Foreign Direct Investments in the Indian Economy

In the pre-liberalization era, Foreign Direct Investments (FDIs) into India were plagued by several restrictions. This included ceilings on foreign equity, restrictions on the use of brand names, restrictions on the expansion of investments into consumer goods and several others. To add to the miseries was the Industrial Licensing System. In 1991, many of these impositions were either abandoned or significantly eased, paving the way for FDIs to boost India’s economic growth.

FDI Equity Inflows

Foreign investments have flowed into intangible assets like technology, management techniques and skills and into the developing of the country’s capital markets. Growing gradually in the initial phase, FDIs have over the years played an increasingly significant role in India’s economy. From around merely $1.72 billion between 1991-92 and 1999-00, FDIs grew to $2.85 billion between 2000-01 and 2004-05. India witnessed a surge during the next five years between 2005-06 and 2009-10, when the annual inflows jumped to $19.78 billion.

FDIs into India surged 34% to a record $46.8 billion in 2011-12. India was finally ready for big-ticket deals. Among these was the acquisition of a controlling stake in Cairn India by London-listed Vedanta. The deal was inked at $9 billion. Another one was the purchase of stake in the oil and gas fields operated by Reliance Industries by British Petroleum (BP). For this, the British major paid $7.2 billion. With Indian stocks sliding during this period, overseas investors were keen to have a stake in Indian companies.

FDI and Economic Development

Economic development is a much larger concept than GDP growth. Economic development encompasses economic and social progress, political freedom and social justice, apart from other parameters to gauge quality of life. While there are so many factors determining standard of living, there is enough empirical evidence to show that all these factors correlate with economic growth.

Here is a cursory look at the benefits of FDIs

–   Greater investments into technology – This has a positive impact on productivity.

–   Higher employment – There is an increase in the level of economic activity in a country,   which in turn boosts employment. An increase in employment and wages leads to improved standards of living.

–   More choices for consumers – With more companies competing to satisfy consumer needs, the number of choices available is higher. Moreover, competition keeps prices under check. And consumers also enjoy better customer service.

–   Better utilization of resources – Due to high competition, companies aim for efficiency improvements to keep costs under control. Companies then need to make the best utilization of resources.

–   Stronger capital markets

FDis boost economic growth, which in turn propels improvements in health, education, flow of wealth within an economy, investments into environment management. In my article ‘India to Slide from Position of Second Fastest Growing Economy’ , I have talked about how an environment that is friendly to FDIs boosts economic growth.