In this blog post, Shubhangini Debi, a student of ULC, Gauhati University, Assam, and currently also pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, critically analyses the advantages and disadvantages of Foreign Direct Investment. 

India has been marked as one of the top three most preferred countries in terms of foreign investment due to its vast scope in development and presence of entrepreneurial minds. It was Manmohan Singh and P. V Narasimha Rao who brought FDI to India. Ever since the economic crisis in the year 1991, the regulatory environment has been created for the maintenance of a steadily increasing FDI. According to the Financial Times in 2015, India took over China and USA as the top destination for Foreign Direct Investment.

What is Foreign Direct Investment?

Foreign Direct Investment or FDI in simple terms is the investments made by foreign investors of one country into the business enterprise of another country, which in turn enhances the economic growth rate of receiving country.

There are two kinds of Foreign Direct Investment – i) Inward Foreign Direct Investment, which is the net inflow of value made by non-resident investors in the reporting country and ii) Outward Foreign Direct Investment, which is values of net outflows made by the residents of the reporting country to another country.

Benefits of Foreign Direct Investment

Since FDI is foreign investment, it obviously brings two countries together. One country can invest in the technology or products of another country, thereby creating not only more jobs but also creating better products by providing their research and technology. Recently, Sushma Swaraj, Minister for External Affairs urged the African Governments to develop mutual trades in India. With the increased FDI limits, trade between both India and African countries will become better since the Start-Ups of the respective countries can share and exchange their research and technical infrastructure.

FDI can also be considered to be the sea for a sailor who wishes to travel into the deeper waters. A young entrepreneur and such bright minds can hope to think beyond or bring in new ideas into the world in an attempt to make our daily chores better and simpler with each day. Although Uber (cab aggregator service) is a foreign brand, yet entrepreneurs like Bhavish Agarwal and Ankit Bhati have founded Ola Cabs to provide the people with the same service with a better experience. In this case, however, the idea may not have been original, but it employed thousands more and added another cab aggregator service which can be used as an alternative by people in urgent situations. Let us look at it this way, when you know that your parents are there to back you up economically, you can freely think about new perspectives. Same goes for an entrepreneur, when there is FDI to back him up, he can think about solving the next issue in front of him.

FDI investment in private banks has also been increased. With MUDRA Yojana in Rural India, small-scale businesses and startups will get a new avenue for investment. Private Banks will be bound by the Indian government to provide at least one small scale business in their locality with the investment for the business. FDI opens options for starting many new private banks. With new private banks in the country, people will be able to acquire much better interest rates and also high paying investments. Low-interest rate gives an entrepreneur more freedom to take the risk and innovate. The foreign private banks will bring the latest technology and help people get work done at much faster rate.

Varied insurance options are also going to benefit from the new increased limits of FDI. Life insurance will also see a new boost. People will find investment processes getting easier.

The government of India has increased the Foreign Direct Investment limits in Private Channels up to 100 percent and increased the limit in News Channels up to 74 percent.  It is a well-known fact that foreign news channels promote startups and hence will provide the requisite platform for Indian startups and acquire the requisite fame will get easier.

Increased FDI will lead to Improvement of supply chain/distribution efficiencies, which when coupled with capacity building and the introduction of modern technology helps arrest wastage. In the present situation, improper storage facilities and lack of investment in logistics have been creating inefficiencies in food supply chain, leading to significant wastages. Improvement in supply chain and food storage will help many startups in the e-commerce sector as well as many food-tech startups that require food storage.

The investor is actuated by the profit motive when he makes a private investment; hence the business operations are scrutinised, and many careful calculations are done. This guarantees that the capital resources (money invested) are most efficiently employed and are not used in some reckless investment as happens in many cases of borrowing.

Another important advantage of direct foreign capital is that it can be induced to be invested in infrastructures such as power, telecom, and development of ports which is an obstacle to accelerating economic growth and the growth of startups as they have to compete with many startups from countries with superior infrastructure at the global level. Lately, Indian Government has been wooing foreign investors to invest in the infrastructure sector. The foreign companies have the resources, technology and technical know-how to lead productive ventures in the infrastructure sector. A strong infrastructure will provide strong support to the Indian entrepreneurship.

Disadvantages of Foreign Direct Investment

Now let us look at the disadvantages of Foreign Direct Investment. As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment. This will affect India in cases where India is heavily investing in another country.

The biggest fear from FDI is that it has potential to destroy the small entrepreneurs and small Kirana shops because they will not be able to compete with the tough competition from big entrepreneurs. These entrepreneurs will provide all the goods to the consumers at much lesser prices than the local entrepreneurs and the local Kirana store.

Many critics of FDI believe that entry of big foreign chains like Wal-Mart etc., is not going to generate any jobs in reality in India. The lesser the jobs in the market, the more the unemployment in the economy. The government will have to focus on the unemployment and will have to tackle the negative impacts of FDI instead of building a conducive environment for entrepreneurs in India.

While FDIs may increase the aggregate demand of the host economy in the short run, through the improvements in productivity and technological transfers, many critics are concerned over the effectiveness of suggested benefits of direct investments. Their reasoning follows the rationale that the long-run balance of payment position of the host economy is jeopardised when the investor pulls out the investment to recover its initial outlay. A negative balance of payment will lead to high debt for the Indian Economy. Indian economy may have to resort to import restrictions to balance the deficit. Many entrepreneurs use imports from other nations as raw materials etc. These businesses will seriously be hampered by the restrictions.

Evidence shows that multinational companies pay a slight premium over local-term wages. Paying a premium for the price of labour may improve the consumption power of workers, but it also has the detrimental ability to disrupt the local employment market. The labour available in the market will prefer working for the multinational corporations, and the entrepreneurs in the Indian market will have to pay a similar amount to the labour or face the dearth of skilled labour available to business. Increased labour cost will reduce the profits or even increase the losses of many budding entrepreneurs.

Conclusion

After taking into consideration both pros & cons of FDI, I can safely say that although there are certain apprehensions about FDI in India but all these fears are unfounded. There is hardly any truth in the fact that it would destroy the small entrepreneurs in India rather it will be beneficial for both the consumers & farmers of India. So, the future of India lies in FDI & the government must proceed in that direction if it wants to make the Indian economy a developed economy.