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FDI and India

FDI and India

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Published by: ashpika on Jan 21, 2012
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01/21/2012

Indian Business Environment And Macroeconomics

Literature review On Foreign Direct Investment in Retail in India and its impact

Submitted By Ashish Kumar Annepu (17)

Introduction Definition of Foreign Direct Investment (FDI) FDI similarly as a category of cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a µlasting interest¶ in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. Impact of FDI on Macro economy y FDI may : o Boost the total funds available for investment in the host economy. o Provide a less volatile or ³footloose´ source of funds than loans and portfolio investment. o Contribute to international integration, generate positive externalities or trigger structural reform beyond what domestically funded investment would be achieved. y The main macroeconomic benefits to the host country through FDI are through reduction in the probability of a disorderly drop in demand for a country¶s assets. y Restricting inward FDI flows makes it harder to finance a given current account deficit at current prices and thus makes large and perhaps sudden currency movements likely.

FDI: The Indian perspective

y

The investment scenario has been buoyant and moving upwards since the initiation of economic reforms.

y

Since the introduction of economic reforms programme in 1991, India has emerged as a principal host and source in the region.

y

The capital markets have become very active and FII¶s, foreign investment banks and asset management companies have shown increasing interest in India.

Importance of FDI in India
y FDI can induce an increase in overall investment and therefore lead to faster economic growth in terms of income ,employment and output generation. y It is additional source of capital without foreign debt to bridge the gap between income and consumption. y Earns foreign exchange creates positive impact on exchange rates

Benefits of Foreign Direct Investment
y y Promoting trade and export, especially in more open host nations. Generates incomes through foreign investment multiplier, which will benefit domestic inputs in general and labour in particular. y Benefits to consumers by providing international standard quality goods at lower prices and enhance their satisfaction level.

India as an Attractive Investment Destination
Following are the reasons as to why India is considered to be an attractive destination for investments: y y y One of the largest economies of the world. Strategic location access to the vast domestic and South Asian markets. Skilled manpower and professional managers are available at competitive costs. y Rich base of mineral and agricultural resource.

Major Challenges for FDI in INDIA
y The lack of proper business quality infrastructural facilities in India is cited to be one of the main reasons for India¶s inability to attract huge FDI inflows. y The overall political instability at the centre is another deterrent for FDI.

y y

Import substitution has acted as a major disincentive for export promotion. Highly profitable domestic market is also one of the reasons for the lack of competition in the economy and thus results in the inertia on the part of FDI companies to actively formulate and export promotion strategy.

FDI in various sectors
FDI inflows are welcomed currently in 63 sectors as compared to 16 sectors in 1991. The sectors receiving the largest share of FDI inflows upto 2010 were the service sector and computer software and hardware sectors, each accounting for 22.14 per cent and 9.48 per cent respectively. There were followed by the telecom, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing, information; and professional, scientific and technical services. Impact of FDI on Indian Retail y FDI In retail benefits in the following manner : o Improved productivity and efficiency of the retail sector o Improved quality of employment-No negative impact on the employment if the economy is growing o Lead to integration of suppliers .logistic services and retailers-reduction in the number of intermediaries. o Consumers are assured of product quality, better services and shopping experience. y The government has not allowed 100% FDI in multi brand retail based on the consensus against the fear that small retailers would be displaced. y The government till recently has approved FDI in wholesale cash and carry trading and beyond 51% in export trading. y The Cabinet has also allowed FDI up to 100% with prior government approval for retail trade in ³single brand ³products and up to 50% in multi brand retail. y In order to facilitate faster growth and inclusion of better technologies, liberalization of FDI in retailing is imperative.

y

It believed that far from leading to an influx of imported goods ,foreign companies would source most of their items domestically, thus giving a fillip to our manufacturing as well as exports.

y

Those against the opening up of the retail sector to FDI argue that the global players come with deep pockets, which is believed to be discriminatory to the domestic retail industry.

y

There are apprehensions in some quarters that FDI in retailing would lead to unfair competition and ultimately result in large scale exit of domestic retailers.

Conclusion FDI is an important instrument of attracting foreign investments and exchange inflows into the country. In the current scenario wherein the policy of allowing FDI inflows in multi-brand retail is facing political and bureaucratic hurdles in implementation, there is no soon end in sight for the problems plaguing the economy such as the widening current account deficit. There are advantages and disadvantages of allowing FDI in the retail sector, but sufficient regulatory measures must be undertaken in order to tame the side effects. An open economy is always a welcoming sign as compared to the recessionary effects of a closed and over protected economy which may have consequential irreversible repercussions ,thus FDI with regulations is the need of the hour as shot in the arm for enhancing economic recovery.

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