Editorials, GS-3, Indian Economy, Uncategorized

FDI inflows: short term gain, long-term pain?


  • According to the Department of Industrial Policy and Promotion, foreign direct investment (FDI) into India reached highest point during the current fiscal year.
  • India needs large investments—foreign as well as domestic—to meet its vast requirements.


  • Is Foreign Direct Investment (FDI) a secure financing (short term gain)or a long term pain?

FDI is virtually a secure financing why?

  • Foreign Direct Investment (FDI) mostly goes into setting up of plants,equipments and factories which eventually produce tradable goods that generate foreign exch resources.
  • Thus over a time the current account balance of the country stabilizes.

Practically it could be different from theories:

  • FDI inflows could go after the domestic market, instead of being export-oriented
  • Concentrate in the relatively more profitable, non-tradable sector, leading to little or no transfer of technology.
  • It may boost consumption and imports which eventually leads to trade deficits instead of surpluses
  • FDI-associated income and principal payments could rise over time.
  • If export earnings are not enough to prevent any, or a combination of these features
  • current account imbalance could actually worsen instead of improving.

What is FDI?

  • Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India.
  • Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing business environment of India.

Positive impacts of FDI on home country:

  1. Improve both economic and political power of home country
  2. Increase profits thanks to the location advantages of the recipient country
  3. Enter new market, extend the product life cycle
  4. Overcome trade barriers and enjoy investment promotion
  5. Enhance diversification when the political situation at home is unstable
  6. Improve market structure and toward better international labor diversification
  7. Improve in the balance of payments as a result of the inward flow of foreign earnings ( repatriation or profits )
  8. FDI positively affects home-country export performance through direct effects on trade as well as indirect effects through various channels
  9. Positive employment effects when the foreign subsidiary creates demand for home-country exports
  10. Benefits from a reverse resource-transfer effect
  11. The outward FDI also leads to creation of new job market with great expertise and necessary skills
  12. The home country is exposed to create new market share and it is liable to create many in the future

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