General Awareness

April 04, 2017 @ 01:15 PM

FDI in INDIA

For any kind of development capital is the most important prerequisite. Since capital is a scarce resource in underdeveloped countries, they always long for foreign capital which comes in two forms- foreign direct investment (FDI) and foreign portfolio investment (FPI). The latter is also referred as Foreign Indirect Investment or Foreign Institutional Investment. The FDI refers to the investment in the real physical assets in the country for e.g. Hyundai setting up an automobile plant in India. FPI refers to the investment in the financial assets of the country for e.g. the external commercial borrowings (ECBs). The funds generated by Indian companies in the foreign capital market are called as ECBs. American Depository Receipts (ADRs). Global Depository Receipts (GDRs are also constitute foreign indirect investment where Indian forms garner funds from external stock market. 

FDI has some inherent advantages over the FPI. The FDI reinforces the long term investment the country while FPI is a short term capital. Further any short term fluctuation results in the flight of capital which is visible in the crumbling of stock markets. Such fluctuation have little impact on the FDI. Since FDI is the investment is physical assets, it directly results is the employment generation, infrastructure development etc, while the process of FPI is an indirect one. Further, costs like interest burden, are almost nil in FDI. Thus FPI adds to the external debt burden of the economy. Apart from this, foreign companies not only bring money but also the latest technology, bringing efficiency in the system and thus infusing the competition. In the most developing nations, the planned investment falls short of the internal savings to ensure the stable course of development, foreign investment is required to fall that gap. Because of the aforesaid advantages of FDI over FPI, every government prefers FDI over FPI.
FDI policy in India:-
At the dawn of independence, the Indian establishment as apprehensive of the foreign capital as it had a bitter of experience of 200 years of servitude under the yoke of  the East India Company. Its because of this reason, 1948 industrial policy resolution heavily controlled the foreign capital.  Though 1956 industrial policy somewhat relaxed the provisions but still foreign capital was too regulated to the satisfaction of foreign capitalist. The 1991 new industrial policy brought major charge in the FDI policy of the country and the foreign capital was assigned a critical role in the country’s economic development. Many industries were deregulated and liberal FDI was allowed. In the post 1991 era, two routes were devised to increase the flow of FDI in the country. Automatic Approval and the FIBP (Foreign Industrial Promotion Board) route. Under automatic approval, foreign companies don’t have to seek permission before investing in India but have to inform RBI within 30 days of bringing investment in India. Under FIBP route, the foreign investment in sectors having long term consequences are cleared on the case by case basis. Here companies have to seek approval before bringing foreign investment into the country, for example under Air transport services, 100% FDI is allowed by NRI, 49% by non-NRI foreigners through automatic route (no direct or indirect investment from foreign airlines is allowed). Beyond 49% FDI will come through FIPB approval route. Currently, the FDI allowed in different sectors of the economy is illustrated in the table:
 
Industry FDI allowed
   
Private Bank 49%
Insurance 26%
Telecom 49%
Petroleum 100%
Power 100%
Drugs & Pharmaceuticals 100%
Roads, Highways, Ports 100%
Hotel & Tourism 100%
Advertisement 100%
Films 100%
Airport 100%
Maps Rapid Tourist 100%
System 100%
SEZ 100%
Township 100%
   
Print media:-  
   
News & current affairs 26%
Technical & Medical publication 74%
Single Brand Retail 51%
 
Currently the sectors where FDI is prohibited are lottery, gambling, chit funds and multi brand retail. The close perusal of the permissible FDI shows than in most sector it is literally allowed. Since infrastructural bottlenecks  are the major impediments is the path of country’s economic development therefore it is liberally allowed in such sector  like roads, highways, ports, power, townships etc, MRTS etc. Further SEZs these days are conceived as the engine of industrial growth, therefore 100% FDI is allowed through automatic route in this sector.
 
The financial sector is a very sensitive sector and entirely based on the confidence of the investors and general public. If I have a doubt if my bank will return my money then I will withdraw my all deposits. And if every one thoughts this way, the bank will be liquidated in no time. It happened with the Global Trust Bank in India which was later merged with the Oriental Bank of Commerce. If 100% FDI is allowed in banking and insurance industry, the sector will be more closely linked with the foreign financial market and a turbulence in any market will shake the Indian market also. Though the RBI should not be denied of it role in averting the impact of global financial crisis 2008 in India, 100% FDI is banking & insurance, situation could have been much critical but on the other hand, opening up of financial sector will also bring new technologies, product diversification, and thus will culminate in strengthening of the financial market. Thus over all, it can be said that with the opening of Indian financial sector, country will be open to the benefits as well as risks of the world financial markets. 
 
Similarly in the case of print media, 26% FDI is allowed in the news and current affairs section. Role of media in creating awareness and creating a public opinion in any county is well established. If 100% FDI is allowed in news and current affairs, then foreign powers through their news agencies may try to change the public opinion according to their needs which will not be good for our national interest. The allowed 26% FDI will help in to improve professionalism as well as bring Indian journalism closer to the international standards. In the case of technical & medical publications 74% of FDI is allowed as they are technical in any nature and not fall in the domain of popular journalism.
 
FDI in retail has been the most debated topic in the country in recent times. In India, more than 90% of the retail trade is unorganized sector where general kirana stores can be seen in any locality which caters the needs of the local population. The retail trade accounts for around 14% of the national GDP and provides employment to the 7% of the work force. Thus the sector has second largest share in providing employment after agriculture. The potential of there sector can be analyzed from the fact that Wal-Mart, the largest retail MNC of the world is the no. 1 company among the Fortune 500 companies. Entry of such MNCs in India will improve the efficiency and productivity of the multibrand the retail trade. Currently 51% FDI in single brand retail is allowed but multibrand retail is closed for the foreign companies. Single brand retail means selling of the products of only one brand like Pantaloon, or Nokia. FDI is multibrand retail is being vehemently opposed by different section because of the vested as well as genuine interest. 
 
Since Indian retailer include the vulnerable section like vegetable vendors, petty traders etc, government doesn’t want to jeopardize their livelihood. A petty street vendor competing with the fortune 500 companies Wal-Mart is beyond logic; therefore it is the genuine concern which must be answered aptly. But development of retail trade by incorporating the foreign retailer will also bring efficiency in the distribution chain. Today it is well known fact that most of the price rise of food product is due to the lengthy and complex distribution chain. On one hand, the final consumer is bearing the brunt of high food inflation; the farmers are unable to cover the cost of their production and farmer suicides are going unabated in the country. In order to reduce the cost of procurement, if MNCs procure directly from the farmers, then not only price of food product will fall but farmer will also get better return for their produce.
 
Though the argument that small retailer will be wiped out if FDI in retail is allowed as they will not be able to stand in the market competing the foreign retail behemoth but they are competing with the domestic retail behemoth like Reliance, Big Bazaar, More & Spencer. so it is very likely that if MNCs like Wal-Mart are allowed in the country they will effect more to the domestic organized retailers than the unorganized small retailers. So if unorganized small retailers (often called as mom and pops shops) can face domestic malls, then indeed they can face foreign MNCs too. Therefore there should be no more politicization of the issue and sector should be opened up after the required cost benefit analysis.  
 
Thus we can see that barring the sensitive and strategic sectors, FDI can play really effective role in developing the respective sectors. It provides not only finances but also new managerial and administrative skills, technology, innovations which are crucial for the development. In today’s globalized world the obstacles to the flow of goods and services are being removed, the obstacles for the flow of capital, technology and labor must also be removed. This is the prerequisite for the organized and unfettered development of globe as a whole.    
 
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