INCON – X 2015 E-ISSN-2320-0065

Advantages & disadvantages of FDI in India

Dr. Rashmi Sunil Dhobale

HOD Business Economics Department,
H.V.Desai College Pune -2
Resi- 020-27654557, Mobile- 9890929715
Email- rashmi.dhobale3@gmail.com

ABSTRACT
India is rapidly gaining importance world-wide as the country. Global investors have
retained their faith in the flexible Indian economy. Foreign investments add a great deal to
India’s economy. As a result, India enjoyed high foreign inflows and investments when rest of
the world was struggling to even survive. Advantages of investing in India includes-Huge
market size and a fast developing economy, bring growth and prosperity, Prices of products
will come down, availability of cheap labour force, openness towards FDI, increasing
improvement of infrastructure, public private partnerships, IT revolution and English
literacy, regulatory framework, and investment protection, Better options and offers to the
consumer whereas few drawbacks likes huge section of poor and middle class, bureaucracy,
power shortage and ethnic diversified are also available in the country. The few drawbacks
like the regulator burden, hindrances in free flow of information, Will affect small merchants,
Inflation may be increased, cause monopoly by foreign companies, Internal insecurity,
economically backward class person may suffer from price, Domestic companies may feel
uprooted, rural India will remain deprived of the services, lack of English literacy. This
paper will analyse both the advantages & disadvantages of FDI in India.

Keywords: FDI, Advantages & disadvantages of FDI.

Introduction
In this 21st century globalization makes world as a global village and people of different
countries are getting closer and closer. Business and trade become more competitive and
diversified than ever before. In this era of globalization and intense competition, foreign
direct investment (FDI) has become a very common and immensely important phenomenon
for consumers, producers and different governments. With the initiation of globalization,
developing countries, particularly those in Asia, have been witnessing a immense surge of
FDI inflows during the past two decades. Even though India has been a latecomer to the FDI
scene compared to other East Asian countries, its considerable market potential and a
liberalized policy regime has sustained its attraction as a favourable destination for foreign
investors. As traditional market is shrinking down in a faster pace, operators are looking for
options for expansion and international trade is getting accelerated. While the large Multi-

ASM Group of Institute of Pune, India 428

INCON – X 2015 E-ISSN-2320-0065

National Corporations(MNC) of the West are getting advantages of market expansion from
FDI, the host countries are also utilizing it as a major mechanism and source for accelerating
their domestic economic growth. Foreign direct investment (FDI) in India has played an
important role in the development of the Indian economy. FDI in India has in a lot of ways
enabled India to achieve a certain degree of financial stability, growth and development. This
money has allowed India to focus on the areas that needed a boost and economic attention,
and address the various problems that continue to challenge the country.
Foreign investment plays a significant role in development of Indian economy. Many
countries provide many incentives for attracting the foreign direct investment (FDI). Need of
FDI depends on saving and investment rate in any country. Foreign Direct investment acts as
a bridge to fulfil the gap between investment and saving. In the process of economic
development foreign capital helps to cover the domestic saving constraint and provide access
to the superior technology that promotes efficiency and productivity of the existing
production capacity and generate new production opportunity.
This research paper aims to examine the impact of FDI on the Indian economy. The paper
also provides the major advantages and disadvantage of FDI for the India, besides drawing
attention on the complexities in interpreting FDI data in India.

Objectives:
The research paper covers the following objectives:
• To evaluate the impact of FDI on the Indian economy.
• To know the advantages & disadvantage of FDI for India.
• To propose potential suggestions to overcome the problem.
Foreign direct investment in India:FDI and Economic Growth: - The historical
background of FDI in India can be traced back with the establishment of East India Company
of Britain. British capital came to India during the colonial era of Britain in India. After
Second World War, Japanese companies entered Indian market and enhanced their trade with
India, yet U.K. remained the most dominant investor in India. Further, after Independence
issues relating to foreign capital, operations of MNCs, gained attention of the policy makers.
Keeping in mind the national interests the policy makers designed the FDI policy which aims
FDI as a medium for acquiring advanced technology and to mobilize foreign exchange
resources. With time and as per economic and political regimes there have been changes in
the FDI policy too. The industrial policy of 1965, allowed MNCs to venture through technical
collaboration in India. Therefore, the government adopted a liberal attitude by allowing more
frequent equity.
In the critical face of Indian economy the government of India with the help of World
Bank and IMF introduced the macro-economic stabilization and structural adjustment
program. As a result of these reforms India open its door to FDI inflows and adopted a more
liberal foreign policy in order to restore the confidence of foreign investors. Further, under
the new foreign investment policy Government of India constituted FIPB (Foreign
Investment Promotion Board) whose main function was to invite and facilitate foreign

ASM Group of Institute of Pune, India 429

INCON – X 2015 E-ISSN-2320-0065

investment. Since all countries are competing with each other for FDI, investors have the
option of picking and choosing the country where they want to set up industries. More open
economies with less government interference and good infrastructure are attractive to foreign
investors. But more than anything, they prefer a disciplined and skilled labour force. That is a
weak area in India and has to be addressed through rapid skill development.As per the data,
the sectors which attracted higher inflows were services, telecommunication, construction
activities and computer software and hardware. Mauritius, Singapore, the US and the UK
were among the leading sources of FDI to the country. In 2013, the government relaxed FDI
norms in several sectors, including telecom, defence, PSU oil refineries, power exchanges
and stock exchanges, among others. In retail, UK-based Tesco submitted its application to
initially invest US$ 110 million to start a supermarket chain in collaboration with Tata
Group's Trent. In civil aviation, Malaysia-based Air Asia and Singapore Airlines teamed up
with Tata Group to launch two new airline services. Also, Abu Dhabi-based Etihad picked up
a 24 per cent stake in Jet Airways that was worth over Rs 2,000 crore (US$ 319.39 million).
India has received total foreign investment of US$ 306.88 billion since 2000 with 94 percent
of the amount coming during the last nine years. In the period 1999–2004, India received
US$ 19.52 billion of foreign investment. In the period 2004–09, foreign investment in the
country touched US$ 114.55 billion, further increasing to US$ 172.82 billion between 2009–
September, 2013. During FY 2012–13, India attracted FDI worth US$ 22.42 billion.
Tourism, pharmaceuticals, services, chemicals and construction were among the biggest
beneficiaries.

Evaluation of FDI and GDP in India during (1991-92 to 2011-2012)

The following table depicts the picture of FDI inflow and its impact on
Evaluation of FDI & India during (1991-92 to 2011-2012)
FDI inflow, GDP FDI inflow Growth GDP Growth FDI as a
&FDI/GDP ratio in (in rupee rate of rate of % of
India during (1991- crore) FDI GDP GDP
92 to 2011-2012) inflow (%)
(%)
1991-92 409 - 1099072 5.363889 0.037213
1992-93 1094 167.4817 1158025 5.681311 0.094471
1993-94 2018 84,46069 1223816 6.394752 0.164894
1994-95 4312 113.6769 1302076 7.288207 0.331163
1995-96 6916 60.38961 1396974 7.974665 0.49507
1996-97 9654 39.58936 1508378 4.301641 0.640025
1997-98 13548 40.33561 1573263 6.683371 0.86114
1998-99 12343 -8.8943 1678410 6.441513 0.735398
1999-00 10311 -16,4628 1786525 4.35348 0.577154
2000-01 12645 22.63602 1864301 5.809416 0.67827

ASM Group of Institute of Pune, India 430

INCON – X 2015 E-ISSN-2320-0065

2001-02 19361 53.1119 1972606 3.836549 0.981494

2002-03 14932 -22.8759 2048286 8.517951 0.729
2003-04 12117 -18.8521 2222758 7.468649 0.545134
2004-05 17138 41.43765 2388768 36.22989 0.717441
2005-06 24613 43.61652 3254216 9.581263 0.756342
2006-07 70630 186.9622 3566011 9.336679 1.980644
2007-08 98664 39.69135 3898958 6.759524 2.530522
2008-09 122919 24.58343 4162509 7.957556 2.953003
2009-10 123378 0.373417 4493743 2.745551
2010-11 88502 -28.2676
2011-12 173947 96.5458
Total 577002 42598695
Source : World Development Report, Economic Survey- Government of India.

Advantages and Disadvantages: A Matter of Perspective

Advantages of FDI in India:-
Huge Market Size and a Fast Developing Economy:India is the second largest country
in the world just behind China in terms of population. Currently the total population is about
1.2 billion. This huge population base automatically makes a huge market for the business
operators to capture.Therefore FDI investors automatically get a huge market to capture and
also ample opportunity to generate cash inflows at relatively quicker times. The economy of
India is also moving at faster pace than most of the economy of the world and inhabitants of
the country also obtaining purchasing power at the same rate (Athreye&Kapur, 2001;World
Bank, 2004)
Availability of Diversified Resources and Cheap Labour Force:The huge advantage
every company gets by investing in India is the availability of diversified resources. It is a
country where different kinds of materials and technological resources are available. India is
a huge country and has forest as well as mining and oil reserve as well. These are also
coupled with availability of very cheap labour forces at almost every parts of the country.
Increasing Improvement of Infrastructure:A lot of research study in India finds out
that historically the country fails to attract a significant amount of FDI mainly because of
problems in infrastructure. But the scenario is changing. The Indian government has taken
huge projects in transportation and energy sectors to improve the case. The Indian national
government also granted permission for FDIs to provide up to 100% of the financing required
for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500
crores, approximately $352.5 million.
Growth Drivers Of Indian Retail Sector: Rising Income and increase in convergence of
consumer taste and preferences. Dual family Income.Knowledge about different product
through different medium like Internet, Television etc. Also knowledge about the latest trend
and fashion.47% of the India’s population is under the age of 30.

ASM Group of Institute of Pune, India 431

INCON – X 2015 E-ISSN-2320-0065

• This category is driving the consumption story.

• Emergence of new retailing format.
• Availability of Credit Facilities.
Openness towards FDI:Recently the Government of India has liberalized their policies
in certain sectors, like increase in the FDI limits in different sectors and also made the
approval system far easier and accessible. Unlike the historical tradition, today for investing
in India government approval do not require in the special cases of investing in various
important sectors like energy, transportation, telecommunications etc. Now days Government
of India is allowing FDI in defence and Railway sector of India.
Regulatory Framework and Investment Protection:In the process of accelerating FDI
in the country the government of India has make the regulatory framework lot more flexible.
In the context of foreign direct investment, advantages and disadvantages are often a
matter of perspective. An FDI may provide some great advantages for the MNE but not for
the foreign country where the investment is made. On the other hand, sometimes the deal can
work out better for the foreign country depending upon how the investment pans out. Ideally,
there should be numerous advantages for both the MNE and the foreign country, which is
often a developing country. We'll examine the advantages and disadvantages from both
perspectives.

Advantages for MNEs

1. Access to markets: FDI can be an effective way for you to enter into a foreign market.
Some countries may extremely limit foreign company access to their domestic markets.
Acquiring or starting a business in the market is a means for you to gain access.
2. Access to resources: FDI is also an effective way for you to acquire important natural
resources, such as precious metals and fossil fuels. Oil companies, for example, often make
tremendous FDIs to develop oil fields.
3. Reduces cost of production: FDI is a means for you to reduce your cost of production
if the labour market is cheaper and the regulations are less restrictive in the target foreign
market. For example, it's a well-known fact that the shoe and clothing industries have been
able to drastically reduce their costs of production by moving operations to developing
countries.

Advantages to Foreign Countries

1. Source of external capital and increased revenue. FDI can be a tremendous source of
external capital for a developing country, which can lead to economic development. For
example, if a large factory is constructed in a small developing country, the country will
typically have to utilize at least some local labor, equipment and materials to construct it.
This will result in new jobs and foreign money being pumped into the economy. Once the
factory is constructed, the factory will have to hire local employees and will probably
utilize a least some local materials and services. This will create further jobs and maybe

ASM Group of Institute of Pune, India 432

INCON – X 2015 E-ISSN-2320-0065

even some new businesses. These new jobs mean that locals have more money to spend,
thereby creating even more jobs.
2. Additionally, tax revenue is generated from the products and activities of the factory, taxes
imposed on factory employee income and purchases, and taxes on the income and
purchases now possible because of the added economic activity created by the factory.
Developing governments can use this capital infusion and revenue from economic growth
to create and improve its physical and economic infrastructure such as building roads,
communication systems, educational institutions and subsidizing the creation of new
domestic industries. Development of new industries. Remember that a MNE doesn't
necessary own all of the foreign entity. Sometimes a local firm can develop a strategic
alliance with a foreign investor to help develop a new industry in the developing country.
The developing country gets to establish a new industry and market, and the MNE gets
access to a new market through its partnership with the local firm.
3. FDI exposes national and local governments, local businesses and citizens to new
business practices, management techniques, economic concepts, and technology.

Main advantages of FDI in domestic country

1. Inflow of Foreign Capital. Capital base of domestic country increases.
2. Increase in tax revenue.
3. Boost economy by GDP growth.
4. Increase competition, productivity and efficiency.
5. Large employment opportunities -FDI in retail will create lakhs of jobs.
6. Inflow of technology, expertise and know how.
7. Infrastructure facilities improve and it will bring growth and prosperity.
8. Reduce cost of production. Prices of products will come down. This will tame
inflationary pressure in the economy.
9. Increase in international trade.
10. High quality products that will help them develop local businesses and industries.
11. Decrease in food wastage: Today a major chunk of the food that is almost 30%, 40%
of the produce is wasted in transportation. A lot of grains are also wasted in the
government storage and go-downs. The government has made it compulsory to
invest 50% of the investment in the development of infrastructure in logistics. Thus it
will become critical to save a lot in storage and logistics. More investments in the
end to end supply chain and world class cold storage facilities.
12. Benefits to the farmers: Farmers were long been left behind and squeezed between
the price raise. Worldwide the big retail giants buy the produce directly from the
farmers eliminating the middle men and offering them at least 15% – 20% higher
prices then they get.
13. Increase in Forex reserves: As per Government’s proposal in increasing the FDI in
retail the each retail giant is supposed to invest a minimum of 100 million dollars.
Each retail giant is expected to open atleast 15 stores across India and to open each

ASM Group of Institute of Pune, India 433

INCON – X 2015 E-ISSN-2320-0065

store it may require 10- 15 million dollars which can total in billions of dollars in
Forex reserves.
14. Better consumer choice: Since most of the retail giants work on a large scale, they
have large number product varieties which generally the kirana stores in your
neighbourhood are not able to store. Better options and offers to the consumer.
15. Reduction in food inflation: The increase in FDI will create stronger competition
among the retailers and will eliminate the middle man, which will eventually help in
reducing food prices and the stocks will help in reducing the supply constraint.
16. Increase in economic growth by dealing in various international products.
17. Billion dollars will be invested in Indian retail market.
18. FDI in defence sector will reduce imports; improve country’s capacity to produce
defence equipment locally and save foreign money. Definitely, it will create
employment opportunities. It will give them a hope that Indian defence equipment
will become globally competitive. High technology and expertise will flow to the
country.
Disadvantages of FDI in India
Investing in India definitely has some negative sides as well. Most noticeably India
considered as a huge market but a major portion of that is a lower and middle class person
who still suffers from budget shortage. The infrastructure of the country also needs to be
improved a lot and already it is under huge strain. There are also problems exists in the power
demand shortfall, port traffic capacity mismatch, poor road conditions deal with an inefficient
and sometimes still slow-moving bureaucracy. The huge market in India is an advantage but
it is also very diverse in nature. India has 17 official languages, 6 major religions, and ethnic
diversity. This makes the tasks difficult for the companies to make appropriate product or
service portfolio. India is not a member of the International Centre for the Settlement of
Investment Disputes also not of the New York Convention of 1958. That make life bit
difficult for the foreign investors. India still has a heavy regulation burden among other
countries, for example the time taken to start business or to register a property is higher in
India. Similarly, indirect taxes, entry-exit barriers and import duties have been major
disadvantages (Nagaraj, 2003; Planning Commission of India, 2002; USITC, 2007; World
Bank, 2004).
1. One has to remember that FDI in the past has been capital intensive and not labour
intensive. Foreign companies tend to use more technology to retain their
competitiveness and flexibility than go for hiring more workers. Most are afraid of
encountering labour problems. Millions of jobs, however, are needed in India and
therefore there has to be a policy of encouraging labour intensive FDI. In mining
industry, there is a danger of FDI harming the environment in their extractive
manoeuvers. Hence India has to study carefully what kind of FDI it wants.
2. Choosing the right kind of investors is critical because India already has many
consumer goods industries. What it needs is investment in infrastructure and capital

ASM Group of Institute of Pune, India 434

INCON – X 2015 E-ISSN-2320-0065

goods industries. Yet most investors are reluctant to enter the infrastructure sector
because returns are low and slow.
3. India ranks low (134th position) in World Bank's 'Ease of Doing Business'. It has to be
seen whether these age old bureaucratic methods can be reformed easily. For example,
both exporters and importers need to undertake a huge amount of paper work and get
different types of clearances that spawn corruption and delays, all of which can cause
patience to run out, making foreign investors pack up and go.
4. May cause monopoly by foreign companies in the absence of proper control by
domestic Government.
5. Internal insecurity:-But will it affect internal security of the country? In a country like
India, where internal security issues like terrorism are more relevant, allowing 100 %
FDI in the major area of protection from enemies may have a chance of giving negative
results. It may also affect the domestic companies involved in defence production.
6. May exploit the domestic resources without giving benefits to domestic country.
7. Domestic companies may feel uprooted.
8. Government does not have any clear stands on the FDI. They have not done any survey
and cost benefit analysis of this issue.
9. As claimed by the government that it will create Jobs, opposition does not buy it but
millions of retailers have to shut their shops.
10. Will affect million small merchants in India.
11. An economically backward class person may suffer from price raise in future.
12. Retailer faces heavy loss of employment and profit.
13. Inflation may be increased.
14. The rural India will remain deprived of the services of foreign players.

Disadvantages to Multinational Enterprises (MNEs)

• Unstable economic conditions. Much of FDI takes place in the developing world,
which is just developing its economic systems. The market conditions in the
developing world can be quite unstable and unpredictable.
• Unstable political and legal system. A bigger problem may be unstable or
underdeveloped political and legal systems. A company may have to deal with a
corrupt or unstable political system. Additionally, the legal system may be
underdeveloped. Contracts and property rights may not be easily enforced.
• FDI is a debt inflow or liability foreign exchange. Why? Simple, because the profits
or returns it generates will have to be repatriated in foreign exchange. Secondly, all
the men, material and merchandise imported in the years to come will have to be paid
in foreign exchange. Finally, at the time of winding up/selling off, the proceeds will
flow out of the country in foreign exchange. And, it is noteworthy here; all this will
end up in the outflow of foreign exchange, many times more than the initial inflow.

Suggestions
ASM Group of Institute of Pune, India 435
INCON – X 2015 E-ISSN-2320-0065

• Government should take some measures to bring FDI and create a healthy
environment for economic growth to loosen rules for portfolio investment in the
Indian market, indicating its desire to sustain external inflows.
• Every FDI is a clear-cut case of liability foreign exchange. Instead of allowing
foreign capital to set up shop here, the country should have used foreign exchange to
just import technology, if needed; and set up the same industries with domestic
capital. No liability foreign exchange; no profits going out of the country; domestic
consumers getting the same products; and the fruits of exports being reaped by
domestic firms and not foreign — all the way a win-win situation for us.
• Nevertheless much said about good things that FDI in retail will bring but argument
will not be justified if we do not take into account the grey areas. Some of the grey
areas are: Predatory pricing could strangulate the domestic retailers. It has been seen
MNCs retailers uses there big size to kill competitors, in order to bring goods at
lowest possible price for customers, they squeeze the margins of their suppliers. So
as claimed by thousand that suppliers will benefit, it is still doubted. In order to
correct these anomalies, India need to have strong regulator for the sector. And at the
same time strengthen the Competition Commission of India before these Big
Retailers creep into the Indian Territory.
• The key to tackling the issue lies in attracting sufficient foreign flows and the best
way of doing that is to make India an attractive destination with long term variety.
• Liberalising FDI ceilings is another way to face this situation with minimising
procedural hassles and creating necessary infrastructure to make it easy to do
business.
• As far as advantages of FDI are concerned, disadvantages are a few. But, these
disadvantages can be turned to positive through proper polices, control and
monitoring of the compliance of policies by Government. Government should ensure
that there is no room for corruption. Government should not lose control on foreign
investors at any stage. Good management of FDI through proper channelization is
the duty of Government and it will definitely give positive results.
• In the process of accelerating FDI in the country the government of India has make
the regulatory framework lot more flexible. Now a day’s foreign investors get
different advantages of tax holiday, tax exemptions, exemption of service and central
taxes. The government also opened few special economic zones and investors of
those zones also get a lot of befits by investing money. Apart from that there are
number of laws has been passed and executed for making the investments safe and
secure for the foreign investors (IMF, 2005; Nagaraj, 2003; Planning Commission of
India, 2002; World Bank, 2004).

ASM Group of Institute of Pune, India 436

INCON – X 2015 E-ISSN-2320-0065

Conclusion :
In this hyper competitive and ever changing business environment no business
organization is certain about tomorrow. That forces them to look for new destination and new
market to capture. The emerging market of India without any doubt poses suitable choice for
this company. Huge population and huge countryside is certainly making India even more
attractive. There are several benefits in investing in India like-very bright future, cheap labour
and raw materials, sound infrastructure, huge market availability. Easiness in regulatory
framework, efficient human resources, investment protect and also efficient promotion
mechanisms. However, factors like hugely diversified culture in India make life bit difficult
for the operators, but the benefits are overwhelming in compare to drawbacks. That is the
prime reason why India will keep attracting foreign investors and will remain as the most
attractive paces to put the money and earn future dividend.

REFERENCES :
1. ICRIER Report on Indian Retail, New Delhi, 2008.
2. Agarwal, S., &Ramaswami, S. N. (1992). Choice of foreign market entry mode:
Impact of ownership, location and internalisation factors. Journal of International
Business Studies, 23, 11-19 http://dx.doi.org/10.1057/palgrave.jibs.8490257
3. Agosin, M., & Mayer, R. (2000). Foreign investment in developing countries:
Does it crowd in domestic investment? Discussion Paper No.146, UNCTAD,
Geneva.
4. Asher, M. G. (2007). India’s Rising Role in Asia
http://www.spp.nus.edu.sg/wp/wp0701b.pdf.
5. Birkinshaw, J. (2000). Upgrading of industry clusters and foreign investment.
International Studies of Management and Organisation, 30(2), 93-113.
6. World Scientific Press. Department of Industrial Policy and Promotion.
(2005). Foreign Direct Investment-Policy & Procedures. New Delhi:
Government of India. Available at http://dipp.nic.in/manual/manual_03_05.pdf.
Internet.
7. Dunning, J. H. (2002). Determinants of foreign direct investment: Globalisation
induced changes and the role of FDI.
8. Lall, S. (2000). FDI and Development: Policy and Research Issues in the Emerging
Context. Working Paper No.43, Queen Elizabeth House, University of Oxford, p. 28.
9. Nagaraj, R. (2003). Foreign direct investment in India in the 1990s: Trends and
issues. Economic and Political Weekly, 38(17), 1701-12.
10. Sharma, K. (2000). Export growth in India: Has FDI played a role ? discussion paper
No 816, Economic Growth Centre, Yale University. pp. 1- TyagiHimani (2012),
“Impact of FDI in retail: Boon or Curse” VSRD International Journal of Business
and Management Research, Vol. 2 No.12.

******
ASM Group of Institute of Pune, India 437