The Evergreen Question :FDI A Boon Or Bane For India?

Posted on October 14, 2012 in Politics

By Chandan Wadhwa:

The notion of FDI will be well encapsulated if we form a solid base before building further understanding on the widely discoursed topic. Foreign Direct Investment (FDI) has formed its niche in major emerging economies of the world as a part of globalisation of economic activity, cross border transaction of technology and direct investments which have expanded greatly over the past two decades, especially since mid 1980s. Several global upheavals have reinforced the expansion. In India, the floodgates opened for the first time after the 1991 crisis and there has been no looking back since then. India has come a long way in terms of economic and social development considering their stance in pre 1991 policy framework.

The expansion in cross border activities of enterprises has been accompanied by a lot of restructuring in the global pattern of production and hence, expansion of technology, trade and investment. The ‘cost plus principle’ is the major driver for the big business houses to pour in the capital in high returning ventures. Over the years, India has emerged as one of the hot destination for foreign capital. The quality of capital invested in India via foreign direct investment or by foreign institutional inflows has an overall booming impact on the economy.

FDI’s expansion fosters on three crucial points:
– Infrastructure
– Abundant low cost labour
– Policy Environment- trade policy, performance requirements, investment and tax incentive, tax rates and patent regimes

The second point is intrinsic to a labour abundant country like India and government is working meticulously to reach the basic minimum threshold in the purview of first and third points stated above.

India is facing a temporary slowdown with public and private sector investment going downhill; it is crippled by multiple problems of corruption, tapering industrial output, inflation, depreciating rupee, rising fiscal and current account deficit and what not. Thus in response to tackle these economic discrepancies, the government has decided to use FDI as a support to regain the lost momentum by instigating animal spirits back in the investors by enforcing cordial policy framework. Hence, government rolled out second major set of reforms by allowing FDI in multi brand retail, aviation sector, Insurance and Pension sectors.

The implementation is not going to be a cake walk as the major political parties have geared up against the government’s announcement. Politics is plagued with hypocrisy as opposition vociferously opposes the decisions of the party in power. These double standards have held back India’s development process.

The outright protests against FDI are perplexing. Each sector in the economy has different challenges and needs. The questions are raised against FDI in retail as emotive reactions have been recorded from different corners. But the actual reality is that the condition of the farmers pre-FDI is horrendous and their suicide rate is in direct correlation with the stated fact. All this is within the prevalent market mechanism which has failed without doubt. So a change in policy was quintessential and FDI in multi brand retail is a positive step in this direction. It will help in vertical integration of retail with farm and promote direct purchases of farm produce from the field. This indirect contribution of FDI in organised retail will be a great help to Indian farmers. It will call for competitive pricing and consumers will also gain, thus benefiting the economy as a whole.

In spite of India being one of the worlds’ largest economies only 3% travels are by air. So, FDI in Aviation sector was also due. New start up airline with foreign airline equity will open up new avenues of linkage to various cities, hence expanding the network. Similarly the Insurance sector was in dire need of investment and increasing its’ FDI share to 49% will definitely help the cause.

The government, by incorporating reforms, will increase efficiency, efficacy, effectiveness, accountability and press on increased economic competition which will create a conducive atmosphere for the transparent functioning of the system.