Why Is FDI Needed in India (2024)

Foreign direct investment or FDI has become an integral part of many countries due to its positive output and popularity on the global level. FDI is an investment in one business, in the form of controlling ownership, by another business or company based in a foreign country.

With FDI, a company or investor not only brings investment in the monetary form but also brings technology, skill, and knowledge.

Generally, the term FDI is used to describe a decision in a business to acquire a stake in a foreign business or to buy it fully to expand its operation to a new region. In other words, FDI is a purchase of a stake in a company by an investor or entity located across borders.

FDI Examples

One of the biggest examples of FDI in India is Google, which announced a $1 billion investment in Indian telecom company Bharti Airtel in January 2022, including a $700 million equity investment for a 1.28 per cent stake in the company and a $300 million fund for potential future investments in areas such as smartphone access, networks, and the cloud.

FDI or Foreign Direct Investment in India

For the economic development of India, FDI plays an important role as an investment in monetary sources. The liberalisation policy was introduced in India in the wake of the crisis in 1991 under the FEMA or the Foreign Exchange Management Act under Dr Manmohan Singh, the then finance minister. Since 1991, FDI in India has increased at a steady pace. India is now a part of the top 100 countries in the EoDB or Ease of Doing business index.

FDI is done via two routes. One is the automatic route, where the foreign or Indian company does not require a prior nod of the Government of India or RBI for FDI. Another route is the government route, where approval from the Indian government is mandatory.

Importance of FDI in India

FDI offers many benefits apart from overcoming the economic crisis. Let’s understand FDI in India and its importance.

• The inflow of capital: There is an inflow of capital in a company by the foreign investors or company in exchange for some of the stakes or equity of a company.
• Technology: A developing country also gets access to the latest technology as investors bring it to the country. Over time, this advanced and modern technology extends to the local economy, resulting in improved efficiency and productivity.
• Economic growth and employment: A major benefit of FDI is the economic development of a recipient country. Increased FDI enhances both the services sector and the development industry. This increases the employment rate in a country by giving opportunities to trained young people and professional workers.
• Increase in exports: This is one of the biggest impacts of FDI in India. Products are made not only for domestic use but also for markets around the world. For example, pharmaceuticals, medicines and vaccines are not just made for the Indian market but for the whole world. During the pandemic of Covid-19, India became a major exporter of vaccines and medicines across the world.
• Open market: Foreign Direct Investment or FDI helps develop an atmosphere where monopolies by domestic companies are broken as foreign companies enter the market. With the FDI, consumers have access to a wide range of products of good quality at affordable prices.
• Human resource development: Human capital involves the skill, knowledge, and competence of a workforce. Knowledge and skill gained via experience and training help in boosting the level of education and human capital of the recipient country. Through FDI, human resources can also be trained in other sectors.

Conclusion

Foreign Direct Investment or FDI refers to gaining a controlling power or rights in a domestic company by a foreign-based company by investing monetary sources in exchange for equity. FDI offers various benefits to a country’s economy.