Question: Justify the need for FDI for the development of the Indian economy. Suggest remedial steps to be taken for increasing actual FDIs in India.
Answer: Foreign Direct Investment (FDI) is a method through which foreign institutions invest in Indian economy by creating assets. The FDI is usually a long term investment unlike FII, which is for a short term only.
Need for FDI
- Creation of wealth and jobs
FDI provides the perfect opportunity for foreign institutions to invest in Indian economy by opening new companies or buying large stake in existing Indian companies. This is important because domestic firms are not capable enough to provide large economic investment that can result in creation of jobs and wealth.
- Technological development
FDI is a major source for technical advancements which domestic players cannot afford to incorporate. Foreign involvement will result in technology transfer that can pave the way for modernisation of the country’s industries.
- Accessing foreign funds
India’s domestic financial market can’t afford to lend for a long term due to shortage of funds. Foreign funds can therefore provide the necessary support to generate impetus in domestic economy.
Measures for increasing FDI
- Rational taxation system
Predatory taxation policies will discourage foreign firms from investing in India. The corporate taxation system must ensure that both the company and government benefit from the profits and nobody looses out.
- Easing permits
Foreign institutions must not be dragged into Indian redtapism that creates impediments for setting up new business. A single window clearance can help in cutting down procedural roadblocks and will not discourage new business ventures.
Thus, FDI is one of the major reason for Indian economy becoming one of the largest in the world. The LPG reforms was thus major reason for the drastic turnaround that we witness today.