FinMin pushes for reforms to spur FDI
Context :
The Finance Ministry has argued forcefully for steps to encourage FDI flows, which decreased last year and may continue to be muted in the months ahead. It suggested that authorities pay more attention to the problems with last-mile infrastructure and the difficulty with establishing large-scale industries that face international investors.
What is the FDI?
- Definition: Purchasing property, buildings, or ownership interests in companies abroad to gain direct control and ownership of those assets is referred to as foreign direct investment (FDI).
- Direct Control: By focusing on direct control, FDI sets itself apart from other investment types, like foreign portfolio investment. FDI gives the investor the power to decide strategically and to direct how the assets they have bought are managed and run.
- Asset Types: FDI can involve investments in a range of assets, including infrastructure projects, technology, natural resources, and intellectual property rights as well as productive assets like factories. It may also involve the creation of new initiatives or the purchase of already established businesses.
- Inorganic FDI: This is FDI that is invested in by purchasing an existing business in the target nation. It entails acquiring a controlling interest in the business, giving the investor immediate access to its assets, operations, and decision-making procedures.
- Organic FDI: FDI that is generated organically in a target country means that an existing company’s operations are expanded there. It entails building new facilities, opening additional branches, or making investments to increase production or distribution networks.
- Motives for FDI: Investors engage in FDI for a variety of reasons, including opening up new markets, obtaining access to vital resources, diversifying their businesses, cutting costs, utilising favourable economic and governmental conditions, and aiming for higher returns on investment.
How is Finance Ministry trying to improve FDI?
- Decline: Foreign Direct Investment (FDI) flows in India have decreased, with gross FDI flows falling 16% in the fiscal year 2023 compared to the fiscal year prior (FY22), when they reached a new high of $84.8 billion. Additionally, net inflows decreased by a sharper 27.4%. It is not just India that is seeing this reduction; net FDI inflows in developing market nations also fell by 36% in 2022.
- Aspects Affecting FDI: The Finance Ministry blames stricter monetary policy and inflationary pressures for the decline in FDI inflows. Additionally, it implies that geopolitical variables now outweigh geographical ones in influencing FDI flows, highlighting the importance of political distance.
- Global Investor difficulties: To encourage and facilitate FDI, policymakers must address global investor difficulties. These difficulties include difficulties in building up massive factories and last-mile infrastructure constraints. To promote FDI inflows, it is essential to address these problems.
- External Factors Affecting Growth Outlook: According to the Ministry, the outlook for India’s growth in the fiscal year 2024 may be threatened by the external sector. Growth may be hampered by elements including geopolitical tension, financial system volatility, stock market corrections, El Nino effects, and weak global demand.
- Need for FDI Facilitation Measures: The Ministry stresses the significance of closely observing FDI data and implementing FDI facilitation measures. This entails fixing last-mile infrastructure problems, assuring labour availability, and creating an atmosphere that is conducive to the creation of significant amounts of capacity.
