FDI's Impact on the Development of India - Essay Example

Amidst Stiff Resistance From Most Actors, The Indian Government Approved Foreign Direct Investment In Retail Last Year. Discuss How This Will Impact the Development in the Country Table of Contents Introduction 3 A Brief Overview of FDI 4 Impact of FDI towards the Development in India 6 Conclusion 13 References 14 Introduction Developments in different sectors are quite indispensable for the progress of an economy of any nation. It is the responsibility of the respective governments of diverse countries to adopt as well as to execute effective business policies with the motive of developing various businesses or operating sectors which would in turn result in the development of the economies by a considerable level (Friedman, 2012). It has been apparently observed that certain imperative factors such as increased level of globalisation, extreme market competition, adoption as well as implementation of pioneering technological advancements and internationalisation have compelled the respective governments of dissimilar nations to formulate along with execute effectual policies for progressing the economies (Hirst et al., 2009). With regard to this aspect, it has been viewed that the government of India felt the urgent need of progressing its economy through approving Foreign Direct Investment (FDI) in recent years particularly in the retail sector. By taking into consideration the aforementioned decisive factors, the government of India has decided to implement such a significant approach with the sole motive of developing its economy at large. In this similar concern, the Indian government previously adopted this significant approach but failed to implement owing to the reason of facing stiff resistance from both the allies and the opposition parties by a greater level. The government strongly believes that the introduction and the implementation of this important approach i.e. FDI would certainly help in advancing Indian economy by a significant extent (Nexia International, n.d.). With this concern, this essay deals with analysing FDI’s impacts towards the development in the country i.e. India. A Brief Overview of FDI FDI is fundamentally regarded as an invaluable source of private capital especially for developing nations which plays a decisive role in making deliberate efforts towards both national along with international development. Generally, FDI is typically described as a cross-border investment which is made by an organisation based in one particular nation into a business entity based in another country with the motive of strengthening its financial position by a greater level (Peng, 2009). The approach of FDI is principally regarded to be an imperative tool for the financial development of any particular nation through standardising advanced technologies, effectively utilising valuable resources and developing innovative techniques (Moghe, 2008). It has been apparently observed that the governments of various countries desire to adopt and execute this significant approach owing to the reason that it helps to progress the economies of the nations in terms of generating ample employment opportunities, enhancing overall productivity growth and most significantly raising financial performances among others (Overseas Development Institute, 2002). Most importantly, it has been viewed that several multinational enterprises (MNEs) view the facet of FDI as a modality through which they extend their territorial horizons overseas. Furthermore, the MNEs tend to perform their different business or operational functions efficiently in both national along with international boundaries through laying much emphasis upon the conception of FDI. In this regard, the approach of FDI can be viewed merely as a procedure through which the assets or the claims made by different MNEs are exchanged on an international basis. One of the prime intentions of the MNEs regarding the adoption along with the execution of FDI is to minimise risks for the purpose of accomplishing monopolistic power in both national and international business context. Besides, most of the MNEs prioritise on paying utmost attention towards the approach of FDI with the intention of attaining several benefits. In this similar context, the benefits might comprise effective utilisation of valuable resources, considerable protection of the market shares that are held by the different MNEs along with mitigating tariff as well as non-tariff barriers by a greater level. However, it can be argued in this similar background that the MNEs may face certain risks while focussing upon the aspect of FDI. The risks might be associated with alterations in the exchange rates and the requirement for conducting different business or operational functions in accordance with the regulations of the respective governments of diverse nations where they operate. This can be owing to the reason of not having a close acquaintance with the local along with international laws based on business taxes and other governmental lawful regulations (Dunning and Rugman, 1985; Kiely and Marfleet, 1998). In relation to analysing the notion of FDI, it has been apparently observed that two important aspects such as trade liberalisation and globalisation impose considerable impact upon FDI at large. In this regard, the facet of trade liberalisation has been noted to be interlinked with FDI. This can be justified with reference to the fact that numerous developing nations have already commenced trade liberalisation and also entered into dynamic trading arrangements that ultimately have resulted in fostering trade and most vitally lessening trading costs. With the mounting trade volumes, the emphasis of the global policy makers especially belonging to the developing nations have now shifted towards determining whether the increased trade volumes can enhance or further heighten both FDI outflows along with inflows (Khor and Khor, 200; Schuurman, 2001). In order to determine the impact of globalisation on FDI, it has been viewed that the modern financial world is experiencing increased level of globalisation as compared to preceding years. The notion of globalisation is usually regarded as a multidimensional procedure through which various cultural as well as social activities are duly performed throughout national or international borders (Kaplinsky, 2005; Ransom, 2006). The idea of globalisation poses greater impact upon FDI in terms of accelerating the procedure of business transition. In this regard, the financial investors tend to introduce and execute pioneering technological advancements in order to raise their operational effectiveness resulting in generating valuable impact upon FDI inflows along with outflows by a greater level (Todaro and Smith, 2002; Pieterse, 2000). Apart from trade liberalisation and globalisation, the other aspects such as privatisation, liberalisation especially in interest charges, deregulation, fiscal discipline, tax reforms and competitive along with unified exchange rates also impose extensive impact upon FDI at large (Rodrik, 2008; McMichael, 2004). It has been apparent that the approach of FDI supports a nation to augment its financial growth which in turn facilitates in eradicating poverty from the country by a greater level. Moreover, the notion of FDI enables to establish a strong association between trade and economic growth which aids in developing finances at large (Crown, 1997; Crown, 2000). Impact of FDI towards the Development in India The increasing pace of trade liberalisation and globalisation has eventually led India to become one of the investment friendly nations rendering FDI with the motive of advancing the economy of the country. In order to determine the impact of FDI towards the development of India, it has been noted that the Indian government has made deliberate efforts in recent times to introduce FDI particularly in the retail sector with the intention of delivering several benefits to the traders. By taking into concern the business position of India, it can broadly be affirmed that the conception of FDI could be an effectual catalyst for the country that would facilitate to intensify market competition especially in the retail sector despite the problems of poor productivity and lesser competition that is currently prevailing in the nation. The Indian government has strongly realised that with the approach of FDI, the foreign investors will substantially invest in the local business markets of the nation resulting in facilitating the Indian companies or firms towards accessing different important aspects. These aspects might comprise quality practices of global management, attractive designs and pioneering technological knowhow among others. In this regard, it has been apparently observed that the Indian government in recent times has adopted the decision to permit 51% FDI particularly in the segment of multi-brand retailing which has confronted ferocious resistance in the nation at large. Relating to this aspect, the Indian government has claimed that this decision would transform the retailing landscape into a positive one in India by a considerable level. However, it has been viewed that stiff resistance from the key opposition parties concerning this decision has put on hold the implementation of the approach, even though it is supported by different groups such as Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industry (CII) among others (Nikhil and Ajitav, 2012). In order to analyse the impact of approving FDI in the segment of retail by the Indian government, it has been viewed that the retail industry belonging to India plays a decisive role in raising the financial growth of the country at large. The government mainly prioritises this particular business segment as it contributes nearly 15% of Gross Domestic Product (GDP) and most crucially engages a substantial portion i.e. approximately 7% of labour force. During the tenure of the former Prime Minister of India named P.V. Narasimha Rao, it has been noted that the prime intention of introducing FDI in the country by the Indian government was to lessen fiscal deficit, raise substantial investments in infrastructure and commence more privatisation in both private along with public sector. In contrast, the latest move that has been made by the United Progressive Alliance (UPA) government concerning the approval of FDI especially in retail segment tends to achieve more benefits as compared to early years. In this regard, the prime objectives of the present UPA government to approve FDI especially in retail segment have been viewed to be augmenting disposable incomes, making enhancements in infrastructures, ensuring intensification in market competition along with curbing inflation. Moreover, the other targets embrace generating ample opportunities of employment, enlarging urbanisation, increasing the living standard of every individual and developing the economy (Uttam and Swapan, 2013; Chaturvedi, 2011). The attractive and dynamic environment of the retail industry that is currently prevailing in India has ultimately made the Indian government towards adopting the decision of approving FDI in the segment of retail. This can be justified with reference to the fact that the retail industry is generally considered to be the sunrise industry in India. This is owing to the reason that the sector is recognised to be rapidly mounting in this competitive financial market contributing hugely to the Indian economy. In this similar concern, it has been apparently observed that the Indian retail sector can be segregated into broad divisions namely organised and unorganised retail segment. The organised retail segment denotes performing trading activities by the licensed retailers i.e. who possess registration in paying income and sales tax among others. On the other hand, the unorganised division of retail signifies the conduct of trading activities by convenience stores, local kirana outlets and general stores that largely prevail in India. One of the major reasons for the Indian government to approve FDI particularly in the retail segment of India is the impressive growth of different retail outlets in the nation. In addition, the other reason for the Indian government to approve FDI in Indian retail segment has been viewed to be raising employment in the respective business segment (Uttam and Swapan, 2013). This can be better understood with the help of the following pictorial illustration: Source: (Uttam and Swapan, 2013) Apart from the above pictorial illustration depicting the rising level of employment level in the retail segment and the growth of retail outlets in India, the sector-wise FDI inflows in India during the period 2000-2010 has also been portrayed hereunder: Source: (Chaturvedi, 2011) With regard to determining the impact of FDI on Indian retail segment, it has been viewed that the retail sector of India has become quite resilient due to the worldwide financial downturn that occurred during the period 2007-2008. Nevertheless, in this similar concern, the growing population along with speedily enlarging middle-class in the country has ultimately facilitated to develop the retail segment in spite of the crisis and attracted the Indian government towards approving FDI on this particular segment (Chari and Raghavan, 2011). After acquiring a brief idea about the position of the retail segment of India, it can be stated that there would be both positive as well as negative impacts of approving FDI especially in the Indian retail segment towards the development in the country. In relation to positive impacts, ample opportunities of employment will be generated with the approval of FDI in Indian retail sector owing to the investments that would be made by the foreign companies in the nation. One of the important impacts of approving FDI would be the prevention of the wastage of food products that perish because of poor refrigeration along with dreadful infrastructure facilities. Most importantly, the inflation rates can be minimised or might become quite low due to the substantial investments that would be made by the foreign companies in India. In this regard, the renovation of different vital facets such as refrigeration technology, infrastructure facilities and transportation can be effectually performed resulting in low-inflation rate. In relation to determining the positive impact of approving FDI particularly in retail segment concerning the development in India, it is observed that the Indian government strongly believes that with the decision of permitting 51% FDI, the productivity along with the effectiveness of the distribution of products can be enhanced and raised considerably. Furthermore, the establishment of the foreign companies relating to retail would ultimately facilitate India to avail new opportunities in the business segment of retail at large in terms of better shopping choices for the customers and the enhancement of credibility of the Indian companies in the worldwide fashion society. The other positive impact of FDI in the Indian retail segment would be supporting the farmers to upgrade their living standard. In this similar context, it can broadly be affirmed that the farmers would be able to attain better price for their produced products and can enhance their storage facilities by a greater level (Salunkhe, 2012). Conversely, with regard to negative impacts, it can be argued that the approval of FDI in Indian retail segment would deliver certain potential threats to the country which might hamper the prevailing business market of the nation. In this regard, it has been apparently observed that the approach of FDI can create massive unemployment. Though the Indian government has claimed that it would generate ample opportunities of employment, there also exists the threat of unemployment. This can be justified with reference to the fact that any considerable alterations in bringing the key foreign retailers through directly procuring from major suppliers would not only create massive unemployment but would also unfavourably affect the middlemen who have been working with this particular industry for longer period of time. However, it can also be argued that the approval of FDI in the retail segment of India would certainly raise the command and the supremacy of organised retailers in the entire consumer business market. This crucial facet would eventually result in generating unfair competition in the retail market making large-scale exit of the local retailers at large. Most vitally, it can also be argued in this similar background that the approval of FDI in the Indian retail segment would result in making the domestic retailers to lose their respective self-competitive strength. This can be justified with reference to the fact that the retail segment belonging to India is still observed to be under-developed in nature and therefore the domestic retailers might not be able to compete with the big worldwide retail giants resulting in losing self-competitive strength by a greater level (Bhattacharya, 2012; Confederation of Indian Industry, n.d.). Conclusion The retail industry contributing nearly 15% towards the national GDP and engaging substantial portion of total workforce can be regarded as the main pillar of the economy of India. The deliberate efforts that have been made by the Indian government concerning the approval of FDI in the retail sector have been regarded as significant moves towards the development in the nation. The retail business segment of India has been viewed to be quite disorganised and fragmented which requires an effective supply chain. It is obvious that the establishment of the foreign companies through the approach of FDI can fulfil the requirement of the country concerning effectual supply chain. However, it can be argued that though the nation would be benefitted from the approach of FDI, it will certainly restrict the development in the nation in terms of generating massive unemployment of the domestic retailers along with the middlemen at large. Thus, the sudden decision of the Indian government towards approving FDI in Indian retail segment has upset numerous traditional retailers in the nation by a considerable level. References Bhattacharya, R. (2012). The Opportunities and Challenges of FDI in Retail in India. IOSR Journal of Humanities and Social Science (JHSS). 5(5). pp. 99-109. Chaturvedi, I. (2001). Role of FDI in Economic Development of India: Sectoral Analysis. International Conference on Technology and Business Management. pp. 528-533. Chari, A. and Raghavan, T. C. A. M. (2011). Introduction. Paper prepared for Foreign Direct Investment in India’s Retail Bazaar: Opportunities and Challenges in North Carolina on March, 2011. URL: http://www.unc.edu/~achari/retail.pdf [Accessed April 05, 2013]. Confederation of Indian Industry (n.d.). Executive Summary. Paper prepared for The Impact of FDI In Retail On SME Sector. URL: http://cii.in/WebCMS/Upload/IMPACTOFFDIINRETAILONSMESECTORSurvey.pdf [Accessed April 05, 2013]. Crown. (1997). Summary. Paper prepared for Eliminating World Poverty: A Challenge for the 21st Century on November 1997. URL: http://www.bris.ac.uk/poverty/downloads/keyofficialdocuments/Eliminating%20world%20poverty%20challenge.pdf [Accessed April 05, 2013]. Crown. (2000). The Challenge of Globalisation. Paper prepared for Eliminating World Poverty: Making Globalisation Work for the Poor on December 2000. URL: http://www.hivpolicy.org/Library/HPP000152.pdf [Accessed April 05, 2013]. Dunning, J. H. and Rugman, A. M. (1985). The Influence of Hymers Dissertation on the Theory of Foreign Direct Investment. The American Economic Review. 75(2). pp. 228-232. Friedman, T. L. (2012). The Lexus and the Olive Tree: Understanding Globalization. United Kingdom, Picador. Hirst, P. Q. et al. (2009). Globalization in Question. United States, Polity. Khor, K. P. and Khor, M. (2001). Rethinking Globalization: Critical Issues and Policy Choices. London, Zed Books. Kaplinsky, R. (2005). Globalization, Poverty and Inequality: Between a Rock and a Hard Place. United States, Wiley. Kiely, R. and Marfleet, P. (1998). Globalisation and the Third World. United Kingdom, Routledge. McMichael, P. (2004). Development and Social Change: A Global Perspective. United States, Pine Forge Press. Moghe, D. (2008). Introduction. Critical Study of Foreign Direct Investment in Indian Retail with Special Reference to Multi Brand Retail Sector. 1(3). pp. 29-39. Nexia International. (n.d.). Changes to Indias FDI Policy, Finally. Paper prepared for Publications. URL: http://www.nexia.com/ChangestoIndiasFDIpolicyfinally [Accessed April 04, 2013]. Nikhil, K. and Ajitav, S. (2012). Foreign Direct Investment in Retail: Historical Perspective and Prospects in Indian Context. Economic Affairs. 57(2). pp. 169-176. Overseas Development Institute. (2002) Foreign Direct Investment: Who Gains? ODI Briefing Paper. pp. 1-4. Pieterse, J.N. (2000). Global Futures: Shaping Globalization. United Kingdom, Zed Books. Peng, M. W. (2009). Global Business: 2009 Update. United States, Cengage Learning. Rodrik, D. (2008). One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. United States, Princeton University Press. Ransom, D. (2006). The No-nonsense Guide to Fair Trade. England, New Internationalist. Schuurman, F. J. (2001). Globalization and Development Studies: Challenges for the 21st Century. United States, SAGE. Salunkhe, B. S. (2012). Impact of Foreign Direct Investment in Indian Retail Sector. International Indexed & Referred Research Journal. IV(38). pp. 38-39. Todaro, M. P. and Smith, S. C. (2002). Economic Development, 8/E. India, Pearson Education. Uttam, P. and Swapan, K. R. (2013). The Indian Government and FDI in Retail Sector in India. Advances in Management. 6(1). pp. 3-6. Read More