Q. Foreign direct investment (FDI) is a like double edged sword. In this light discuss the positive and negative impact of FDI in India. Also suggest suitable measures to improve FDI in India.

Structure of the answer:

  • Introduction (using data)
  • Positive impact of FDI
  • Negative impact of FDI
  • Measures to increase FDI in India

Model Answer

FDI is an investment made by a firm or an individual into business interest located in other countries. Unlike, portfolio investment the investor in FDI acquire foreign business asset, ownership or controlling interest in foreign company.

FDI equity inflow in India in 2018-19 stood at $44 billion. Further, according to UNCTAD’s World investment report, India is 10th largest recipient of FDI in world.

  • FDI has multiple benefits such as generate technology spill overs, helps human capital formation, contributes to international trade integration, create a more competitive business environment and enhances enterprise development.
  • FDI contribute to higher economic growth, which is the strongest tool to alleviate poverty in developing countries.
  • Moreover, foreign direct investment may help improve environmental and social conditions in the host country.
  • FDI brings in foreign technical expertise that is an important factor in improving the existing technical processes and advances in technology.
  • FDI has both backward and forward linkages as create demand for local goods and create jobs and increase employment in the target country.

However, some economists have also criticized FDI on various grounds due to its negative impact, such as:

  • FDI occasionally hamper domestic investment, as it focuses resources elsewhere.
  • FDI impacts exchange rates to the advantage of one country and the disadvantage of the other nation.
  • FDI creates culture of dependency on the foreign capital and may impact sovereignty of the nation.
  • The FDI has sometimes led to large outflow of capital in form of repatriation, dividend payment and royalties

Overall FDI has a positive impact on the economy therefore there is a need to adopt following steps:

  • Adopting favorable policy regime and robust business environment.
  • There is also a need for improving regulatory regime and promoting further FDI relaxation.

The best practice in form of establishing Investment Facilitation Cell like- Japan cell and Korea cell need to be further strengthened.