A foreign direct investment (FDI) is an investment in the form of a controlling the ownership of a business in one country from another country. Since 1991 FDI inflows in India has increased as India opened its door for the foreign trade and has shown a significant role in improving India’s GDP in the last few decades.
In the year 1991 to 1992, FDI was implemented with intend to boost up the economy of the country. The GDP, with the implementation of the FDI increased from 6.5 percent to 8.2 percent, and clearly showed its fruitful effects to the economy. Since then FDI acted like a source to development and modernization, growth and employment.
Later, the government made more amendment and achieved the record FDI inflow of $60.1 billion in 2016-17 and according to UN report; India has got an amount of $22 billion in half of the year 2018. Since 1991 FDI inflows in India has increased approximately by more than 165 times which is only possible because of new policies:
FDI policy 2017 incorporated all press note of previous year and revised FDI in few sectors.
Manufacturing: 100% FDI is allowed under Government approval route for retail trading, e-commerce and food product manufacturing.
Civil aviation: FDI in the automatic route is increased to 100% from 74%.
Single brand retailing: sourcing norm for FDI is given relaxation and will not apply for 3 years of commencement of the business in the case of a local source is not possible.
Other financial services: All non-banking financial services fall under automatic route 100% FDI.
Hence, India has started liberalizing investment regimes and is still working to make the inflow process smooth by amending the policies to attract more FDI.
ECONOMIC GROWTH: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is schematically measured as the percent rate of increase in actual gross domestic product (GDP).
The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. Implicitly, the rate of growth is the trend of the average level of GDP over the period, which generally ignores the fluctuations in the GDP nearby this trend. An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth.
Increase in the number of inputs available for use such as (increased population, new territory) causes GDP growth is called extensive growth.
Measuring economic growth: Determinants of per capita GDP growth are:
• Productivity
• Intensity (hours worked)
• Demographic changes
• Political institutions, property rights, and rule of law
• Capital
• New products and services
• Growth phases and sector shares
And FDI is promoting the above factors which ultimately target economic growth. As:
• India, the second largest populated country is like a big market as its population rose from 866 million in 1991 to 1.3 billion in 2018.
• The literacy rate is also increasing hence giving skilled and educated professionals as a cheap workforce.
• India is now the world’s fifth largest economy and spending too much on its infrastructure. Today government is spending 5.97 trillion rupees on infrastructure in 2018 as compared to 4.97 trillion rupees in 2017-18.
• Easy rules and regulations have also pushed the world to invest more in India.
• All the sectors i.e. primary, secondary and tertiary have no dominance on other hence removing the problem of Dutch disease.
Hence FDI has emerged as a vital tool for strengthening the economy of the country. Today, FDI is opened to various sectors i.e. defence, automobile, chemical, broadcasting, petrol & natural gas, civil aviation, banking, railway infrastructure etc. The telecommunications sector constituted for the largest part in foreign direct investment equity inflows in India with an overall amount of 6.14 billion U.S. dollars for FY 2018.
Positive effects of FDI on the economy:
• Trade effect: The capital investment is increasing the forex reserve which strengthens the value of the currency which ultimately helps to reduce the inflation as the result of which RBI changes its policies related to the interest rate, benefitting the citizens of the country.
• Human capital contribution: FDI helps to build the infrastructure, new firms or factories which ultimately reduce unemployment which act as a tool to reduce poverty, improve literacy rate etc.
• Competition level: FDI comes with advanced technology, quality and offers products with affordable price which increases the competition among the domestic players, as a result, they also start investing to capture the market, this is like a fruitful situation for the domestic market.
GRAPH1: GDP of India from 1980 to 2016 (Source: RBI)
GRAPH2: FDI from 2000 to 2017 (Source: RBI)
The above two graphs show that how the GDP is going up as the FDI inflow is increasing in India
Hence, FDI targets every sector which improves the quality and ultimately helps to boost the GDP of a country but FDI not always act like a boon to the country. Many countries, in order to attract FDI made loose policies; as a result, they observed the adverse consequences of FDI.
Negative effects of FDI on the economy:
• Monopoly: A firm comes with huge investment and sometimes captures the market of the whole particular sector by giving quality products with affordable prices which kills the domestic players of that sectors and ultimately they steps back from the market which creates a monopoly to the firm as they capture the whole market with no competition.
• Dual economy: FDI can lead them to have a dual economy, which has one developed sector mostly owned by foreign firms and underdeveloped sector owned by domestic firms. It effect hampers the economic development of countries as most of their citizens are located in the non-developed labor-intensive sector. Negative effect of FDI can lead to Dutch Disease effect.
• Cash imbalance: An increase in FDI inflows from the home country will result in an increase in imports in the host country from the home country. This can implicitly affect the economy of the country.
Conclusion:
Due to some case, there are still contradictory thoughts about the effects of FDI on the economy but still, it is believed to have positive effects on the economy of the country. However, countries do not benefit from the investments at the same level.
FDI is not beneficial to the economic growth by themselves, their benefits depends upon the policies set by the government. Sometimes to attract FDI government makes loose policies which give negative effects and sometimes due to harsh policies, countries do not get any foreign investment.
Hence FDI does benefit the economy but that depends upon the government that how they attract them and their policies will never give the chance to the negative side of FDI.