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Today, you will read General Awareness Topic:
"Can India afford without FDI ?"
Foreign Direct Investment is described as investment into the business of a country by a company in another country. Mostly the investment is into production by either buying a company in the target country or by expanding operations of an existing business in that country.
Such investments can take place for many reasons including to take advantage of cheaper wages, special investment privileges (e.g. tax exemptions) offered by the country etc. Historically, India has been an attractive FDI destination, however, after independence, India become apprehensive about the foreign capital due to the bitter experience of East India Company. Post 1991, India policy measures were initiated to make the country an attractive FDI destination.
FDI has always been extensively debated across the country and Indian intelligentsia is full of staunch supporter as well as opponent of FDI. However, before the argument for or against FDI in India, let’s have a look at the possible situation of the country in case of complete absence of FDI. For the last few years, the GDP growth rate of the country has been continuously falling because the investment rate is not picking up.
The investment required for more than 8 percent growth cannot be achieved by domestic savings only. The gap between saving and investment is filled by FDI. In the complete absence of FDI, GDP growth rate will fall further.
When FDI comes to a country, it not only brings money with it, but also the technology, specialization etc. As the research and development expenditure is very low which is the reason behind the fewer innovations in India as compared to the west. In the absence of FDI, we may have to buy the technology from west at very high prices which will put pressure on the foreign exchange. Moreover, if we take an example of mobile handsets, all the market leaders are foreign companies like Nokia, Samsung, LG, Ericsson etc. Similarly in automobile market, except for Maruti and Tata, most brands of the car are owned by foreign companies.
When there will be no foreign companies in the country, domestic companies will not face any competition or challenge and will get complacent. The quality of products will reduce and export market of the country will also shrink. In the absence of foreign companies, domestic companies may also not able to supply the goods and services required by the country and demand and supply mismatch may give rise to inflation and black market.
Though there are few bad experiences with FDI in India like Union Carbide responsible for Bhopal disaster or Dhabhol experience in Maharashtra but FDI is crucial for the overall development of the country and there is need for proper preventive measures.
Major benefits of FDI are as under :
• Developing countries, which invite FDI, can gain access to a wider global and better platform in the world economy.
• A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.
• Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.
• FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. Developing countries by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process. Foreign expertise can be an important factor in upgrading the existing technical processes.
• FDI increases the level of competition in the host country. Other companies will also have to improve on their processes and services in order to stay in the market. FDI enhanced the quality of products, services and regulates a particular sector. Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns.
• Employees of the country which is open to FDI get acquaint with globally valued skills.
Though the liberal policy stance and strong economic fundamentals appear to have driven the steep rise in FDI flows in India over past one decade and sustained their momentum even during the period of global economic crisis (2008-09 and 2009-10), the subsequent moderation in investment flows despite faster recovery from the crisis period appears somewhat inexplicable.
Survey of empirical literature and analysis presented in the paper seems to suggest that these divergent trends in FDI flows could be the result of certain institutional factors that dampened the investor’s sentiments despite continued strength of economic fundamentals. There are few shortcomings of FDI but with no FDI, there will be much more shortcoming, therefore, country should invite the foreign capitals but with precautions.
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