Pros and Cons of FDI - A layman's perspective
What Exactly does FDI mean?
FDI is stands for Foreign Direct Investment – which is a component of a country's national financial accounts. Foreign direct investment is investment that is made by other foreign industries belonging to other countries into the domestic structure. Like for example now we hear of Walmart, TESCO, IKEA and many other companies waiting to start and expand their business here with the permission of the central government when they satisfy the rules and regulations that have been set down for such an investment.
It has become a reality now with the government procuring the required number of votes to pass the FDI bill in both the houses and it is only a matter of time before these foreign outfits will make an entry into the Indian consumer market. However, this does not include foreign investment made into the stock markets which had already been opened up a few years ago and one can see that it has contributed positively to the Indian economy in some ways.
According to eminent economists Foreign direct investment ( FDI) is thought to be much more useful to a country than investments in the equity or in the share market since it can be withdrawn at any point of time, whereas FDI is durable and cannot be done so since it involves long term projects, for which a lot of investment and infra structural measures have been utilised and made available. In the case of Foreign investments in the stock markets - when there is a downward trend or even a possible bear market prediction , investors can withdraw their investment within a short period of time and this can create a lot of instability in the whole economic system affecting the currency exchange rate as well which cannot be the case in FDI since there are long term implications to the host country as well as the investors.
Why is FDI Important ?
1. Normally Foreign Direct investments are done either by opening up a subsidiary company with a local partner or by merging with an already existing company or at rimes even acquiring a considerable number of shares in a particular company.
2. FDI basically increases the job opportunities, skill and technology due to the inflow of foreign funds in any given country. Lakhs of job opportunities will be created by the big overseas companies, which employ vast number of people and train them accordingly.
3. People also get an added advantage of becoming more specialised and skilled , in effect it can cut down on under employment – For example - if a skilled man is working at the grocery store or at a mobile shop as a sales man because he is unable to get a job that suits his qualification , he can now broaden his horizons and find himself a job that matches his interests in the new and improved retail sector that needs more trained man power.
4. Since the investment is direct because the investor, who could belong to a foreign company or a group of entities, also will have significant influence over the foreign enterprise. This makes a country internationally stronger, having the ability to get the cooperation and help of other nations who have business interest in our country.
5. Since FDI is a major source of external finance , the countries with limited amounts of capital can receive financial help and resulting infra structure from wealthier countries. . According to the World Bank, FDI definitely helps in developing the private sector in lower-income economies such as India and other developing economies in Asia thereby reducing poverty. 6, People would have a number of choices to pick from when there are many more industries coming in. Also another noteworthy factor would be that the competition among the foreign goods and the domestic ones would go a long way in ensuring better quality products at reasonable rates. Hence, for the consumer it is a very favorable situation.
Will FDI be beneficial or not?
There is no single answer to that since no one knows the answer .Most people especially the eminent economists believe that the economy will benefit by this step and there will be plenty of jobs opportunities and the choices available will touch the sky and so on..This is true to a great extent but no system is perfect and so is this !
There are bound to be problems in other ways. People have been hearing so much about FDI and its pros and cons that they are unable to make up their mind as to whether it would benefit them or not. Those opposed to FDI say that foreign markets will overtake the domestic ones with Indian business organisations having little say in the matter.
They also feel that the inflation levels will rise along with everything else and the benefits that are being spoken about seize to matter when your buying power goes down.
Let us look at what could be in store for India when FDI becomes a reality in the very near future. I am noting down some pros and cons below
Pros
When we see the Indian Retail sector we see that in most smaller cities we have the tradition of family stores run to suit the daily needs of the population .This has continued in spite of the advances that other sectors like the super market chains and malls have made over the years. With the advent of Foreign Direct Investment (FDI) in the retail sector one can hope to see some welcome changes that would bring in a new era of consumerism where consumer is the master and has a number of choices.
Secondly, the much needed infrastructure across the country will get a boost and move on fast track since unless the government provides these basic needs will not be able to attract any foreign investors here. As we all know India's roads still continue to be one of the worst maintained in the world and the power cuts remain a way of life in most parts of the country. This cannot go on if we hope to have foreign investors setting up their business here since they would want favorable working conditions.Enron faced such situation when it pulled out of the Dabhol power project which hopefully has taught a lesson to the government .
Thirdly, India’s labor laws as they stand today are pathetic and needs to be modified in the interest of our citizens. This also makes foreign investors respect the nation since they know where they stand. In the long run this will be very beneficial for the country's working population.
Another point that comes to my mind - Talking about India and the way it is expanding and impacting the world after liberalization, we need to improve our lifestyles as compared to other countries. We have to make out nation come up to the level of other developing countries which is possible when we have a balanced all round growth which has not been possible so far even after 65 years of Independence due to lack of commitment and other obvious reasons , so we need to look for other alternatives like the FDI
The fifth point I would like to make here is that , when foreign retail majors when they become a reality will ensure efficiency, as they will look into all the minute details that include cold chains, packing refrigeration, transportation, sorting and processing. This will in time lead to lower prices with higher quality thereby benefiting the consumers at large. Wastage will be cut down since they will look at all aspects that is bringing down productivity and profit and hence this provides a step towards the speedy growth of the country.
Lastly, we all know that in India corruption is the norm, not an exception. International reports on transparency has been ranking India again and again as one of the most corrupt country in the world. Once we have foreign investors in India , things might become much more transparent and people friendly. Since corruption to a large extent has been a major contributory factor for making our nation what it is, FDI seems all the more important for our country.
Cons
In India The common man is fed up of political parties and leaders and their corrupt ways and the general opinion is that FDI might be more transparent since other foreign companies are involved too. However, that may not be true given the greed of the Indian politicians. One can already see the fence sitters ( those MPS , Ministers and netas )who voted for the FDI at the last minute after weighing all their options ,gearing up for making the most of the situation by hoping for plum investments in their own territories and of course the kick backs !
Secondly, once the FDI plan is in place there will be no stopping it, and one could see a rise in price which may not be good for the middle class. Foreign enterprises would need land for their projects and this is bound to drive the land prices up, as well as rentals and commercial space. Unless the wages go up accordingly, middle class people and the poorer people will bear the brunt to a great extent.
Thirdly, the small scale industries are bound to be hit with people wanting to try out new things and unless the government goes all out to take care of their interest , many of them will be left with no option but to either merge( that is if there are takers ) or close down.
We may think that through FDI opening up here India and Indians would gain superior technical knowledge that may is not available here, however that may not be the case. The foreign investors may not part with any such knowledge fearing that they would lose a competitive edge , thereby keeping it to themselves and giving employment to our people at lower levels. This does precious little to help our people and our economy .
Since the very word FDI implies that the investor exerts a significant degree of influence on the management of the enterprise in our economy it can lead to some major policy changes that may go against the interest of the host country . The government may become helpless if the demands are within the framework of what has been laid down in black and white. It is also possible to arm twist the government since the stakes are high once the investors are in and contributing to the economy.
It has been told that when we are looking for higher returns and more profits we may lose our focus and neglect our own country’s natural resources and potentials. This may also include the destruction of forests , greenery and open land that may be destroyed while making way for the large Foreign based industries.
Lastly, there is bound to be a cultural change with foreign way of thinking,dressing and lifestyle seeping into our society all of which would influence the masses at some stage or the other. Many old timers already have a fear of losing the Indian identity which has been carefully preserved through the centuries and we have seen a definite change and shift in people's attitude ( especially the younger lot ) towards customs and traditions which is after all what makes our country unique. Unless care is taken one may altogether lose that Indian identity !
To conclude - No doubt that FDI will play a major role in helping the economic development of any country especially a developing country like India , but unless our government is committed and has all its policies properly chalked out FDI can go either way, it can be a blessing or a curse.We have to bear in mind that these days most of the FDIs are large corporations and wield a lot of international power, so we have to look after the interest of the people and the nation before taking any concrete steps that may later prove detrimental to the nation.It is also a fact that once the process gets going it is almost irreversible.
Like it on Facebook, Tweet it or share this article on other bookmarking websites.