Importance and issues of FDI, FDI Policies in India since Independence

Why Countries Seek FDI: 

• FDI supplements domestic investment as Domestic capital is inadequate for purpose of economic growth.
• FDI is non debt capital and brings capital, technical know how and increases competitiveness of the economy .
• ⇓FDI Improves forex position of the country alongwith helping in capital formation by bringing fresh capital . 
• The association of FDI players in global marketing network play a major role in the promotion of exports .

Issues with FDI :  

• Role of FDI depends whether it crowds out or crowds in the domestic investments.
• In case of crowding out, Small Domestic enterprises find it difficult to compete with companies bringing FDI and feels that they may ultimately be edged out of business. 
• These MNC's have deep pockets and have ability to monopolise and take over the highly profitable sectors;
• These MNC's invest more in machinery and intellectual property than in wages of the local people;
• Government has less control over the functioning of such companies as they are subsidiary of an overseas company.

CO RELATION BETWEEN FDI AND FOREX: 

                               The MNC will need INR to carry out day to day job or purchase.

                                ⇊

                               FDI- Foreign Currency will be converted to INR 

                                                                         Foreign Currency 

   Company                                                  ⇄                                            RBI

                                                                                INR     

                                                        ⇊

                     Forex with RBI will increase

Why India has become FDI attractive :

• Unlike China, FDI in India is not export growth oriented as India does not impose any export obligation on MNC affiliate which attracts MNC's.
• Huge market size, growth prospects in tier-2 and tier-3 cities and growth  of infra are the motivating factors for attrracting FDI.
• Rise of high-tech sectors, market size, and digital and technological improvements are also driving India’s growth trajectory, making it an attractive investment destination.
• Innovative FDI initiatives by government in industries such as asset reconstruction firms, broadcasting, pharmaceuticals, single-brand retail trading etc are also promoting FDI investments.
• The Atmanirbhar Bharat aims to increase FDI in the defence sector by 74% through an automated route.The percentage of FDI inflows into the insurance sector has been boosted by the government from 49% to 74%.
• Policies like Production-Linked Incentive (PLI) programmes, Make in India , PM Gati Shakti, Foreign Trade Policy, Liberal FDI norms, PTAs and FTAs and the National Single Window System (NSWS) are motivating investors to set up manufacturing units in India. 

FDI ENTRY IN INDIA:

Independence to 1965-67:

• Post independence ,domestic funds were limited and basic infrastructure was to be developed so there was  receptive attitude with cautious towards FDI .
• There was non discriminatory treatment to FDI until mid of 60’s. 

1965-1980's :

Till mid of 1960’s local manufacturing base was developed with the flow of FDI  but it was accompanied by a lot of outflow in the form of remittances of dividends ,profits, royalties and technical fee .

1980-1990 :

• Outflow during 1965-80's led  policy makers to make  FDI  policy to be restrictive and selective post 1980's.
• Restriction on FDI was there if it was not entering without technology .
• Stake above 40 % ownership  was not allowed and it was allowed only in priority areas.

1991 onwards :

Paradigm shift from restrictive and selective to open door policy. 

The present FDI policy :

Characterized by Negative Listing permitting FDI in all the fields except a few in negative list. 

There are 3 methods of FDI entry in India :

1.Prohibited sectors                                                          

2.FDI is allowed upto a certain limit

3.100 % FDI :

• with automatic approval 
• with the approval of the government

At present, FDI is prohibited  in :

 a) Lottery Business 

b) Gambling and Betting including casinos etc. 

c) Chit funds 

d) Nidhi company 

e) Trading in Transferable Development Rights (TDRs)

f) Real estate business which shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.

g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

 h) Activities/sectors not open to private sector investment e.g. (I) Atomic Energy and (II) Railway operations (other than permitted activities mentioned in permitted sectors).