Question: What is Foreign Direct Investment (FDI)? Elaborate on the current rise in FDI inflows. Suggest measures that can enable higher FDI inflows.
Answer: Foreign Direct Investment (FDI) is an investment made by an individual or a firm from one country into business ventures located in another one with the intention of establishing a lasting interest. India’s FDI inflows have achieved record number lately.
Reasons for rise in FDI inflows
- Higher returns
Economies of developing countries provide better returns on investment. With China emerging as a suspicious entity, investments have been directed towards Indian companies.
- Recession in Europe
European economies have long passed their growth peak. Investors from these countries look for higher earnings by investing in high-growth countries such as India.
Measures to attract higher FDI
- Reducing red tape
FDI approvals have to be given at the earliest. Impediments created due to bureaucratic red tape have to be negated and faster facilitation has to be provided.
- Single window clearance
Approvals have to be cleared through single window without having to run pillar to post in complex system of India. This will encourage future investments.
- Tax provisions
To promote FDI, economic measures such as tax rebates have to be provided. Schemes such as Production Linked Incentives (PLI) will attract more investments.
Benefits of FDI growth
- Creation of capital
FDI will create more capital for budding industries and sectors. It will remove stress from Indian banking entities by making available foreign funds.
- Employment generation
FDI will create new jobs in various sectors ranging from professionals to unskilled. Employment will further increase the GDP and other growth indicators of the country.
- Technology transfer
FDI will ensure domestic firms get better access to new cutting edge technology. This will help in improving product structure as well as reduce costs.
Thus, FDI is a vital part of economic development that will allow overall development to take place. The increasing dependency on government capital can be reduced through FDI.