Foreign Direct Investment (FDI) plays a pivotal role in fostering the economic development of India, serving as a catalyst for growth, employment generation, and technological advancement. The infusion of foreign capital not only supplements domestic investments but also brings in expertise, technology, and managerial skills that contribute to the overall enhancement of the Indian economy. Despite the signing of Memorandums of Understanding (MOUs) indicating potential foreign investments, a noticeable gap exists between the commitments made and the actual FDIs received. This divergence can be attributed to bureaucratic hurdles, regulatory complexities, and concerns related to the ease of doing business in India. To address this issue and attract more actual FDIs, the government should focus on streamlining regulatory procedures, simplifying tax structures, and improving infrastructure. Additionally, proactive measures to enhance the business environment and address investor concerns will be crucial in bridging the gap between MOUs and actual FDIs, ensuring a more robust and sustainable economic development trajectory for India.
Tag: Investment models.
Decoding the Question:
- In the Intro, try to start your answer with defining FDI.
- In Body,
- Discuss the need of FDI in the first part of the answer in brief.
- In the second part of the answer, you need to discuss the reasons behind the gap of MOU signed and the actual FDI.
- Suggest measures for the realising of MOU signed FDI.
- Try to conclude as per the context of the question.
Answer:
Foreign Direct Investment (FDI) refers to capital inflows from abroad that are invested in or to enhance the production capacity of the economy. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign country. FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
The growth of FDI in India will boost the economic growth of the country. FDI in an economy helps in relaxing the domestic savings constraints. It helps to overcome the foreign exchange barrier thereby increasing capital flow and provides risk-sharing capital financing.
Need of FDI for developement of the Indian Economy:
- Private investment from the domestic sector has been constrained because of Non-Performing Assets.
- Induction of advanced technology and technical know-how.
- Improves efficiency and competition.
- Increases consumer choice.
- Sustain and enhance growth, which in turn will ameliorate poverty.
- Better than Foreign Portfolio Investment, which is hot money (Fly by night money)
- Need for non-debt investments.
- Increase employment opportunities.
The reason behind the gap between MOU signed and actual FDI’s:
- Ease of Doing Business: Infrastructural and regulatory bottlenecks such as, dealing with construction permits, registering properties, availability of electricity, paying taxes, trading across borders, corruption, strict labor laws etc. delay project implementation, sometimes rolling back investment decisions. For example, POSCO signed a preliminary agreement of investment of more than $5 billion dollar but on the issue of securing mining rights and regulatory clearance/litigations, it decided to pull out.
- Land Acquisition: Land acquisition is the biggest hurdle in achieving desired level FDI inflow. As major infrastructure projects and Industrial clusters need concessional land, delay in land acquisition leads to increased cost of projects.
- Red tape: Increasing corruption and maladministration in granting all the required permissions for investments have been not addressed. This restrictive behavior resulted in the realization of a signed MOU and the actual inflow of FDI.
- Vested interests: Several reports by GoI have pointed towards the role of some NGOs obstructing the course of projects by playing with popular sentiments. Such tactics not only delay implementation but also create a negative image of India as a business destination to attract FDI.
Remedial steps to increase actual FDI:
- Stable, predictable tax regime.
- Reliable, fair, transparent, rules-based policy making.
- Phasing out of Foreign Investment Promotion Board.
- Expediting clearances and facilitating fast decision-making.
- More FDI should be allowed through automatic routes.
- Fair and rule-based intellectual property regime.
- Diluting precondition for sectors with restrictions.
- Management and control by domestic players should be retained only in strategic sectors.
- Protect and facilitate beau acts for bonafide actions.
- Decrease discretionary powers of bureaucrats.
- Empower bureaucrats to make decisions without fear or favors.
FDI is the need of the hour for further development of the Indian economy. By making it more competitive, it also holds the key to making India part of the Global supply chain. GoI along with respective state governments must engage the global community to attract more and more FDI and prioritize their implementation.
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