Foreign Direct Investment ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. It has always been matter of concern and whichever government comes or goes, it has to do the needful and deal with it sagaciously.
Foreign Direct Investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.
On one hand, an FDI may provide some great advantages for the multinational enterprises (MNEs) but not for the foreign country where the investment is made, On the other hand, sometimes the deal can work out better for the foreign country depending upon how the investment pans out. Ideally, there should be numerous advantages for both the MNE and the foreign country, which is often a developing country. We'll examine the advantages and disadvantages by focusing on few sectors in India.
Defence- Opening up FDI in the defence sector was a no-go area so far, but with the change of guard at centre, the proposal to raise FDI cap in defence from 26 per cent to 100 per cent is aimed at giving a boost to the manufacturing activities. Portfolio investors, including Foreign Institutional Investor (FIIs), would be permitted to invest only up to 49 per cent. This will hugely help in reducing import bill for defence equipment, and will help in boosting manufacturing and creating jobs.
Railways- Railways is the most important sector which needs FDI as without FDI and Central Government assistance railway cannot even think of running bullet trains on their own – a bullet train will need investment of around Rs 60,000 cores each. FDI liberalisation in the sector would help in modernisation and expansion of railway projects, and will give boost to infrastructure development and will generate jobs
Insurance: The Insurance Laws (Amendment) Bill aims to raise the foreign direct investment in insurance sector to 49 per cent, from the current level of 26 per cent. For up to 26 per cent FDI in insurance, the Foreign Investment Promotion Board (FIPB) nod would not be needed but for the 49 per cent limit, the board's approval would be needed. Besides entry of more players in the insurance sector, higher FDI could boost job creation in the sector. Higher capital will help insurance companies to tap under-insured markets through better infrastructure and more manpower.
Retail-The FDI in retail seems to be the certifying the story of “The Clever Monkey and 2 Cats”. In this story the Indian buyer and seller are the two cats and the MNCs play the role of the Clever Monkey. The big multi brand retailers always claims that they source 90% of products from local manufacturers which clearly states that we are buying our own products from the overseas middle man and are in turn draining of our own wealth.
FDI in retail will drain out the country’s share of revenue to foreign countries, which may cause negative impact on India’s economy. Congress Government allowed 51% FDI in multi brand retail and increased FDI limit in single brand retail from 49% to 100%.
Telecom- Repairing India’s telecom sector, which has been severely troubled since the Supreme Court ruling on the so-called “2G Spectrum Scam” resulted in the 2012 cancellation of 122 telecom licenses awarded to 22 operators in 2008 is Bharatiya Janata Party’s primary agenda. There are two areas of focus that they need to fix immediately—quality of service to the consumer and building investor confidence. As there is 100 percent FDI in the sector, the investment in the sector must be quickened to create jobs and improve connectivity.
Adv Ashutosh Bansal (The writer is a Expert on Institutional Finance)