General Overview of Country
The report is about analyzing the potential of foreign direct investment in selected country that is India. Discussion incorporates general overview of country and existence technological, political, social and economic advantages that would help in facilitating FDI opportunities. Furthermore, foreign exchange, trade policies, incentives, barriers and systems along with factor endowments creating competitive advantages have also been explained. Competitive advantages of India in relation to natural resources and factor endowment those facilities foreign investments have been discussed. Existing trade policies accompanied with barriers to foreign investment have been discussed in later part of report.
India has the world largest democracy and one of the growing economic globalization in the country is foreign direct investment. Country has been liberalizing its policies for attracting foreign investments. Compared to other form of international capital inflow, FDI has gained importance in India. Some of the factors that have attracted FDI are availability of quality and cheap human resources, stable economic policies and opportunities for exploring unexplored markets. In recent years, there has been a modest gain in flow of foreign direct investment in India. It is recognized by most investors that size of Indian market has a promising prospects of growth. India faces many issues in terms of poverty, heath problems, global competition, technology obsolescence, research and development, education and employment. Foreign capital inflow is favoured in light of acquisition of better technology, acquisition of labour at cheaper cost, upgraded technology and generation of employment (Vinayagathasan 2013).
India has become one of the fastest growing G-20 economies and since year 2014, there has been recovery in economic growth with annual growth rate hovering around 7.5%. Declining current account deficit and inflation has accompanied robust economic growth. Lower pressure on inflation and current account deficit is attributed to the factor such as declining prices of commodities (Chan 2016). For some years, downward trend has been witnessed in investment to GDP ratio. However, the corporate investment has been damped by corporations’ weak financial position and low capacity utilization
Appreciation of real exchange rate and weak external demand in the second half of 2014 and 2015 led to fall in export. Export of jewellery account for 15% of total merchandise export was hurt due to hike in precious metals excise duties along with declining oil demand from exporting countries (Rath and Samal 2015).
Weak business investment is reflected by falling merchandize exports. Some of the macroeconomic parameters and consumption is impacted by demonetisation. In the first half of year 2016, total investment has fallen despite sustainable public investment.
Political, Economic, Socio-cultural and Technological Influences
It can be seen from above graph that there has been fall in inflation in the current year resulting from active management of food stocks and lower increase in minimum support price. The expectation of anchoring inflation would be attained from change in framework of monetary policy and industrial sector low capacity utilization. Inflation is projected to witness declining phase due to better condition of weather that has reduced pressure on food inflation and strengthening credibility and effectiveness of monetary policies (Cheikh and Louhichi 2016). Household borrowing is in increasing trend and there is a low exposure on global trade and financial conditions. It is projected that growth would continue to remain strong.
One of the factors that help in attracting FDI in India is socio-cultural influence. A value is encompassed in traditional culture of India that emphasizes getting detached from material and limits the social mobility along the castes. However, cultural values are likely to impact FDI flows in India.
Technological influences:
In country like India, there exist huge gap in technology and it is required by foreign capital to update their traditional technology that would help in driving international competitiveness. Increase in FDI inflows would bring marketing expertise, technology transfer and generating new possibilities for technology transfer. Such investment would help in induction of foreign technology as there are many sector in India that are deprived of technology and collaboration of foreign technology through acquisition would help in enhancing technological advancement. A country can accelerate the economic development through foreign investment and foreign technology (Anand et al. 2014). FDI would have positive impact on India as it helps in supplementing technology of exiting companies as well as domestic capital.
Important sources of competitiveness of India are its factor conditions such as physical resource, knowledge resources, human resources, and infrastructure and capital resources. Human resource in India is one of the key factors for gaining competitive advantage over other countries and existing of vast household market leading to economies of scale helps in attracting foreign investors. Reverse development pattern is another Indian characteristics and well developed financial market boasts plausibly innovative and sophisticated business. Overall development of Indian economy is propelled by infrastructure sector and infrastructural development is good for attracting investments (Schnabl 2017). However, such development should be enhanced. Furthermore, India possesses great advantage in terms of natural resources that is a significant factor when considering investment decision by foreign firms.
Social-Cultural Influences
A large share of eternal liabilities of India is denominated in foreign currency and after attack on rupee in year 2013; there has been replenishment in foreign exchange reserves.
The exchange rate and flow of FDI in India is positively correlated as increase or appreciation in exchange rate leads to increased foreign investment. For the developing country like India, it is essential to have continuous inflow of foreign capital and stable exchange rate helps in increasing inflow of FDI to India. Depreciation in Indian rupee weakens the inflow of foreign capital and there is a gradual tapering in portfolios of both equity and debt. Depreciation of rupee in India would weigh on import bill which would widen current account deficit and importing oil will be costlier. Possibility of increased FDI inflow would be compromised if the interest rate arbitrage becomes less attractive. Foreign investment tumbled from $ 171.4% million in May in current year as compared to $ 27.22 million in June (Kremer et al. 2013).
In year 1991, India has liberalised its FDI and trade regime. There are varieties of intermediaries on which India has loosened its tariff, even though the tariff rate is as high as 35%. Abolishment of industrial licensing system has been done to facilitate foreign investment and the objection of holding majority of equity participants by foreign organization has also been removed. This has assisted in streamlining the approval process of foreign investment in India. Despite of all these measures, there is still lower volume of FDI inflows in India. Nonetheless, the traditional image of antagonism of India towards FDI and private enterprise is yet to be removed. Inefficacy in pronouncements of trade policies exist in light of opposition from powerful lobbies, elite and opinion makers combined with the reluctance for implementation of agreed policies by bureaucracy (Buckley et al. 2014). This can be illustrated in the context of state of Maharashtra where Enron power project is facing much publicized problems. The factors or barriers that has resulted in attracting low level of FD investment in India has been mainly attributed to burdensome process for approving projects of foreign investments, stringent labour laws, political exigencies where entrenched interest groups are catered by party in power and notwithstanding protestations.
Another barrier to foreign investment that exists in India is the effort of piece meal liberalization. Factor that is of little attraction to foreign investment in India is liberalization of foreign trade regime resulting from reform packages and it does not impact the distortions of factor market (Pattanaik and Nadhanael 2013). In such situation, foreign investors would intend to service the market from their home base through exports rather than FDI.
Technological Influences
India can get most out of its federalism and external vulnerability of country can be mitigated by robust inflow of FDI. Competitiveness and investment over the medium-term will be supported by the implementation of Goods and Service tax from financial year 2017-2018. This is likely to raise the growth of GDP by 0.5% to 2% and this might adversely impact consumption and inflation for shorter duration.
India is amongst the top reformers in FDI as revealed from the FDI regulatory restrictiveness index. Reforms of FDI have mainly focussed on agriculture, civil aviation, defence, railway, construction, air transport, insurance and pension funds in the context of initiative that was launched in year 2014. The flow of foreign direct investment in India as revealed by Reserve bank in financial year 2015-2016 has increased to USD 45 Billion as against USD 31 billion in financial year 2013-2014. Compared to other OECD and BRICS countries, in India there were stringent restriction of on flow of FDI.
Promotion of FDI is done by introducing several measures. Administrative burden relating to the route of government approval for investment has been avoided by bringing more sectors under the automatic route and there has been rise in FDI caps. Moreover, measures have been taken by Indian government to improve the ease of doing business in the country. FDI inflows are supported by particular buoyancy in services and construction along with FDI deregulation. FDI restrictions have been comparatively higher in financial, media and business services (Mohaddes and Raissi 2014).
It is emphasized by investors that India has significant potential to become an attractive FDI (Foreign Direct Investment) destination. Sentiment of investors would be undermined by the bureaucracy, red tape and poor infrastructure. Lack of adequate infrastructure is regarded as one of the significant deterrent to FDI in the country and it is ascertained than investing in India is comparatively more difficult than other countries. There exists impartially in the legal system of country and expensive and ling process of dispute resolution makes it difficult to make investment an attractive option in the country (Malhotra 2014).
From the above analysis of various aspects to FDI in India, it can be said that there has been gradual liberalisation of policies intending to make investment market investor friendly. International bodies have ranked India among the top three global investment destinations. There are several positive impacts of FDI inflow on Indian economy and India has remarkable potential for attracting foreign investment. The development of economic growth of country would be facilitated by development of technological skills and enhancement of domestic capital by way of FDI. However, there are some challenges that are faced by country and it is required to make improvement in some areas. Challenges are faced in terms of resources, policies along with political and federal factors.
- It is required by India to put continuous effort in reducing barriers to FDI and trade mainly in network and services sectors.
- A common ground needs to be created between foreign countries investing in country and parliament. Investing enterprise in another country requires political support
- Business environment in India should be improved by introduction of modern bankruptcy law along with reduction of administrative burden and simplification of regulations on foreign firms. It is recommended that labour laws should be made more flexible that does not provide the opportunity for creating distinction between the size of firms and thereby reducing barriers to formal employment.
- It is essential to foster balance economic growth and at the same time social equality for achieving balance growth. There has been inadequate exploitation of poor sections compared to tapping of urban areas. A balance is required to be created between regional developments for creating a seamless investment expansion.
References list:
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Anand, R., Cheng, M.K.C., Rehman, S. and Zhang, M.L., 2014. Potential growth in emerging Asia. International Monetary Fund.
Buckley, P.J., Cross, A.R. and Horn, S.A., 2014. Japanese foreign direct investment in India: An institutional theory approach. In The Multinational Enterprise and the Emergence of the Global Factory (pp. 255-292). Palgrave Macmillan UK.
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