RSTV: THE BIG PICTURE- WOOING FDI
Foreign Direct Investment or FDI is a major driver of economic growth and is largely a matter of private business decisions. FDI inflows depend on a number of factors sub as availability of natural resources , infrastructure , market size , general investment climate etc. Govt of India has put in place a liberal and transparent policy for FDI with most sectors open to FDI under the automatic route. To further attract more investors the department for promotion of Industry and Internal trade and the investment promotion agency Invest India have joined hands to put in place a new mechanism under which those looking to invest 500 million dollars or more will have a designated person to facilitate all clearances .
- Soon, those looking to invest $500 million or more in the country will have a designated person who will facilitate all clearances — from the Centre to local bodies — with officials from state government and central ministries too converging on one place to address investor queries and enhance flows.
- DPIIT and Invest India have joined hands to put in place a new mechanism aimed at attracting investors, many of whom have in the past complained of a plethora of clearances holding up their plans.
- The Centre’s investment promotion agency Invest India is scouting for space, where officials from several ministries, including tax and environment and forest, will be present to address investment queries.
- State governments, too, will depute officers at the facility.
Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.
The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
Factors affecting foreign direct investment:
- Regulatory framework policy needs to be predictable
- Wage Rates
- Labour skills
- Tax rates
- Transport and Infrastructure
- Size of economy and its potential for growth
- Political stability
- Existence of commodities
- Exchange rate
- Access to free trade areas
Advantages of Foreign Direct Investment (FDI)
· Capital inflows create higher output and jobs.
· Capital inflows can help finance a current account deficit.
· Long-term capital inflows are more sustainable than short-term portfolio inflows. e.g. in a credit crunch, banks can easily withdraw portfolio investment, but capital investment is less prone to sudden withdrawals.
· Recipient country can benefit from improved knowledge and expertise of foreign multinational.
· Investment from abroad could lead to higher wages and improved working conditions, especially if the MNCs are conscious of their public image of working conditions in developing economies.
Potential Problems of Foreign Direct Investment
· Gives multinationals controlling rights within foreign countries. Critics argue powerful MNCs can use their financial clout to influence local politics to gain favourable laws and regulations.
· FDI may be a convenient way to bypass local environmental laws. Developing countries may be tempted to compete on reducing environmental regulation to attract the necessary FDI.
· FDI does not always benefit recipient countries as it enables foreign multinationals to gain from ownership of raw materials, with little evidence of wealth being distributed throughout society.
· Multinationals have been criticised for poor working conditions in foreign factories (e.g. Apple’s factories in China)
Importance of foreign direct investment
Foreign Direct Investment has increased significantly in past few decades. This is because:
- Lower transport costs
- Improved technology which has helped increase low capital intensive start-ups
- Increased global trade and lower tariff costs
Government Initiatives and analysis:
- The government’s policy is very dynamic one.
- The government has been from time to time relaxing more policies to include more items in the automatic list rather than restrictive list.
- In August 2019, government permitted 100 per cent FDI under the automatic route in coal mining for open sale (as well as in developing allied infrastructure like washeries).
- In Union Budget 2019-2020, the government of India proposed opening of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.
- 100 per cent FDI is permitted for insurance intermediaries.
- As of February 2019, the Government of India is working on a road map to achieve its goal of US$ 100 billion worth of FDI inflows.
- In February 2019, the Government of India released the Draft National E-Commerce Policy which encourages FDI in the marketplace model of e-commerce. Further, it states that the FDI policy for e-commerce sector has been developed to ensure a level playing field for all participants.
- Government of India is planning to consider 100 per cent FDI in Insurance intermediaries in India to give a boost to the sector and attracting more funds.
- In December 2018, the Government of India revised FDI rules related to e-commerce. As per the rules 100 per cent FDI is allowed in the marketplace-based model of e-commerce. Also, sales of any vendor through an e-commerce marketplace entity or its group companies have been limited to 25 per cent of the total sales of such vendor.
- In September 2018, the Government of India released the National Digital Communications Policy, 2018 which envisages increasing FDI inflows in the telecommunications sector to US$ 100 billion by 2022.
- In January 2018, Government of India allowed foreign airlines to invest in Air India up to 49 per cent with government approval. The investment cannot exceed 49 per cent directly or indirectly.
- No government approval will be required for FDI up to an extent of 100 per cent in Real Estate Broking Services.
- The Government of India is in talks with stakeholders to further ease foreign direct investment (FDI) in defence under the automatic route to 51 per cent from the current 49 per cent, in order to give a boost to the Make in India initiative and to generate employment.
- Having a flexible policy in place is a pre-requisite.
- Few of the things are very positive in India like market size.
- But stability is missing because changes take place so frequently
- Taxation issues at times which sends wrong message.
- We need to show the investors that the ecosystem is welcoming.
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