Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.

Answer

Approach:IntroductionDefine FDI.BodyJustify the need for FDIMention the reasons behind gap between MOUs and actual FDISuggest remedies.ConclusionConclude stating that FDIs are important for growth and steps must be taken to ensure that MOUs become realities.

Introduction

Foreign Direct Investment (FDI) refers tocapital inflows from abroadthat are invested in or to enhance the production capacity of the economy.

Body

Need of FDI for development of Indian Economy:

• Private investment from the domestic sectorhas been constrained because of Non-Performing Assets (NPAs). The banking sector has been cautious about lending.


• Induction of advanced technology and technical knowhow:It provides access to the superior technology, superior managerial skills and bigger markets.


• Improves efficiency and competition:It promotes efficiency and productivity through international competition of superior quality products.


• Increase employment opportunities:FDI can ensure a number of employment opportunities by aiding the setting up of industrial units in various corners of India.


• Need for non-debt investments.

Reason for Gap between MOU and actual FDI:

MOUs significantly reflect the political understanding between nations whereas investment reflects the economic scenario. Some reasons for gap are:

• According to the World Bank’s Ease of doing Business Index, the Indian Economy is less attractive because of infrastructural bottlenecks such as availability of electricity, dealing with construction permits; registering property; getting credit; protecting minority investors, paying taxes; trading across borders, corruption, strict labour laws, etc.


• Unpredictable policy and Tax regime:Difficult exit policies, red tapism, bureaucratic inertia, and political deadlock play a great role in maintaining the gap between MoUs signed and actual FDIs in the Indian economy.


• Prolonged litigations involving government


• Unilateral Withdrawal from Bilateral investment treaties


• Issues in land acquisition:Land acquisition for industry is contentious in India, particularly when the purchaser is foreign. Concerns about the control of natural resources by foreign companies have stymied efforts to liberalize foreign investment.

Remedial measures:

Insolvency and Bankruptcy Code, Ease of doing business, establishment of Special Economic Zone, Labour laws reforms can help in attracting FDIs in Indian economy.

Conclusion

FDI is a very crucial aspect of how development would occur given the fact that these are stable and long term commitments and are focused on long term growth.