UPSC PRELIMS 2020 : FDI Review

FDI Review

Topic : FDI Review

Topic in Syllabus: Indian Economy

 

Context:

FDI Review

Recently, the Union Cabinet has approved the proposal for the review of Foreign Direct Investment in various sectors.

 

Background:

  • This will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment and growth.
  • As of now (March 2019), Singapore remains India’s top FDI source, twice that from Mauritius.

 

Steps Taken:

  • 100% FDI under automatic route is permitted for sale of coal, for coal mining activities including associated processing infrastructure.
  • The government has allowed 100% FDI through the automatic route for contract manufacturing.It will augment the Make in India initiative and will attract global companies in India looking to establish alternative manufacturing hubs
  • Easing norms for FDI in Single Brand Retail Trading (SBRT):Retail trading through online trade by SBRT, can also be undertaken prior to the opening of brick and mortar stores (it should be opened within 2 years from the date of start of online retail).
  • Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training and product skilling.
  • It has been decided to permit 26% FDI under government route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media.
  • In India, FDI policy provisions have been progressively liberalized across various sectors in recent years to make India an attractive investment destination.
  • Some of the sectors include Defence, Construction Development, Trading, Pharmaceuticals, Power Exchanges, Insurance, Pension, Other Financial Services, Asset reconstruction Companies, Broadcasting and Civil Aviation.

 

Way Forward:

  • Due to these measures, a total FDI into India from 2014-15 to 2018-19 has been $ 286 billion.
  • Despite the dim global picture (UNCTAD’s World Investment Report 2019), India continues to remain a preferred and attractive destination for global FDI flows.
  • India seeks to use this potential to attract far more foreign investment which can be achieved inter-alia by further liberalizing and simplifying the FDI policy regime.

 

Foreign direct investment (FDI)

  • It is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest.
  • Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.
  • Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.

 

Contract manufacturing

The business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design. Companies outsource their production to other companies.

 

Contract manufacturing – Benefits:

  • Cost Savings: Companies save on their capital costs and labour costs because they do not have to pay for a facility and the equipment needed for production.
  • Some companies may look to contract manufacture in low-cost countries, such as India, to benefit from the low cost of labour.
  • Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturer does.
  • Focus: Companies can focus on their core competencies better if they can hand off base production to an outside company.
  • Economies of Scale: Contract Manufacturers have multiple customers that they produce, it may lead to reduced costs in acquiring raw materials by benefiting from economies of scale.

 

Sample Question:

Which of the following types of FDI includes creation of new assets and production facilities in the host country?

a. brownfield investment

b. strategic alliances

c. merger and acquisition

d. greenfield investment

 

Answer: d