Introduction:
Foreign direct investment (FDI) constitutes a form of cross-border investment wherein an investor residing in one economy establishes a lasting interest in and exerts a significant degree of influence over an enterprise located in another economy. According to the Global Investment Report 2023, there has been a 16% decline in total FDI inflows in India for the fiscal year 2023.
Body:
Significance of Foreign Direct Investment (FDI):
- Economic Growth: FDI serves as a catalyst for economic growth by infusing foreign capital into infrastructure, industrial expansion, and technological advancements. Notably, sectors like the manufacturing of silicon chips in India have witnessed growth due to FDI and initiatives like Production-Linked Incentive (PLI).
- Job Creation: FDI plays a pivotal role in job creation, addressing challenges related to India’s burgeoning population, such as unemployment and poverty reduction.
- Technology Transfer: Multinational corporations bring advanced technology and expertise, facilitating domestic innovation, as evidenced by collaborative projects like Brahmos, Jet Engine, or Submarine ventures with countries like France. Balance of Payments: FDI contributes to enhancing foreign exchange reserves, a critical component for economic stability and managing trade deficits.
- Industrial Development: FDI acts as a stimulant for growth in sectors like manufacturing, aligning with national initiatives such as “Make in India,” exemplified by strategic partnerships like Airbus’s investment with TATA in airplane manufacturing.
- Global Integration: FDI integrates India into the global economy, fostering international cooperation and positioning the country as an attractive investment destination.
Reasons for Decline in FDI Inflows:
- High inflation and weak demand in the US and Europe have diminished India’s attractiveness as an investment destination. Limited policy reforms and state-level improvements have hindered efforts to liberalize FDI regulations and enhance the business environment at regional levels.
- Global pessimism, influenced by uncertainties in global growth, has led to a decline in cross-border mergers and acquisitions (M&As) as Western corporations exercise caution in making substantial investments. Geopolitical considerations, particularly India’s distancing from Chinese FDI after the 2020 border clashes, have played a role in the decline.
- Issues in various industries beyond technology have contributed to the broader impact of the FDI decline.
- Policy uncertainty and mid-course changes deter potential investors, while disparities in the playing field discourage investments. India’s non-participation in agreements like RCEP and the absence of EU trade deals have hindered FDI attraction.
Potential Measures to Enhance FDI:
- Government schemes such as the production-linked incentive (PLI) scheme in 2020 for electronics manufacturing aim to attract foreign investments by offering incentives. The 2019 amendment to FDI Policy 2017 allowing 100% FDI in coal mining under the automatic route has provided a boost to FDI inflow. In 2019, a clarification extended the 100% automatic route to investments in contract manufacturing for Indian entities.
- The government’s opening up of digital sectors, allowing 26% FDI, presents a lucrative market with high return potential due to favorable demographics, extensive mobile and internet penetration, and significant technology adoption. Campaigns like ‘Make in India’ and ‘Atmanirbhar Bharat,’ coupled with efforts to strengthen India’s position in global supply chains, have given momentum to FDI inflows in recent years.
- Schemes designed to attract investments, such as the National Technical Textile Mission, Production Linked Incentive Scheme, Pradhan Mantri Kisan SAMPADA Yojana, etc., contribute to creating a favorable investment environment. Investing in skill development programs supports technology transfer and innovation, making India an attractive destination for FDI.
Conclusion:
Enhancing FDI is paramount for India’s sustained economic growth. While FDI and foreign investment are crucial, exploring diverse sources of investment will ensure a more comprehensive and sustained development of the Indian economy.
In case you still have your doubts, contact us on 9811333901.
For UPSC Prelims Resources, Click here
For Daily Updates and Study Material:
Join our Telegram Channel – Edukemy for IAS
- 1. Learn through Videos – here
- 2. Be Exam Ready by Practicing Daily MCQs – here
- 3. Daily Newsletter – Get all your Current Affairs Covered – here
- 4. Mains Answer Writing Practice – here
