India ushered in an era of liberalisation in 1991; since then, people have began engaged in a war of words over the merits and demerits of allowing Foreign Direct Investment (FDI) in India. It has generated so much controversy that past governments has had to tread lightly and with caution while introducing economic reforms, for fear of upsetting the Indian populace.
However, nearly three decades have passed since the Liberalisation, Globalisation, Privatisation (LPG) of India and the time has come to evaluate whether the concerns over FDI were valid and whether those have actualised.
What is Foreign Direct Investment (FDI)?
Foreign Direct Investment refers to the inflow of capital from one country into native businesses or firms based in another one. It involves the foreign entity acquiring native business assets through either partial ownership or by a controlling interest, and by establishing its own business operations in the country.
The foreign enterprises are also directly involved in the functioning of the domestic ones. Thus, Foreign Direct Investment is different from Foreign Portfolio Investment (FPI) in the fact that in FDI, the foreign enterprises do not simply hold shares or a mere equity ownership, as is the case in FPI.
Benefits of Foreign Direct Investment
- FDI is a better alternative to foreign loans as, as no debt is created in the recipient country due to FDI, therefore, there is no anxiety over the repayment of dues, interests, taxes, and so. Diplomatic issues like constant allegiance to the loaner country are avoided.
- The rate of returns on the capital invested is dependent on the economic growth of the recipient country or the success of the company’s projects; therefore, foreign investors would be more motivated to ensure the company’s economic progress.
- The foreign capital invested is used to create resources within recipient country or to productively utilise its already existing ones. Profits are ordinarily reinvested or reutilised in the recipient country.
- It facilitates the growth of international trade relations and global economic integration. Exports may increase.
- There is an increased exchange of knowledge, technology, skills and human expertise.
- It also leads to organised human capital formation and generates employment opportunities.
- Competition in the business environment intensifies, and can lead to more capital investment as well as more business and employment opportunities.
- Taxes on FDI profits supplement government tax revenues.
The Negative Hype over FDI in India
It was the P. V. Narasimha Rao government that first allowed Foreign Direct Investment in India. Since their introduction, the FDI reforms have faced bitter opposition from all quarters of the Indian polity. The scars of the two hundred year colonial rule were still fresh in everyone’s mind and no one wanted to be financially beholden to a foreign power. The British, after all, came to India to trade and ended up conquering the whole nation.
However, the Indian economy was struggling to keep itself afloat. The Congress government felt that bringing in foreign investments seemed like the best option for saving it. The Bharatiya Janata Party (BJP) tried to stall FDI by making out to be another form of western imperialism.
They fostered nationalistic impulses and invoked Gandhi’s conception of ‘swadeshi’ (indigenous’), to bolster their arguments. The apprehension of further economic decline, a strong sensitivity to their newfound Indian identity, coupled with a misunderstanding of the implications of FDI made the rural mass protest against its entry, even though they would not be directly affected. Therefore, governments have been forced to proceed with caution and take baby steps towards opening up the Indian economy.
The negative hype over the introduction of FDI has arisen due to the following concerns:
- Domestic businesses and home-grown brands are going to suffer huge losses due to increased and overbearing competition. Foreign companies, having a lot of capital, may lower prices of their commodities in order to attract more customers. This will lead to loss of revenue for Indian enterprises.
- After eviscerating all competition in the market, a foreign company will start to monopolise it and will lead to foreign economic domination.
- The closure of local small retail stores and the elimination of middlemen will lead to huge loss of job opportunities.
- Due to high competition for jobs, workers might end up offering their services for lower wages. Foreign companies who outsource work to India may also deliberately suppress wages in order to keep labour costs low.
- Foreign companies may try to influence political and governmental decision-making.
The government’s decision to allow FDI in retail (in the far end of 2011) put a glaring spotlight on this debate again, with most opposition parties saying that the disadvantages of FDI inclusion outweighed its advantages. However, most farmer and entrepreneurial groups supported these reforms saying that change was necessary as the economy was stagnating and businesses were accruing losses.
The Reality of FDI in India
According to Indian Brand Equity Formation, the Indian economy is anticipated to have a growth rate of 6.8% in 2018-2019. The total amount of FDI participation in the country was valued at US$ 44.36 billion between April-March 2019.
The top five countries which have made direct investments in India are the United States of America (USA), Japan, United Arab Emirates (UAE), Germany and Sweden. India’s growth rate has been curving upwards steadily and India is supposed to surpass China soon in terms of FDI infusion.
Both industry and infrastructure have also grown by leaps and bounds. For example, India is one of the top nations in the terms of network coverage and telecommunication has become cheaper than was ever imaginable.
It is because of FDI reforms that we are seeing outlets of famous international brands like Starbucks, GAP, Tommy Hilfiger, Gucci, Sephora, Macdonald’s, Honda, Mitsubishi, BMW, Volkswagen, Volvo and so on, sprouting up here and there in the cities.
We also have access to some outstanding brands which provide world-class technology, such as superior-grade smart phones, televisions, laptops, etc. Thus, as a consequence of the opening up of the economy, consumers are now being able to choose from a large variety of products, some of them very high-end ones which would not have been possible earlier.
However, all is not as rosy as it was made out. Although quite a number of jobs have been created, the share of unemployed youth in the recent years has been the worst in decades. This might be the fallout of India’s burgeoning population too; the rate of job growth has not been proportionate with India’s population growth.
FDI inflow is not as much as it was hoped would be, the 2018-2019 figures being just marginally better than 2008 figures, when the world was in recession. Moreover, it seems that a lot of the profits from FDI have regrettably been repatriated to the country of origin.
The world economy has become sluggish. Due to right-wing forces coming to power in most countries, most countries have been adopting self-protectionist economies policies, to focus on their own growth. Outsourcing is being discouraged and imports are being cut down.
Therefore, global economic integration has yet to materialise as of now. Additionally, due to its attempts to facilitate global trade, India has also become an intermediary stop on the re-routing of money to tax havens like Mauritius because of its agreement to waive off taxes on money going to or coming from Mauritius.
The Future of FDI in India
FDI reforms appear to have accomplished a great deal of economic success, due to which successive governments are suggesting that FDI laws be eased, in spite of their initial reluctance. More and more sectors are being given clearances for automatic approval of investments from foreign sources.
However, some sectors are still inaccessible, for example, like e-commerce. India allows hundred per cent FDI in the marketplace model of e-commerce entities, but not in inventory-driven structures. This has proved to be a big problem for Flipkart and Amazon as both run on the lines of the latter model.
Nevertheless, despite these restrictions, Walmart is slated to hold on to its majority interest in Flipkart, that it acquired by spending a whole year’s profits – a whopping sixteen billion dollars – to buy a 77% stake in the Indian e-tailer.
The future prospects are somewhat worrying. The current NDA dispensation has been trying to lure in more foreign investors by widening the scope of FDI. However, all the while, they are also giving special incentives to domestic players in the form of tax concessions, easy loans and other financial benefits. Potential foreign investors have been put off by this preferential treatment.
Current NDA Prime Minister Narendra Modi launched a ‘Make in India’ campaign to pursue foreign companies to invest in India for the manufacturing goods. This drive has failed to achieve any special difference. India has climbed higher in the World Bank’s ranking of ease of doing business, but foreign investment has been slow to trickle in.
In conclusion, the liberalisation of India’s FDI policy has had quite a few benefits.
However, drawbacks still remain, though they are counterbalanced by the advantages. People need not be worried about India losing its economic and political autonomy as it still has a long way to go before full liberalisation is achieved.
The negative propaganda over FDI consisted mostly of invalid concerns, and so far none of them have come to fruition. The reality has fortunately proved to be better than the apocalyptic scene that it was made out to be.