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Is Foreign Direct Investment (FDI) Necessary For India?

Is Foreign Direct Investment (FDI) Necessary For India?

An integral part of a country’s economic development, foreign direct investment has a direct positive impact on domestic capital, productivity, and employment. This is the reason why FDI has become an indispensable tool for initiating economic growth for countries.

In order to facilitate economic development, the government of India had decided to liberalize norms and policies for overseas investments in 1991. FDI in India has effectively contributed to the overall growth of the economy. Apart from being a critical driver of economic growth, foreign direct investment equity inflows also is responsible for an inflow of new technology, innovative and fresh ideas, improved infrastructure, and business innovation. All this has led to a highly competitive business environment.

Some might ask is economic development not possible without foreign investments? Is FDI such an indispensable part of the economy that development cannot take place without it?

India only opened up its economy to foreign investments in 1991. India can grow without foreign direct investment and it is logical to not solely rely on funds from overseas. However, external help in the form of investment will certainly effect the level and pace of growth.

Take India for example. The growth trends and patterns without foreign investments before 1980’s are completely different from that of 1990’s, after India introduced economic liberalization.

Developing countries like India require significant foreign inflows to accelerate economic growth and development. In order to make its way up to the top ranks, the country needs an influx of investment, both domestic and international. FDI in India helps in fastening economic activity and also brings with it technological expertise, managerial knowledge and experience and improved infrastructure.  

Apart from bringing in investment, foreign direct investment helps in revenue generation, employment generation, getting the latest technology. It also facilitates cultural exchange across borders and helps in improving existing infrastructure.

Foreign direct investment in India can be done under two routes.

  1. Automatic Route

Under this route, foreign direct investment up to 100% is allowed in all sectors and activities except the following. The services/activities listed below require prior approval of the government.

  • Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.
  • FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the government or the Reserve Bank of India 
  • The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the non-resident investors.
  • Where provisions of Press Note 1 (2005 Series) issued by the Government of India are attracted.
  • Government Route

Sectors and activities that are not covered under the automatic route require an approval from the Government of India and are considered by the Ministry of Finance and Foreign Investment Promotion Board (FIPB). One glance at the extensive list of steps involved can be overwhelming. But today, foreign direct investment in India has been made easy. Thanks to government plans and strategies to encourage FDI in the country for a holistic growth across sectors.

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