You are on page 1of 5

FDI IN INDIA

NAME: Ankita Agarwal 1st sem PGDM


Its been long that we are hearing about FDI. Every newspaper, magazine and business news is talking about FDI. But do we actually know what FDI is all about. Do we know the COS AND PRONS of FDI. This article is all about that. What FDI is all about? FDI means Foreign Direct Investment. It is an investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investment involves in the direct production activity and also of medium to long-term nature. As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. Direct investment excludes investment through purchase of shares. Foreign direct investment is nothing but increase the country's economy An example of foreign direct investment would be an American company taking a majority stake in a company in India or Indian company purchasing a stake in an American Hotel chain. For example petroleum major BP is making one of the largest FDI in india in recent years with an estimated $7.2 billion tie up with indian energy major Reliance Industries to explore deepwater oil and gas. BP will take an estimated 30% stake in 23 oil and gas blocks owned by Reliance and will form a 50: 50 joint venture with reliance for sourcing and marketing of gas in india. this is of course incoming FDI. For example TATA sons purchase of European Steel major CORRUS for a $12.3bn way back in 2006007. For example Bharti Telecom purchasing business assets in Africa and other countries for over $10.7bn in 2010 to become a global player. these are examples of outgoing FDI. FDI today is a direct link to the development of a country. It is estimated that every dollar of FDI spent, together with the technology, adds three dollars to the GDP and the same amount to the exports.

Hence $100 Billion FDI invested over ten years will add $300 Billion to GDP and $100 Billion a year to the exports. Recent Reform in INDIA in FDI On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51% and in singlebrand retail up to 100%. The choice of allowing FDI in multi-brand retail up to 51% has been left to each state. In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain (cold storage). This allows non-Indians to now invest with full ownership in India's burgeoning demand for efficient food supply systems. The need to reduce waste in fresh food and to feed the aspiring demand of India's fast developing population has made the cold supply chain a very exciting investment proposition. Foreign investment was introduced by Prime Minister Manmohan Singh when he was finance minister in 1991.

Arguments in favour of FDI With the central governments decision to allow up to 51 percent foreign direct investment (FDI) in multi-brand retail and raise the limit for overseas investment in single-brand retail to 100 percent the size of India's retail industry is expected to more than double to $1.3 trillion by 2020, led by an estimated 25 percent average annual growth in organised retail if overseas investment is permitted in the sector while the country's traditional retail industry is expected to grow at an average annual rate of five percent over the next year. Currently, almost 94 percent of India's retail industry is unorganised or traditional. Because of the investment of foreign companies, job opportunities in areas like marketing, agro-processing, packaging, transportation, etc. will be created. According to the Government, 10 million new jobs will be created in the recent future. With the introduction of FDI post of middlemen in India will be removed. Because of that, farmers will get a good price for their crops and their exploitation will ease. In the long run, it is also expected that foreign companies will invest around $100 Billion in India, which will result in infrastructure facilities, refrigeration technology, transportation, etc. will be upgraded to a large extent . That will lead to low-inflation rate. According to the Indian Governments conditions, foreign companies have to source a minimum of 30% of their goods from Indian micro and small industries.

This will provide the scales to encourage domestic manufacturing, by creating a big effect for employment and to upgrade the technology. Countries like China, Indonesia, and Thailand already have 100% FDI in retail. After allowing FDI in retail, these countries have experienced tremendous growth in the agro processing industry, refrigeration technology and infrastructure. Foreign companies will also create a supply-chain in the India market. Because of that, food which perishes due to bad infrastructure facilities and refrigeration, will not be wasted Arguments against FDI According to those who oppose the idea of FDI believes that the governments claims that FDI in multi-brand retail will bring modern technology to the country, improve rural infrastructure, reduce wastage of agricultural produce and enable the farmers to get better prices for their crops, besides generating employment and bringing down prices is not going to be a success. They are of view that the government is trying to falsely project that FDI in multi-brand retail is an essential reform to boost the growth rate of the economy. There are Evidences from various parts of the world indicate that widespread emergence of big format retail super stores opened by multinational retail giants have led to extensive ruin of retail stores/shops thereby resulting in the loss of employment and livelihood to millions of persons involved in retail trade. These multinational retail giants will wipe out many smaller Indian retailer chains and the small retailers like the kirana stores, mom and pop stores, provision/grocery shops, hawkers/push cart vendors and so on. These tiny entrepreneurs will not only lose their source of income and livelihood, but also their honor and prestige, once they lose their retail trading occupation due to the competition from multinational retail giants. Moreover, there is scarcely any evidence to show that foreign investment, especially FDI, has acted as an enabling factor for controlling inflationary pressure anywhere in the world. Similarly, evidences suggest that nowhere in the world consumers have benefited from the establishment of super stores by multinational retail giants. They believe that FDI in multi-brand retail trade will not serve any purpose. It will do more harm than benefit the people, especially to the unorganised/informal retail sector, which is an important source of employment and livelihood for the multitude unemployed people of the country, besides being the cushion for those who are displaced for various reasons from other occupations/employment in the industrial, agricultural and services sectors. Jobs in the manufacturing sector will be lost because foreign giants will purchase their goods from the international market and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail. Although, our country had made a condition that they must source a minimum of 30% of their goods from Indian micro and small industries, we cant stop

them from purchasing goods from international markets as per WTO law. So after coming to India, they can reduce this 30% by litigating at the WTO. FLOW OF FDI The flow of FDI good or bad as the argument may be depends largely on the following factors: 1. Host countries with sizeable domestic markets, measured by GDP per capita and sustained growth of these markets, measured by growth rates of GDP, attract relatively large volumes of FDI 2. Resource endowments of host countries including natural resources and human resources are a factor of importance in the investment decision process of foreign firms. 3. Infrastructure facilities including transportation and communication net works are an important determinant of FDI. 4. Macro economic stability, signified by stable exchange rates and low rates of inflation is a significant factor in attracting foreign investors. 5. Political stability in the host countries is an important factor in the investment decision process of foreign firms. 6. A stable and transparent policy framework towards FDI is attractive to potential investors. 7. Foreign firms place a premium on a distortion free economic and business environment. An allied proposition here is that a distortion free foreign trade regime, which is neutral in terms of the incentives it provides for import substituting (IS) and export industries (EP), attracts relatively large volumes of FDI. 8. Fiscal and monetary incentives in the form of tax concessions do play a role in attracting FDI, but these are of little significance in the absence of a stable economic environment.

Conclusion FDI plays an important role in growth of an economy. Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy. It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.

The change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.