FDI in India and its economic impact

FDI in India and its economic impact

  • Foreign Direct Investment (FDI) leads to the long term growth of the economy.  MNCs bring about technology transfer to the domestic companies. Organic growth or expansion takes place in the companies. Employment too rises.
  • FDI strengthens the balance sheet as it raises the assets of the companies. Profits of the businesses increase and labor productivity increases too.
  • Per capita income increases and consumption improves. Tax revenues increase and government spending rises.
  • GDP increases and there is also a lagged effect due to which subsequent years GDP too increases.
  • Furthermore investment has gestation period and returns increase after few years.
  • FDI puts the companies and hence the economy on higher growth mode and the right process of FDI is selection of the strategic sectors in the economy that generate highest RoI.
  • Balanced and unbalanced growth theories of Development economics too harp on this. So is Leibenstein’s minimum effort hypothesis.
  • FDI also acts as a solid complement to domestic stock of investment which is low ( about 32%) in India because of low savings. This investment raises competitiveness among the businesses, breeds innovation and efficiency and increases standard of living through better products and services in the market.
  • Exports get a fillip and balance of payments show surplus which causes rupee to appreciate vis a vis the Dollar. Forex reserves rises significantly and this causes RBI ‘s assets to increase due to which money supply rises and thus inflation too rises according to Quantity Theory of Money.
  • So according to Mundell Fleming model in the open economy context, bond prices go up, interest rates go down, investment escalates further and growth rises.
  • FDI is better than Foreign Institutional Investment (FII) or hot money which is volatile in nature and moves to  the stock and bond markets. Because of FDI, there is solid growth in the companies and hence stock market rallies and attracts more capital which raises more funds for the businesses.
  • In FDI there is technology transfer or the movement of technical know how to the domestic country due to which skill development takes place and together with higher capital this raises productivity and profitability.
  • Total FDI inflows in the country in the last 20 years (April 2000 – September 2020) are $729.8 bn while the total FDI inflows received in the last 5 years (April 2014- September 2019) was $319 bn which amounts to nearly 50% of total FDI inflow in last 20 years.

In this huge investment scenario let us see, the top 5 Indian states according to FDI destinations .

FDI in State
*Rs in Crs*   % of Total
1.Gujrat 181794 30
2.Maharshtra 171807 28
3.Karnataka 87631 14
4.Delhi 68951 11
5.Tamilnadu 24439 3
      Total 534622 86
Let us look at the next 5 in the list (Rank 6 to 10) .
FDI in State
*Rs in Crs*   % of Total
6.Jharkhand 19200 3
7.Telengana 17757 3
8.Haryana 13483 2
9.Punjab 5417 1
10.UP 4861 1
  Total 60718 10

West Bengal is not in the next 5 names also ! Bengal has not been able to secure even 1% of the total Investments in the country ! It is unfortunate that we live in this state.

In economics, if x is a necessary condition for y then no y means no x. And if x is a sufficient condition for y then x implies y.

Thus, to sum it all, according to economic reasoning FDI  is not necessary for growth but sufficient for growth.

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