CONTEXT
“India has recorded the highest ever annual FDI inflow of USD 83.57 billion in 2021-22,” the ministry noted in a statement. It said that the foreign inflows are increasing despite challenges like a military operation in Ukraine and COVID-19 pandemic.
These inflows have increased 20-fold since 2003-04, when the inflows were USD 4.3 billion only, it added.
The ministry also informed that FDI equity inflow in manufacturing sectors has increased by 76 per cent in 2021-22 (USD 21.34 billion) compared to 2020-21 (USD 12.09 billion).
WHAT IS FDI
It is an investment through which an investor establishes/acquires a business entity in a foreign country along with management control.
IMF has defined FDI as,
“an investment through which an investor acquires lasting and substantial management control (at least 10% equity or voting rights) in the foreign affiliate”
Arvind Mayaram committee recommended that FDI should include,
a) Foreign equity investment of 10% or more in listed companies.
b) Any amount of investment in unlisted companies.
COMPONENTS OF FDI
a) Foreign equity investment of 10% or more in listed companies.
b) Any amount of investment in unlisted companies.
c) Intra Company Debt transfer [Loan from parent to subsidiary company]
SOURCES OF FDI
a) Branches of MNCs ( Multi National Companies)
b) Subsidiaries of MNCs
c) Joint Venture of two or more MNCs
The ministry said that in terms of top investor countries, Singapore is at the top with a 27 per cent share, followed by the US (18 per cent) and Mauritius (16 per cent) during the last fiscal. These trends “are an endorsement of its status as a preferred investment destination amongst global investors,” the ministry added.
Among sectors, computer software and hardware attracted maximum inflows. It was followed by the services sector and automobile industry.
Karnataka is the top recipient state with a 38 per cent share of the total FDI equity inflow reported during 2021-22 followed by Maharashtra (26 per cent) and Delhi (14 per cent), according to the statement.
ADVANTAGES of FDI/MNC’s:-
a) They bring modern technology, managerial and entrepreneurial skills, marketing strategies etc. along with the foreign capital.
b) They promote competition by suppressing domestic monopolies. It compels domestic firms to improve efficiency.
c) They provide a wide variety of quality products to consumes at competitive prices. It enhances standard of living of people.
d) They promote industrial diversification we may not have technology. But they can establish industry.
e) They promote infrastructural development in host countries by directly investing in infrastructure projects as well as by creating demand for such services.
f) They promote infrastructural development in host countries by directly investing in infrastructure projects as well as by creating demand for such services.
g) It provides significant tax revenue to the host govt.
h) They tends to reduce factor price differentials across the nations i.e., they tends to increase wage rates and decrease interest rates in developing countries and vice-versa.
DISADVANTAGES OF FDI
a) They adversely affect domestic companies especially MSMEs. It may worsen unemployment situation in developing countries.
b) FDI create possibility of intervention in domestic economic policies.
c) FDI aggregate or worsen income and regional inequalities.
d) FDI induce dualism in developing countries. Dualism means sharp different between traditional and modern sector.
e) They repatriate (Send back) huge forex in various forms like high dividends, interest, royalties, etc.
f) They indulge in various malpractices like transfer pricing, base erosion and profit shifting.
g) They induce consumerism by indulging in excessive advertisement and superficial product differentiation. It adversely affects savings and capital formation.
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