[Adarsh Chavakula - CH11B003]
Foreign Direct Investment is a two sided coin. Its merits
and demerits have been debated over several times in the past few decades. There
are groups which argue in favor of FDI and several that are against it
altogether. A few arguments in favor of FDI and a few counter-arguments have
been briefly summarized here.
Advantages of Foreign Direct
Investment:
Economic growth and inflow of cash
FDI results in the direct inflow of cash into the economy. This can be an
extremely important boost to the various economic sectors, especially in
developing countries like India. This is the foremost reason why developing
countries open up to foreign investment. India emerged out of an economic
crisis in 1991 by opening up its markets to foreign investment. This increased
the foreign investment from $132 million in 1992 to $5.3 billion in 1996. Subsequently,
this led to the emergence of several Indian cities as major hubs for
development, innovation and industrial growth. The recent efforts made by the
Indian Prime Minister, Shri. Narendra Modi to get more foreign investment
reflects the importance of this point. Following Mr. Modi’s visit, Japan has
agreed to invest a massive sum of $33.5 Billion over the next five years. This
will give a much needed boost to various sectors of our economy like defense
and manufacturing.
Access to resources
and superior technology
Developing countries can gain access to sophisticated
technology through FDI. Several of India’s technological advances in fields like transportation,
telecom have been brought in through FDI. India is now set to gain the financial,
technical and operational support to introduce bullet trains from Japan over
the next few years. This can drastically alter the scenario of public
transportation in Indian metropolitan cities. India also plans on procuring
vast amounts of Uranium, the raw material for nuclear power from Australia
along with the technology to build sophisticated and efficient nuclear
reactors. This will ease India’s power paralysis by a large extent. Given that
we are a developing country, we cannot afford to waste our resources on carrying
out expensive research in sophisticated technologies like high speed bullet
trains. Hence it is essential for us to be able to access these technologies
through foreign investments.
Financial
boost to manufacturing
Manufacturing is the backbone for development. It has
been the chief driver for development in several nations around the world.
India however has been severely lagging behind in this sector. Our
manufacturing sector’s performance has been abysmal over the last 10 years with
2013/14 witnessing a negative growth of -0.2%. This comes as a sharp contrast
to China which sees double digit growth rates in this sector. Manufacturing has
been the sole platform for China to emerge as a global super-power. This is
primarily because of the Chinese government’s attitude towards foreign investment
in this sector. The freedom provided to foreign Multinationals to set up and
maintain manufacturing establishments in China has resulted in a paradigm shift
in the global manufacturing scenario. Most multinational companies carry out
their production operations almost completely out of China. China now
single-handedly dominates the manufacturing sector across the globe.
India too has all the elements needed to generate a
manufacturing boom, except for the required capital investment. With a large
workforce in the 18-35 years age-group, we can tap into the huge potential of
this sector to help our economy grow rapidly. The currently popular phrase “Make
in India” introduced by the prime minister is a step in this direction
and lays emphasis on the importance of FDI in manufacturing. Through this
initiative, India has extended invitations to developed countries to set up large
scale manufacturing units in India. This would give a boosted financial inflow
into the currently stagnant manufacturing sector. This would also help India
develop into a hub for large scale production like China and create employment
for millions of people.
Improved
competition and fair pricing
This is a critical factor in sectors like retail and
manufacturing. With an inflow of goods and services of superior quality, the
domestic retail and manufacturing sectors are forced to raise the quality of
their own goods and services to stay in competition. This helps consumers get
access to quality services at competitive prices.
Benefits to
agricultural producers
FDI is also beneficial to the producers – farmers and
cultivators. Several farming groups like Bharat Krishak Samaj, Consortium of
Indian Farmers Associations (CIFA), Shriram Gadhve of All India Vegetable
Growers Association (AIVGA) etc. have extended support towards retail reforms.
This is driven by the fact that farmers are usually very poorly paid under the
current retail structure. They often get only a fraction of the fair price for
their produce and the rest is pocketed by middlemen as commissions and markups.
Inquiries suggest that farmers often get only one-third of the price that
consumers pay in the case of staple crops. The fraction is a lot less at just
about 12% to 15% in case of horticulture produce and less than 10% for
potatoes. Introduction of organized retail through FDI gets rid of middlemen
and hence is far more rewarding for farmers. Introduction of cold storage and
cold transportation gives the farmers the flexibility to sell perishable crops
likes fruits and vegetables at better prices without having to worry about
spoilage.
FDI has also been directly involved in improving farming
practices. This often comes in the form of an overall supply chain enhancement
including introduction of high-yield crop variants, introducing sustainable
farming and scientific crop diversification, better storage and transport
facilities and sometimes just better compensation to the farmers. An example
here is an initiative taken up by PepsiCo in India and China to help farmers
improve their yields and incomes. Under this program farmers are provided with
agricultural implements and seeds at subsidized prices, credit at low rates and
an assured buy-back mechanism to insulate from market fluctuations.
Disadvantages
of Foreign Direct Investment
Wipeout of
unorganized retail sector
This is probably the biggest and the most effective
counter-argument against FDI in the Indian context. It stems from the fact that
most of the retail in India is unorganized (kirana
stores). Introduction of very large scale retailers like Wal-Mart, Carrefour and Tesco could take away a major share of the
retail space, rendering millions of kirana
store-keepers jobless. The effects of FDI in the retail sector are discussed in
greater detail in the case study section.
Social
Impact
This is an extremely subtle idea which has gained momentum
over the last few years. Many developing countries, or at least countries with
a history of colonialism, fear that foreign direct investment may result in a
form of modern day economic colonialism, exposing host countries and leaving
them and their resources vulnerable to the exploitations of the foreign company.
This is not hard to understand if one looks at how big some of the well-known
Multinational companies are. Some of these companies are several times bigger
than the entire GDPs of small countries. Hence they possess the power to
influence governmental policies and decision making. They can also
single-handedly control a small nation’s economic course.
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