Country Analysis And Assessment Of Potential For Foreign Direct Investment (FDI) In India
HI5014 International Business Across Borders
HI5014 International Business Across Borders
HI5014 International Business Across Borders
HI5014 International Business Across Borders
Political, Economic, Socio-cultural and Technological benefits
As per area, India is world seventh largest country. In 2017, the Indian economy is the world six largest in terms of nominal GDP (Bhattacharyya, 2018) and also a fastest growing economy all over the world. However, there are some major challenges faced by the economy from a long period of time. These challenges are poverty, corruption and malnutrition. In the globe, India also has second largest standing army. Federal republic governed in India consisting of 29 states and 7 union territories.
Foreign direct investment (FDI) in all over the world in general and in India leads to an inflow and outflow of market with the agreement of various policies such as globalization, liberalization and privatization (Pao & Tsai, 2011). This helps India to emerge as one of the most significant sources and contributor in terms of inflow and outflow of resources that also leads to capital formation in world arena.
Foreign direct investment (FDI) is also based on several determinants as well as sector base analysis. Indian investment scenario is changed in many ways due to the political impact of larger FDI. This impact is forcing government to support conceptions like liberalization. In terms of liberalization, political climate is directing on telecom, banking, infrastructure and insurance sectors (Srivastava, 2015). In addition, the government is focusing on rural sectors so as to bring fairness in relation with wealth distribution and investment.
The political system of India also brings various benefits relating to foreign direct investment such as introduction of various economic reforms in 1991, many different policies were initiated like abolition of licensing, dismantling of price control, freedom to import technologies and so on (Chakraborty & Nunnenkamp, 2008). This leads to several new polices in respect with foreign direct investment such as obtaining autocratic rights by foreign firms with international brand names, allowance of 100% foreign equity in terms of infrastructure project, opening of 51% FDI in retail and many more. These all policies are favourable in term of political environment and so there could be many benefits for the firms to invest in India. For instance, one of the recent change in terms of policy is that foreign direct investment rules has been changed by India for three years to five years and with this new policy, Apple can start manufacturing in India in align with the operations of various retail stores.
Indian economy is also showing positive aspects of foreign direct investment. As India is a developing country, FDI inflow will be significantly important in emerging countries than the developed ones. IMF also gives a definition term to FDI as “a group of global investment that shows the goals of a resident entity in one economy and getting a eternal control and concern in an enterprise resident in another economy (Malhotra, 2014). Moreover, FDI also brings more employment opportunities to the Indian economy, as it is a labour intensive country. In addition, with the recent changes in new policies and acts like GST, demonization, it is expected that India GDP and economy will go at a faster pace in the next 5 years and this also shows positive sign for the firms to invest in India. For instance, foreign investors have impelled in an astounding $3.55 billion in the Indian capital market this month after the completion of GST rates for bulk of the items. (Pti, 2017).
National resources and factor endowments leading to competitive advantage
In terms of Socio and cultural environment, there may be some aspects having a crucial effect on the ability of countries and regions to attract FDI and on the practices to which FDI inflows are put. Indian history is no exception to this observation. With the continuous investment by the firm, they also settle down in the country in respective with mutual sharing of culture. In India, FDI can promote social progress with the help of specific reports like investment in healthcare and education – directly with the help of employment and higher incomes (Skeldon, 2008). This shows that there is a constructive association among FDI and social progress as FDI can encourage future social development and in the same way, elements of social progress such as education, infrastructure and political security can also attract foreign investment. India also provides a business culture, help in partnerships between foreign and local firms for testing of innovations and adaption of advanced technologies in respect with different market conditions.
The next factor that can influence FDI in India is technology. In every segment of the economy, Information technology can be used potentially. On both developed and developed countries like India, IT sector constitute as a dynamic one. There is no doubt that the IT sector has been a dynamic one in various developed and developing countries like India. It is framed in the form of software exports instead of country relatively low level of income and development. The IT industry raised demand in several sectors in India like education (mainly for engineers and computer science) (Sharma, 2017). Moreover, the core competencies of India IT’s have enticed important investment from main countries. Between the period of 2000 and 2015, India gains collective FDI inflows worth $18.17 billion USD as per the report published by DIPP.
In the last three decades, developing nations have done considerable progress in relation to industrialization. Today, India is considered to be a wonderland for investment due to favourable business environment. The country has abundance of skilled labour and workforce and vast financial system, and lucrative policies for FDI (Zheng, 2009). These all-inherent advantages and various new initiatives from government prefer India to other developing nations like China, Russia and Indonesia.
India has forex reserve of USD 375.274 billion. Moreover, having 356 million people makes a larger youth population country where their age belongs between 10-24 years old (NetIndian, 2017). In addition, this will leads in shifting of big chunk of the population into working age group and thus results in rise of disposable income and consumption. India is also a land of huge natural resources such as iron ore, diamonds, coal, natural gas, chromite and other rare earth elements.
In global market, the wealth of natural resources or factory endowments is a key factor of competiveness. International trade in factory endowments is called a “Vent for Surplus” where a nation excerpts advances from resources, which are not able to utilize by the country due to closed economy in respect with native demand. India has a large pool of trained labour endowments accumulating value of the trade – with stage-wise vertical segregation in respect with resource endowment. (Jain, 2018).
Foreign currency and exchange influences
India is one of the most likely economies in the domain. In 2015, the country receives a high amount of foreign investment and so leaves behind United States and China (Dwivedi & Giri, 2016). However, there are some important aspects having significant impact on the inflow of foreign investment. One of the major issues having significant impact on inflow of FDI is exchange rates. It refers to price of one currency in terms of another currency where the levels need to be considered. These exchange rates fluctuate conferring to change in supply and demand of financial assests of many countries. Moreover, some added aspects are also accountable for these variations such as interest rates, money supply, inflation rate, etc.
Moreover, as FDI increases, demand for Indian currency increases and this leads to appreciation in the exchange rate. For instance, pre FDI inflows exchange rate was 1$ = 61 ? and post FDI inflows it will be appreciated to say 1$ = 60 ?. Hence, value of India currency will raise when the country gets inflows through FDI.
There is a positive association between FDI and exchange rates in India and it needs to adopt effective policy measures so as to attract FDI and generates new employment opportunities for educated youth.
The integration of the domestic economy with the help of various flow of trade channels in the past few years led India GDP to reach at Rs 167.73 trillion (US $ 2.30 trillion) in the year 2017-18 (Ibef, 2018). It can also be ascertained that India trade and external sector had a substantial influence on the GDP growth as well as increase in per capita income.
Although India has increasingly opened up its economy, it tariffs continue to raise in comparison with other nations and the policies and norms are still restrictive. Before 1990s, India was a closed economy, however, it started instigated to vigilantly reform by liberalising certain policies. From that time, the trade reforms of India start showing remarkable results. Moreover, with these recent years, the trade and investment policy is modified by government in area of protecting ‘producers’ to benefitting ‘consumers’.
In upcoming years, India will become a major player in the world trade as the country is aggressively pushing more liberal global trade regime majorly in services.
There are some barriers also for FDI in India, like a glaring lack of infrastructure slowing down the development of country continent, difficulty in economic reforms due to slow administrative procedures at federal level, issues related to corruption and political party pressure both a national and regional level. In addition, the labour legislations are also rigid and complex in the whole world.
In addition, Indian government offers tax and non-tax investment enticements in particular segments (for example, electronics), and districts. Moreover, it is also formed inducements for manufacturing organizations to set up in Special Economic Zones (SEZ). Each state in India have their own policy and thus providing various inclusive incentives such as subsidised land prices, reduces tariffs on electric power supply, concession in taxes and many more. Medium and long term loans were also provided in respect to new projects and by the central and state government.
India ranks among the top 10 host economies for FDI as per the report published by UNCTAD 2018. In 2016, the inflow in relation with FDI was USD 44.5 billion in 2016 but in 2017, there was a downward trend where it declined to USD 39.9 billion (Jhingan, Yadav & Kothari, 2018).
In India, FDI growth is associated with many assests and services and with skilled, inexpensive labour force in respect to a potential market of one billion inhabitants. In the year 2018, there were some necessary amendments takes place in relation to the national FDI policy where government had eased around 87 FDI rules among 21 sectors so that with this simplification, there will be more inflow of FDI from other nations. World Bank published a report where, India ranked 100th out of 190 countries.
India has become the most attractive emerging market for global companies due to various market attractiveness. It trade policies, government reforms and economic strengths need to be integrated so as to give more destinations in foreign investment in the world.
In recommendations, India should decrease boundaries on FDI and offer open, transparent, and dependable situations for all sorts of firms. India has a complex labour policy and the government need to break it into simpler one so that foreign company can understand polices easily and get adequate labour for their respective manufacturing unit. Government also need to set-up infrastructure required for a quality investor. These infrastructures include reliable supply of energy, transport facilities and airports ideally designed in cooperation with the investors.
References
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