetary policies which
control the money flow in a country (Ecuador, El Salvador, Panama accept the dollar as legal
tender).
So in the end, it all melts down to how we control the foreign capital when it is on our land,
how cautious we are and policies we take to negate the ill effects of FDI. One of the major
vocal issues of FDI is unemployment and to reduce this effect, it is important that we have
proper rehabilitation centres for people effected by FDI and provide them with alternate
employment opportunities.
References:
http://www.thehindu.com/business/Economy/fdi-inflows-rise-29/article8656537.ece
http://voxeu.org/article/can-fdi-help-developing-countries-upgrade-export-quality
http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=15
http://economictimes.indiatimes.com/news/defence/no-change-in-defence-fdi-limits-butstate-of-art-technology-not-needed-for-investments-over-49/articleshow/52843171.cms

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Foreign Direct Investments policies and issues in India

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