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How Foreign Direct Investment has shifted the gears of the Indian Economy

Foreign Direct Investment was first introduced in the year 1991 by former Prime Minister Sri. Manmohan Singh. Over a period of time, FDI has helped the Indian economy grow tremendously with a strong back-up from the government. A recent survey undertaken states that India has overtaken China and the US as the top destination for FDI.

FDI has turned out to be a major source of non-debt financial resource for the economic development of our country besides being a critical driver of economic growth. What attracts many foreign companies invest in India is the availability of cheap manpower, low wages and special privileges such as tax exemptions and so on. It also means achieving technical know-how and generating vast employment opportunities.

What has made the foreign capital flow into the country is the government’s favourable policy regime and robust business environment. The initiatives taken by the government in recent years with respect to relaxing the FDI norms across different verticals like defence, PSU oil refineries, telecom, power, and stock exchanges have boosted the economy significantly in recent times.

The total FDI in India for the first quarter of 2018 stood at US$ 12.78 billion. This is considered to be a significant leap in recent times. The relaxation in FDI norms and the governments aggressive initiative moves in doing business are yielding fine results. Data shows that the service sector attracted the highest FDI followed by trading, telecom, and IT sector. India received the maximum FDI inflows from Singapore followed by Mauritius, Japan, Netherlands and, the United Kingdom.

Here are some of the significant FDI announcements that were made in recent times.

  • In August 2018, Bharti Airtel received an approval from Govt. of India for sale of 20% stake in its DTH arm to an American based private equity firm, Warburg Pincus for around $350 million.
  • In June 2018, Idea’s appeal for 100% FDI was approved by Department of Telecommunication (DOT) followed by its merger with Vodafone making Vodafone Idea the biggest merger in the telecom sector.
  • Ikea announced its plans to invest up to Rs. 4000 crore in the State of Maharashtra to set up multi-format stores and experience centers.
  • The Department of Industrial Policy and Promotion (DIPP) approved FDI proposals of Damro Furniture in the retail sector.

The Indian government is planning to consider 100% FDI in insurance intermediaries to give a boost to the sector to attract more funds. However, no government approval will be required for FDI up to an extent of 100% in real estate broking services.

Road Ahead

According to a recent market survey, India is becoming the most attractive emerging market for global partner’s investments in the coming months. The annual FDI inflows are expected to witness a boom over the next five years.

You may ask what are the advantages of FDI and how it will reflect on the Indian economy.

Some of the merits are listed below;

  • It provides local economic benefits in multiple locations

The firms that indulge in FDI can look forward to an economic growth. Profits often reinvested could lead to multiple opportunities.

  • It is very easy to complete an international trade

Many countries have an import tariff that must be paid for the goods and the services. Due to taxes, the import/export business may hit hard to keep the products at an affordable cost for customers. Through FDI, it becomes possible to remove these tariffs since a minimum stake takes place in a foreign firm. This gives the local business more control over the market while maintaining the price competition.

  • FDI leads to an increase in foreign income

With FDI, one can notice an increase in foreign income level. As there will be an increase in wages, this creates new opportunities and an increase in resources which is a good sign.

  • Allows your money to work harder

The government has provided tax incentives on this type of investment to encourage FDI. This, in turn, makes more money available to work for a foreign company without affecting the investing budget. These incentives make it easier to achieve the goals because the money involved can be directed towards resources.

However, FDI has certain limitations like;

  • It’s all about risk

FDI is prone to more risks due to political instability. Even though firms look for foreign organizations that have little risk, any business transactions are subject to risk as one cannot completely eliminate it.

  • FDI can be expensive

The transactions undertaken through FDI can be an expensive affair. Since the dollar, euro and pound trade higher than the Indian rupee, investing in firms dealing in foreign currencies by way of FDI would actually have higher costs for the business as compared to a local investment.

  • Affect currency exchange rates

A developing country like India with fluctuating currency rates may see a downtrend with respect to FDI. Organizations see an investment as a sign of stability. But due to constant fluctuation, it may affect the currency exchange rates.

Though FDI has a good prospect on the Indian economy in the coming years, it has its own pros and cons.  Only time will decide the future of FDI in India until then keep your fingers crossed!

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