Implementing the Foreign Direct Investment in the Indian Markets - Essay Example

Introduction: F.D.I acronym for Foreign Direct Investment is a key indicator and element of the economy of a given country. It directly impacts the overall health of the country in various ways. It however does bring upon number of considerations, constraints and requirements with itself with regard to its impact on the overall economy. The impact of F.D.I varies with regard to the outlook of a given country. For a developing country the concept of F.D.I brings along the consideration of critically evaluating all the angles and aspects related to its processing (Moran, 2011, p. 81). India as a developing economy: For a country India, that is a developing economy (Banerjee, 2009, p. 75), the element of F.D.I is a mixed phenomenon. It brings along a whole set of conditions, requirements and parameters that are to be taken into regard with reference to processing the foreign direct investment. There are certain industries where the F.D.I benefits the overall health and outlook of the economy, for others there are areas where the Foreign Direct investment does not auger well. This paper looks into the overall scenarios, the determinants, the positives, the negatives, the constraints and considerations that are needed to be taken into account with regard to the Foreign Direct Investment and economy of India. The scenario behind F.D.I: The F.D.I comes into play on account of the meager outlook of the developing states where the resources are limited compared to the overall needs. Owing to this, the country aims for foreign investments. The foreign investment comes along with set of conditions, rules and regulations which makes up for the loss of free environment. Determinants of Foreign Direct Investment: Erdal Demirhan and Mahmut Masca have undertaken an investigative study of the developing countries with regard to the F.D.I and the determinants associated with it. Their study takes into account a total of over thirty eight developing countries that have been checked for the impact of F.D.I upon their economy (Demirhan & Masca, 2008). The determinants are presented in the form of variables. These variables are the per capita income, the G.D.P growth rate, labor rates, the overall rate of inflation against the given annual budget and most importantly the tax to G.D.P ratio and overall tax net. These elements have been assessed for to give a clear account of the F.D.I and its overall feasibility against a given economy such as India in this particular case. In order to present the scenario of Indian economy and the overall impact of F.D.I it is important to identify and mention the variables that are mentioned by Erdal Demirhan et.al as important and substantive towards the clear understanding of the F.D.I feasibility. Market size as a determinant: Market size is often marked as the basic determinant towards the F.D.I evaluation (Lim, 2001,p. 12). The market size directly reflects the G.D.P, per capita income, exports against imports, government policies and overall economic growth rates. Labor rates as an integral element: The labor rates are a direct indicator of overall measure of F.D.I in a given environment. Cheap labor rates attract the foreign investors in a simplistic manner. Higher costs of labors have been seen to distract the foreign investors from showing trust and interest in the given market (Wattanawisitporn, 2005, p. 80). Political stability: The overall political stability of the country plays a direct impact upon the internal and external economics and not just the F.D.I. The political stability within the country gives the investors an element of confidence and trust and enable them investing in a long term manner. Political stability also enables the investors to engage in partnerships without any major element of uncertainty and cartels production on account of rapid change in governments of the given place and country. Political stability and India: India is the world’s largest democracy. Over its history of 67 years, it has had a total democratic process in activity without any disengagement of democracy as is the case in number of other regional countries form South Asia. This has always led to the higher interest of investors in India in particular. The recently held elections and the party that came to power made the foreign investors friendly policies formulation part of their manifesto creating for more secure and more investor friendly corporate environment (Onkvisit & Shaw, 2009,p. 113). Other determinants of F.D.I: The F.D.I is also determined by various other factors of the economic health of the country. These include Taxation system (Jensen, 2008,p. 68): Infrastructural support: Growth rates: Business friendly budget: Fact file: Before understanding the F.D.I determinants, constraints and drawbacks and risks, it is important to understand certain basic facts related to the Indian Economy. The following are few of the key indicators of Indian economy. India is a country with a 1.2 billion population making is the world’s second most populous country in the world. It is a developing country owing to the following facts and figures. Per capita income: $ 5, 375 (T.O.I, 2015) G.D.P growth rate: 4.4 percent Inflation: 9.5 percent Unemployment rates: 3.7 percent Sector wise consideration: India has adopted a selective and subject F.D.I based policy which is subject to the kind of industry. In some cases India allows for investments and F.D.I up to hundred percent as is the case in the form of renewable energies. In the other cases it does not provide F.D.I a suitable market owing to the already saturated market and fears of the local products and manpower suffering at the hands of this incentive. India has undertaken a mixed policy for example in the case of defense sector; it is strongly relying upon the increase in foreign direct investments. Hence, a clear cut on F.D.I is not visible rather a mixed and a subjectively calculated F.D.I response is observed in the case of India and this makes the case of India more interesting for the purpose of business studies and economic dependencies understanding with regard to the foreign direct investments and their overall role on the economy. Non debt based financial resourcing: F.D.I comes along as a non debt based financial lift up to the economy. It does not add any extra burden on economy in terms of the loans or other support funds which are commonly assisted by the global banks such as the World Bank and I.M.F. Hence it is a safe deal in this regard that it does not add to the overall total external debts or any particular interest based loan. In recent times Indian government in recent times is aiming to attract more number of investors from the outside world. In order to provide strength to this case the Indian government has been supporting the investments in form of tax free incentives and other reduced costs based propositions which directly invite foreign direct investments as a result the positive outcome and impact upon the economy. Literature Review: Case 1: The case of renewable energies sector: India, owing to its large population and energy needs has resorted to renewable energies in the form of solar energy. For this purpose it highly welcomes the F.D.I and has given exemption to the investors on number of grounds. These include tax holidays for a period of over ten years. The depreciation claims have also been lowered to the benefits of the foreign investors. Further exemptions from customs and other excise based duties is also another incentive given to the foreign investors in this sector of economic potential (Sahoo, 2014). Case 2: The case of Retail sector: In contrast to the renewable energy sector of India, the retail sector shares a different story with regard to the government’s policies over foreign direct investment. The retrial trade has seen slight revision owing to the new government and its economic policies. This decision is made owing to the domestic market orientations and allowing the local investors and entrepreneurs to exercise maximum support and freedom in the open market (Correspondent, 2014). Case 3: Defense sector: Defense sector of India in recent times has seen a surge in the upward direction. This is largely due to the strengthening ties and relationships with the United States of America. As a result the F.D.I increases in this particular sector. The percentage of F.D.I in the defense sector in particular has gone past from 26 percent to 49 percent as a whole. (Johnson, 2014). Benefits of F.D.I to Indian economy: The single case of increase in F.D.I in the defense sector of India is a prime example of how it benefits that particular industry. It will lead to more job creation opportunities, it will lead to India becoming self sufficient in the longer run towards making its own small arms and later on possibly becoming the supplier and exporter of the small arms. Technological advancements: F.D.I brings along advanced machinery and technology with itself leading to improvement and overall pace in the given industry. Since the F.D.Is are often provided by the developed nations that have improved infrastructural existence and technology in usage, this enables promoting and using the same technology in the local market in the longer run. An impetus to the economy: Since F.D.I means direct inflow of the cash into the economy, this results in increase in the foreign reserves, the remittances, the overall exchange of capital and relative stability in terms of foreign currency exchange rates. This overall exchange and engagement has a positive impact upon the overall health of the given economy of the country. Increased competition: The F.D.Is bring about competition within the domestic market. The external investors raise the overall bar of standard which prompts the local investors, producers and service providers to match up with the services, technologies and features of the foreign companies and investors. In such scenario, the overall benefactor is the common citizen who get to have a choice and variety between the various products, and services at hand. Hence this is another added plus of the foreign direct investment. Other advantages: Other advantages from the Foreign Direct investment include the development of the industry for the business activities as the global attention is attracted towards it. The increased rate of opportunities provided. The telecom sector developments in the Indian market is one prime example where the F.D.I helped recruiting thousands of individuals on account of the 2nd, 3rd and 4th generational digital communication introduction across the broadband spectrum. The downside of F.D.I: The first possible casualty of the F.D.I is the local raw material and the local products being manufactured in the local industry. Since it is an understood phenomenon that the F.D.I supported infrastructural assisted equipment and services will be advanced in quality, they will have a direct negative impact upon the local investors (Banerji, 2013). Over excessively competitive environment: At times the developing countries have a relatively medium paced and averagely advanced infrastructure, the introduction of the developed states technologies bring along an unnecessary competition in the market, which leads to loss of trust and confidence in the domestic investors and as a result an increased burden and stress with regard to performance. Potential fears of inflation: With inflow of extra money and potential foreign currency being floated into the country, there are highly likelihood of increased rate of inflation by the end of the overall foreign direct investment based incentives. Critical appraisal of Indian market: Owing to the potential possessed by the Indian markets and the other factors that are necessary for a positively engaging foreign direct investment which come along in the form of government stability and internal stability, India is ranked as the top 4th country in the world with regard to attracting the foreign direct investment (Maryam, 2014). Although it has slipped down from its previous standing of being the second most suitable country with regard to the foreign direct investment, yet being at 4th for the foreign investments, is still an achievement and positive sign with regard to the overall economic health and policies of India. India serves as the top notch ideal center for the investors and foreign direct investment. This is largely due to the secure environment in terms of political stability, foreigners safety, large sized population leading to reduced labor rates and various other critically effective and important factors. All this said, the decisions to engage foreign direct investment must be gauged against the various variables and constraints back home. It must not come at the cost of compromising the local manpower, local investors and local industries. The local entrepreneurs must be provided with sufficient amount of leverage and facilities that will encourage building upon the strengths that are possessed in the local environment. Make in India is one similar move and the government’s stance on the retail industry is one prime example and the same pattern should be followed by the government in the other industries as well with regard to the foreign direct investment entailment. http://articles.economictimes.indiatimes.com/2014-06-24/news/50825711_1_fdi-destination-fdi-inflows-fdi-policy F.D.Is versus Make in India campaign: India in recent times has aimed at shifting its focus from the foreign investments to domestic project and internal investments. This comes about largely in the form of the incumbent government that made such move and policy a part of their manifesto. Further, the campaign Make in India is a move aimed at sole ownership rather than asking for direct investment as is the case in the form of foreign direct investment (George, 2014). The case of retail industry: Retail industry of India has been long in the lime light owing to the possible question of whether the government should enroll it into the foreign direct investment program. The possible glitches faced in this regard is the overall size of the industry. This requires investment in return in form of massive multi billion dollars projects. Layout designs and ensuring that the large amount of local workforce that is employed in the retail industry does not suffer any layoffs because the foreign direct investors could potentially go for slashing upon the size of personnel within the organizations and respective areas. The other side of the entire case of retail industry is that the farmers will benefit a great deal from the investment owing to the introduction of the capital and introduction of the modern technology enabled equipment and support mechanism. Conclusion: The case of India as the developing economy and agent of Foreign direct investment cannot be gauged as a black and white affair. It is rather a grey concept with bits of positives in number of areas and certain considerations, negatives and constraints attached to them in the other cases. It is therefore wise to implement and introduce the foreign direct investment in the Indian markets subjectively and only after the concerns of the local investors are removed. Further, the sectors where there is no negative impact on the economy or the local investors, such as in the case of the defense expansion and foreign investments, such programs should be supported with regard to the overall health and improvement of Indian economy in the longer run. The retail sector foreign direct investment may be given a thought but it must be done so after getting the approval of the farmers and also providing them with support and security subject to their concerns. Overall, a country cannot survive without the global engagements of business partnerships. For developing economies such as that of India that has all the promise and growth in its ranks, it must continue with the foreign direct investments and partnership; however each of the sector must be engaged into this process owing to the clearly defined rules, regulations and ground realities. It must not be modeled and patterned based on the lines of other countries because the dynamics and circumstances often differ between the countries with relevance to the overall variables such as the manpower, the labor rates, currency depreciation and mother important indicators. References: Banerjee, D., 2009. Economic and Human Development in Contemporary India: Cronyism and Fragility. s.l.:Routledge Banerji, S., 2013. Effects of Foreign Direct Investment (FDI) in the Indian Economy, s.l.: HAL. Correspondant, 2014. India to disallow FDI in multi-brand retail: Nirmala. [Online] Available at: http://www.thehindu.com/business/india-to-disallow-fdi-in-multibrand-retail-nirmala/article6391737.ece#comments [Accessed 24 March 2015] Demirhan, E. & Masca, M., 2008. DETERMINANTS OF FOREIGN DIRECT INVESTMENT FLOWS TO DEVELOPING COUNTRIES: A CROSS-SECTIONAL ANALYSIS, s.l.: PRA GUE ECO NO MIC PA PERS GEORGE, V. K., 2014. Indian growth cannot be FDI-driven: Muralidhar Rao. 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