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How Does Foreign Direct Investment Help Indian Economy?

How Does Foreign Direct Investment Help Indian Economy?

Foreign direct investment is a crucial driving force of economic growth and development of the country. It plays a significant role where domestic savings are not sufficient to generate funds for capital investments. Yes, FDI supplements the investment requirements of an economy, but it does more than that. Foreign investment also brings with it new technology, expertise, knowledge, and adds to foreign exchange reserves.

Foreign investment equity inflows are particularly valuable to developing economies, as compared to the developed economies.

Foreign direct investment is defined by the International Monetary Fund (IMF) as- “a category of international investment that reflects the objective of a resident entity in one economy (direct investor or parent enterprise) obtaining a lasting interest and control in an enterprise resident in another economy (direct investment enterprise)”.

FDI equity inflow has steadily grown in India since the economic liberalization of 1991. The government of India has regularly eased foreign investment policies in order to encourage an increased equity inflow and, by extension- economic growth and development.

As per statistics and data, FDI has an important role to play in the economic growth of the host or domestic country, in this case- India. The most important benefit that foreign direct investment brings with it is the capital supplement to the domestic capital for investment demand. Apart from the money that it brings, it also brings new and innovative technology, a new business perspective, expertise, and knowledge.

As a result, it also puts pressure on domestic firms to up their games and perform better in order to match up to the competition.

Apart from this, foreign investment also helps in generating more employment opportunities. India has emerged as an investment friendly destination, preferred by foreign investors. They take advantage of the country’s low wages, special investment privileges like tax exemptions.

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