FOREIGN DIRECT INVESTMENT IN INDIA

What is FDI  ? 

The Foreign Direct Investment means “cross-border investment made by a resident in one economy in an enterprise in another economy, with the objective of establishing a lasting interest in the investee economy. FDI is also 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.

Why Countries Seek FDI ? 

(a) Domestic capital is inadequate for purpose of economic growth; 

(b) Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development; 

(c) Foreign capital usually brings it with other scarce productive factors like technical know how, business expertise and knowledge.

What are the major benefits of FDI : 

(a) Improves forex position of the country; 

(b) Employment generation and increase in production ;

(c) Help in capital formation by bringing fresh capital; 

(d) Helps in transfer of new technologies, management skills, intellectual property 

(e) Increases competition within the local market and this brings higher efficiencies 

(f) Helps in increasing exports; 

(g) Increases tax revenues

Why FDI is Opposed by Local People or Disadvantages of FDI :

(a) Domestic companies fear that they may lose their ownership to overseas company

(b) Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business; 

(c) Large giants of the world try to monopolise and take over the highly profitable sectors; 

(d) Such foreign companies invest more in machinery and intellectual property than in wages of the local people; 

(e) Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

Explain the forms in which business can be conducted by a foreign company in India 

A foreign company planning to set up business operations in India may: Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary. Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company

What is the procedure for receiving Foreign Direct Investment in an Indian company? 

An Indian company may receive Foreign Direct Investment under the two routes as given under: i. Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

What is Scope of FDI in India? 

Why World is looking towards India for Foreign Direct Investments : 

India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India, has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies. Some of the major economic sectors where India can attract investment are as follows:-

• Telecommunications 
• Apparels 
• Information Technology 
• Pharma 
• Auto parts 
• Jewellery 
• Chemicals

In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.