FDI : Its Advantages & Disadvantages

Introduction Foreign direct investment (FDI) is a direct investment into

production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Need of FDI :

High level of investment for development Fulfill the technological gap Exploitation of natural resources Development of economic infrastructure.

Previous results.. Impact of FDI on Indian economy is assessed by analyzing the

performance of three sectors where FDI has been permitted. These sectors were:

Telecommunications

Automobiles

IT/ITES

Some of the benefits of liberalization of Telecom Sector were:

Provided private players to tap the existing potential in the sector.

Assisted the industry in upgrading technology

Reduction of Call Rates

Gave consumers more choices in terms of services, products.

Provided financial support to set up infrastructure to spread telecom benefits.

Some of the benefits of liberalization of Automobiles Sector were:

Increase in Production, Domestic Sales and Exports

Development of a healthy Auto Component’s Industry

Greater Choice for the Consumer

FDI bought the required capital into the sector which assisted players in scaling up their supply thereby assisting their overall efficiency and growth

Some of the benefits of liberalization of IT/ITES Sector were:

High Growth Rates

Increase in export of software services

Government’s focus on reforms

The government has decided to pursue policies to attract higher foreign direct investment (FDI). It has liberalized policy norms for FDI in the following sectors:

i. Single Brand Retail ii. Multi Brand Retail iii. Civil Aviation iv. Broadcast Services

Single brand retail Government of India increased the threshold limit of Foreign

Direct Investment (FDI) in Single Brand Retail from 51% to 100% for the purpose of attracting investment in production and marketing and improving the availability of such goods for the consumer.

a) Products to be sold should be of a 'Single Brand' only.

b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

c) 'Single Brand' product-retail trading would cover only products which are branded during manufacturing.

d) The foreign investor should be the owner of the brand.

e) In respect of proposals involving FDI beyond 51%, at least 30% of the value of products sold would have to be mandatory sourced from Indian 'small industries/ village and cottage industries, artisans and craftsmen'.

Multi brand retail Government of India announced the opening of FDI in

multi-brand retail, subject to approvals by individual states.

The government has approved 51% of FDI in multi-brand retail with the following conditions:

Minimum amount to be brought in, as FDI would be USD 100 million

At least 50% of total FDI should be invested in ‘backend infrastructure’ like processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage etc.

At least 30% of the procurement of manufactured/processed products shall be sourced from `small industries` (less than USD 1 milllion).

Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census. Only 53 qualify out of nearly 8000 towns & cities.

Government will have the first right to procurement of agricultural products.

FDI in other sectors are: Aviation up to 49% Pension sector up to 26% Insurance sector up to 49% Broadcasting up to 74%

Impact of these reforms: Agriculture

Farmers

Middleman

Middleman

Retailer

Middleman

Market

FDI

It will eliminate multiple layers of middlemen thereby giving better prices to the farmers.

Benefit to agriculture sector Better back-end infrastructure- supply chains and

cold storage(less wastage of farm produce) Minimizing the layers of intermediaries as a result

of which farmer get much lower prices than they could if they supplied directly to retail stores.

Modern retailers will also provide farmerswith new high yield varieties of seeds andbetter technologies that will help bringdown the cost and more yields.

Retail sector It accounts for 14-15 % of GDP - estimated to be USD $450

billion Indian retail industry is essentially owner manned shop(kirana

stores)

Retail and logistic industry employ 40 million Indians (3.3 % of population)

Indian retail sector is in 2 parts : Organised retailing- trading activities undertaken by licensed

retailers, which are registered for sales tax, income tax etc. Like supermarkets, privately owned large retail businesses (about 5%)

Unorganized retailing- refers to the traditional low-cost retailing, for example, the local corner shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. (about 95 %)

Retail sector Inflow of equipment and technology. Improved consumer welfare through reduced cost ,

wider choice and improved quality.

Important contribution will be in the generation of a large number of ‘semi-skilled’ or skilled jobs for India’s young population

Mandating 30% of sourcing from smallIndustries will boost their growth

Civil aviation Indian carriers posted a combined loss of 12,000 crore in the

last financial year and airline honchos have time and again urged the government to modify the jet fuel tax structure.

Relaxing FDI rules will help bring a much-needed cash flow to India's bleeding private airlines.

The aviation sector in India has witnessed strong growth in passenger volumes.

Civil Aviation facilitates: • Trade - by offering a reliable and faster mode of

transport services to move products and personnel across long distances

• Tourism • Generates both direct and indirect employment

opportunities

Other advantages Causes a flow of money into the economy which

stimulates economic activity It may give domestic producers an incentive to become

more efficient

Due to inbuilt inefficiencies and wastage in distribution and storage about 30% of food production doesn't reach consumers.

Prevent labour exploitation

FDI in retail sector will transform the way perishable agricultural produce is acquired, stored, preserved, and marketed -- and thus help control India's persistent food inflation.

Disadvantage Although FDI brings with it lot of advantages

but it is not free from disadvantages as well. Following are some of its demerits

domestic firms may suffer if they are relatively uncompetitive

There may be loss of jobs of peoples if there is a lot of FDI into one industry e.g. the

automotive industry then a country can become too dependent on it

Various Indian sectors having FDI restrictions: FDI Restrictions in Indian Sectors have been imposed in order to

protect the interests of the country, as these sectors either relate to national security or sensitive enough to keep apart the foreign companies.

Foreign direct investment restrictions in Indian sectors have also been imposed in order to allow the domestic companies to make more profits with less competition, than that of in the presence of rivalry international firms.

Atomic energy Railway transport Betting and gambling Ammunition and arms Chit fund business Lottery business…………

Conclusion although there are certain apprehensions about FDI in

India but all these fears are unfounded. the future of India lies in FDI & the government must

proceed in that direction if it wants to make the Indian economy a developed economy.

It is expected that states will keep away their political causes and take a decision in such a way that will be beneficial to the small businessmen and for the youth who seeks for career growth and opportunities in retail industry.

Thank you..!!