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Foreign Direct Investments (FDIs) in India Research Team | Posted On Wednesday, September 18,2019, 05:58 PM

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Foreign Direct Investments (FDIs) in India



What are FDIs? The concept of FDIs is very simple. FDIs are investments made by individuals or firms from one country into businesses in another country. The intention of FDIs is to create a lasting business interest. FDIs occur when individuals or business enterprises retain at least the 10% ownership of a transnational company. In case the investors own lower than 10%, the International Monetary Fund (IMF) considers it to be a part of their stock portfolio. Many economists appreciate the concept of FDIs when they are transmitting from economically developed countries to economically backward countries across the globe.

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FDIs in India

The average inflow of Foreign Direct Investments (FDIs) in India stood at $1,384 million from 1995 until the current year, 2019. FDs reached an all time high of $8,569 million in the month of August 2017, while they touched a record downfall of $1,336 million in the month of November 2017. According to a recent Government report, the inflow of FDI equity was up by 28% in the beginning quarter of the current financial year, 2019-2020. India is considered to be a favorite destination for FDIs for five important reasons:

  • India has a stable government.
  • India witnesses a strong economic growth.
  • The indigenous demand in India has been on the rise.
  • The country has a young working unit.
  • India always reforms it economic policies in sync with its requirements.

See Also: Importance of Financial Planning

Recent FDI initiatives in India

  • VMware, a prominent software innovating company from the USA, in October 2018, declared a net investment of $2 billion in India by 2023.
  • Bharti Airtel, in the month of August 2018, sought the approval from the Government of India for the sale of 20% stake (DTH arm) to a private equity firm from the US.
  • The International Finance Corporation (IFC), which is the investment wing of the World Bank Group, is contemplating to make an investment of up to $6 billion by 2022 in many renewable and sustainable energy programs in the country.
  • A 77% stake in Flipkart was acquired by Walmart, an American-based retail company, in the month of May 2018.

As per the UN Conference on Trade and Development (UNCTAD), in India, FDIs soared by 6% to $42 billion previous year. The recently released UNCTAD report says that FDIs are very strong in financial, manufacturing and communication services. James Zhan, who is the Director of Investment and Enterprise, said, “FDIs have witnessed a sustainable growth rate since the agencies for FDIs are dynamic in fostering investments.”

See Also: Steps in the Financial Planning Process

FDI policies of India

FDI policies offer a mechanism of investments in business entities in one country by other business entities in another country. They fill the gap between the savings and investments of resources and intend to enhance the efficiency rate of both input and throughput. The latest FDI policies direct towards the norms of liberalization. These policies have brought in a few important changes, which include:

  • FDIs in limited liabilities partnerships (LLPS), startups and e-commerce
  • FDIs in financial services, pension sector and infrastructure enterprises in the securities market
  • Liberalization in pharmaceuticals, deferred consideration, broadcasting and payment against pre-incorporation overheads
  • Cash and carry wholesale trading form

Types of FDIs

FDIs are of two types: 1) greenfield investments and 2) mergers and acquisitions. Greenfield investments are made exclusively in brand new facilities or the extension of prevailing facilities. They are normally made in developed economies, including India and China. When two companies merge together to form a single enterprise, investments are required to be made either by a single company or both. A company in one country can acquire another company in other country. It is called acquisition. When acquisition happens, there are some expenses to be incurred according to the business terms and conditions.

Merits of FDIs

  • The participants of FDIs can earn profits jointly. Profits may further be increased to create employment opportunities. New FDIs will emerge as a result of increasing employment opportunities.
  • Unquestionably, FDIs make overseas trade convenient and easier as they allow restricting or eradicating import tariffs if applicable.
  • Overseas incomes and human resources will increase.
  • The investors’ money works harder and harder.

See Also: Investment Planning

 Demerits of FDIs

  • As FDIs are gaining prominence and popularity, domestic investments are getting affected.
  • FDIs are not free from political risk.
  • They may lead to exploitation.
  • They are expensive as compared to domestic investments.

Final word

Several developing nations have no adequate funds to develop the much-needed sectors. FDIs help in that regard. They also have a direct impact on the economies of both the investing country and the recipient country. As far as India is concerned, they have proven to be instrumental in creating wealth.

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