GS3 PYQ (Mains Answer Writing): Foreign Direct Investment | Indian Economy for UPSC CSE PDF Download

Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (UPSC MAINS GS3 )

Apart from being a critical driver of economic growth, foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.

• Similarly, in the current scenario when domestic investment activity is less due to twin balance sheet phenomenoh, FDI can act as a crowding-in factor and can boost investment by India’s private sector too.
• The Make in India week in Mumbai in 2016, resulted in investment commitments worth Rs.15.2 trillion across various Indian states. Of this, about 30% of the investments fall under the foreign direct investment (FDI) category. Similarly, each year in various summits various such very high investment commitments are made, but, they are far too much compared to the levels of FDI received by the country. 
• While MoUs (Memorandum of Understanding – a bilateral agreement between two entities expressing common intention & line of action) close to Rs 21 lakh crore were signed in the 2011 summit, a study by Gujarat state government shows that just above 1% of the promised investments have actually come in so far
• Thus, there is a huge gap between FDI commitments and actual FDI. There can be various factors for that. 
• Promising FDI in each possible destination is a common practise to check government response and special considerations, this boosts FDI commitment several times then are really made. Number of times, business cycle downturn or financial strain can prevent investment in a intended project, for example, Posco. However, despite being less than committed, FDI inflows have risen rapidly, from $24 billion in 2012 to $44.2 billion in 2015 — a seven-year high. This increase is also fairly broad-based. It is not just the e-commerce.
• (trading) sector that has received more inflows; other sectors such as computer software and hardware, construction, services, autos and the telecom sectors also account for a large share of the increase. Interestingly, even though China continues to attract larger FDI inflows than India in absolute terms, India has started to close the gap, when FDI is measured as a share of GDP.
•  FDI inflows into China have moderated to 2.3 per cent of GDP in 2015, from 2.6 per cent in 2014. During the same period, FDI inflows into India rose to 2.1 per cent from 1.7 per cent. Additionally, one could also argue that the quality of FDI inflow into India is much better. Over the last decade or more, China has accumulated a large stock of FDI.
•  As a result, almost half of the FDI inflow into China includes retained earnings. In contrast, almost three-quarters of FDI inflows into India are fresh equity infusions. The FDI received by India in 2016 are much higher than other countries and presently highest in the world. According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments India received during April - September 2016 rose 30 per cent year-on-year to US$ 21.6 billion, indicating that government's effort to improve ease of doing business and relaxation in FDI norms is yielding results. 
• The current Make in India and other initiatives are addressing the issues, which turns away investors from India.

Topics Covered - FDI