FDI or Foreign Direct Investment is the investment made by an investor or a company of a foreign country in the business or a company in another country. FDI comes in different forms such as a total buyout of a company in a country by merger or acquisition, acquiring the shares in a company, setting up new enterprises in the country and expanding the sphere of operations of an existing company.
The economic liberalization initiated by the Indian government in the year 1991 opened the Indian economy to foreign investments. Foreign cash inflow into the Indian economy gained momentum after the decision but bureaucratic red tape and lack of political will posed a major impediment in attracting foreign investments into the country. India was 15th in the world in terms of FDI inflow in the year 2013 which rose to the 9th position in the year 2014.
The current Indian government which took office on May 2014 has laid great emphasis on FDI with the launching of some ambitious schemes such as the Make in India initiative which aims to improve the manufacturing sector on the country. The government’s efforts met with success as India became the top FDI destination in the world in 2015 overtaking China and USA.
FDI has always been a controversial economic subject in India with strong voices of both support and opposition assiduously defending their respective cases. FDI is a double edged sword with both merits and demerits. Let’s have a look at some of the advantages and disadvantages of FDI.
- Employment generation- Unemployment continues to plague the Indian youth and is one of the major issues facing India. FDI creates new jobs in the target country due to the setting up of new companies. In India, it is generally agreed that an increase in the manufacturing sector can generate new jobs because the government jobs are limited and cannot provide employment to the millions of educated youths of the country.
- Quality of products and flow of technology- The quality of products manufactured by the company increase greatly due to the increased competition in the market. Modern technologies brought by the foreign companies into India will give the much needed boost to the Indian industries and make them more competitive in the world. Consumers would also be greatly benefited due to the decreased prices of the products manufactured in their own country. It has been estimated that consumer savings would increase by 5-10% due to FDI.
- Improvement of agricultural sector- The Indian farmers are in a pitiable state. Every year thousands of farmers are committing suicide all over the country due to the lesser returns generated by their agricultural produce. FDI will bring about a significant change in the lives of the farmers as they would earn 10-30% more income for their products.
- Increase in government revenue- The revenue earned by the government is estimated to be increased by about 25-30 million dollars. This increased revenue would be highly beneficial for the development of India. The Indian economy would receive a huge boost and would greatly contribute to the country’s quest to become an economic powerhouse.
- Bad deal for the small entrepreneurs- The small businessmen and the cottage industry would face extinction from the market because they would not be in a position to compete with the big multinational giants with their immense resources and formidable marketing methods. The Indian consumers would be more inclined towards the products manufactured by the big companies.
- Trade Deficit- Trade Related Intellectual Property Rights and Trade Related Investment Measures restrict the production of certain products in other countries. These measures force the countries like India to manufacture certain products at a higher cost through FDI.
- Inflation- The critics of FDI argue that the presence of foreign companies in India would result in inflation in the economy. It is argued that the foreign companies tend to spend a lot of money on advertisements to attract customers. This huge amount of money spent on advertisements is compensated by increasing the prices of the goods. Therefore, the consumer is forced to spend a lot more than required. The companies gradually gain control of the market and exploit the consumers.
- Limited employment generation- It has also been argued that FDI would not result in job creation for illiterate and semi literate people. The number of such people in India is high which gives credence to such arguments. It is also pointed out that the big retail companies like Walmart are only going to move the jobs from the unorganized to the organized sector without any significant enhancement in the number of jobs.
- Impact on Farmers- Many critics of the FDI have dismissed the possible benefits that FDI is likely to have on farmers. They have argued that the entry of big foreign companies in India would place the farmers completely under their control. FDI would prove to be extremely detrimental to the farmer’s interests.
- Corruption- Political and bureaucratic corruption is rampant in India. The foreign companies go to the extent of bribing government officials and ministers in their quest to grab a large chunk of government’s favours and the market. The nexus between the businessmen, politicians and the bureaucrats along with past precedents of big ticket corruption in the country does create doubts in the minds of many about the benefits of FDI in India.