UNDERSTANDING FDI AND ITS IMPACT IN THE INDIAN ECONOMY

INTRODUCTION

An investment in the form of controlling ownership in a business in one country by an entity

based in another country is known as a foreign direct investment (FDI). [9] A sense of direct
control distinguishes it from a foreign portfolio investment. The source of the investment has
no bearing on its status as an FDI: it might be made "inorganically" by purchasing a firm in
the target country or "organically" by expanding the activities of an existing company in that
nation. In this article the author intends to define the concept of Foreign Direct Investment,
explain about the current scenario of FDI in India and then assess its impact in the Indian
Economy.

WHAT IS FDI?

"Mergers and acquisitions, new facility construction, reinvesting earnings made from abroad
operations, and intra-company loans" are all examples of foreign direct investment. Foreign
direct investment, in a narrow sense, refers to the construction of new facilities and the
acquisition of a long-term management interest (10 percent or more of voting shares) in a
company that operates in a different economy than the investors. As seen in the balance of
payments, FDI is the sum of equity, long-term, and short-term capital. FDI typically entails
management engagement, joint ventures, technology transfer, and expertise transfer. The
stock of FDI is the net cumulative FDI for any given period. Direct investment does not
include stock purchases that result in an investor owning less than 10% of the company's
stock. Controlling ownership of a business enterprise in one country by an entity
headquartered in another country is classified as FDI, a subset of international factor
movements. The aspect of "control" distinguishes foreign direct investment from foreign
portfolio investment, which is a passive investment in foreign securities such as public stocks
and bonds. "Standard definitions of control employ the globally acknowledged 10% level of
voting shares," according to the Financial Times, "although this is a grey area as often a
smaller block of shares will confer control in widely owned corporations." Moreover, control
of technology, management, even crucial inputs can confer de facto control.

There are three forms of FDI. Horizontal FDI occurs when a company repeats its home
country-based activities in a host nation at the same value chain step. Platform FDI is foreign
direct investment from a source country into a destination country with the intention of
exporting to a third country. Vertical FDI occurs when a company moves upstream or
downstream in different value chains through FDI, i.e., when companies execute value-
adding operations in a vertical fashion in a host country.

FDI IN INDIA

The origins of foreign direct investment in India can be traced back to the British East India
Company. During Britain's colonial period in India, British capital arrived in India. Despite
the fact that Japanese corporations entered the Indian market after WWII and expanded their
trade with India, the United Kingdom remained India's most powerful investor. Following
independence, policymakers began to pay attention to concerns connected to foreign finance
and MNC operations. The FDI strategy was created with national interests in mind, and it
intends to use FDI as a means of acquiring sophisticated technology and mobilising foreign
exchange resources. The FDI policy has changed over time and according to economic and
political regimes. MNCs were authorised to venture into India through technical partnership
under the 1965 industrial policy. As a result, the government took a more liberal stance,
allowing more frequent equity. In response to the critical state of the Indian economy, the
government of India implemented a macroeconomic stabilisation and structural adjustment
programme with the assistance of the World Bank and the IMF. As a result of these reforms,
India has opened its doors to FDI inflows and has adopted a more liberal foreign policy in
order to regain foreign investor confidence. Furthermore, the Government of India
established the FIPB (Foreign Investment Promotion Board) as part of its new international
investment policy, with the primary goal of attracting and facilitating foreign investment. A
recent UNCTAD survey forecast India as the second most important FDI destination (after
China) for transnational businesses during 2010-2012, based on a 1990 baseline of less than
USD 1 billion. Services, telecommunications, building activities, and computer software and
hardware were the industries that drew the most inflows, according to the report. Mauritius,
Singapore, the United States, and the United Kingdom were among the top FDI sources in the
country. Since 2000, India has received a total of US$ 306.88 billion in foreign investment,
with 94 percent of that coming in the last nine years. India received US$ 19.52 billion in
foreign investment from 1999 to 2004. Foreign investment in the country reached US$
114.55 billion between 2004 and 2009, rising to US$ 172.82 billion between 2009 and
September 2013. India received US$ 22.42 billion in FDI in the fiscal year 2012–13. The
tourism industry, pharmaceuticals, services, chemicals, and construction industries were
among the largest winners.

IMPACT OF FDI IN THE INDIAN MARKET

Foreign Direct Investment (FDI) contributed to the economy's long-term growth. MNCs
facilitated the transfer of technology to indigenous firms. The businesses had organic growth
or expansion. Employment increased as well. FDI bolstered the balance sheet by increasing
the value of the companies' assets. Businesses' profits increased, and labour productivity
increased as well. Consumption improved as per capita income climbed. Revenues from taxes
increased, while government spending soared. GDP improved, and there was a lag effect, so
GDP increased in subsequent years as well. Furthermore, investments have a gestation time,
and after a few years, returns increase. Companies and, as a result, the economy benefitted
from FDI, and the appropriate FDI process is the identification of important sectors in the
economy that yield the highest return on investment. FDI also served as a strong complement
to India's low domestic stock of investment (about 32 percent) due to poor savings. This
investment increased company competitiveness, encouraged innovation and efficiency, and
elevated the level of living by improving market products and services. Foreign Direct
Investment (FDI) is preferable to Foreign Institutional Investment (FII), also known as "hot
money," which is highly volatile and travels between the stock and bond markets. Companies
developed steadily as a result of FDI, and the stock market rose, attracting more money and
raising more funds for enterprises. Technology transfer, or the migration of technological
know-how, occurred as a result of FDI, resulting in skill development and, when combined
with increased capital, increased productivity and profitability.

CONCLUSION

The Foreign Direct Investment (FDI) policy in India has been steadily liberalised in order to
make the market more investor-friendly. The outcomes have been positive. According to a
United Nations (UN) report, the country is now continuously ranked among the top three
global investment destinations by all international organisations, including the World Bank.
FDI has had a favourable impact on the Indian economy, which has immense potential. FDI
inflows supplement indigenous capital, as well as existing enterprises' technology and
expertise. It also aids in the formation of new businesses. All of these factors contribute to
India's economic growth. The author is correct in believing that this essay has educated
readers on the concept of foreign direct investment and has also assisted them in assessing
India's current FDI scenario.