FDI in Indian economy

Differentiating FDI and trade


From UPSC perspective, the following things are important :

Prelims level : FDI

Mains level : Paper 3- Differentiating between trade and investment

Differentiating between trade and investment is necessary for reaping the benefits that come with foreign investment in firms. However, the concerns over the source of funds are not unfounded. So, some caution is warranted in dealing with FDI.

Let’s look into the debate

  • Government is asking its citizens to aim for self-reliance.
  • So, should India continue to allow investment inflows from China? This is the debate.
  • China has invested $4 billion in Indian startups in the past 5 years.
  • This amount would be higher if funds located in tax havens with Chinese ownership are also accounted for.

Some of the questions raised in the debate

  •  Is trade of products like buttons, crockery same as long-term foreign investments in high-risk new age technology-driven products?
  • Is it economically prudent for a country to fulfil all its capital requirements or compromise on innovation due to lack of thereof?

 Trade vs FDI

  • Trade just helps the country fulfil its requirements of those goods and services (G&S) that may not available in the country.
  • Investments provide the capital to build infrastructure that can plug the G&S deficit, even, sell it to other markets.
  • Trade just provides entry of G&S.
  • FDI inflow is a route for transferring capabilities, technology, building linkages, business capabilities etc.
  • FDI helps generate employment, public assets, tax revenues and develop markets, none of this is contributed by the trade of merchandise.
  • Foreign investment does have an adverse impact on domestic markets in the short-run by crowding out domestic competition or investment.
  • In fact, attracting FDI in employment-intensive sectors can create positive economic and social spillovers.
  • Possibilities to increase exports often arise from companies with significant levels of FDI.
  • Foreign investor exposes itself to regulatory, economic and geo-political risks of the country.

Foreign investment in Indian firms: Two aspects to consider

  • While discussing the funding composition of the likes of Paytm, OYO hotel chain or Ola, two aspects need to be considered.
  • 1) These companies are Indian companies operating under the law of land, creating economic opportunities for the youth and contributing to the welfare of the Indian community.
  • 2) Success of these ventures is not solely due to the investment, but because of the novelty of the product offering.
  • Investments in start-ups involve high risk; the list of failed start-ups with Chinese investment is bound to be much longer.
  • In the absence of technology giants in India, we may also end up draining the brain to countries with a stronger financial ecosystem for fresh ideas.

Apprehension over FDI in India

  • Apprehensions related to investments from any country per se, are not unwarranted in India.
  • This is mainly because history suggests foreign investment can potentially lead to economic colonisation.
  • However, times have changed and so has the world order.
  • Steady inflow of investments can exist without impacting the economic or political stability of the country.
  • To do so we should practice some of the following recommendations.

How to address the concern over FDI

  • Investment funds can be set up outside the home country of the investor or be routed through companies located at tax havens.
  • It is not always possible to map the investor to the country.

How to solve this problem

  • To solve this identify sectors based on sensitivity, the investment required, technology, employment and social impact.
  • Tighten regulations related to data storage and access by companies through data localisation in these sensitive sectors.
  • Modify the offset policy in defence to ensure a certain portion of the profits is invested in the SMEs.
  • To further India’s interests in nascent sectors such as machine learning, HealthTech, maximum period for an investor to be invested in a greenfield should be limited to 10 years.
  • All firms receiving foreign investment should have a plan to contribute to India’s exports within the product lifecycle and minimum employment generation.
  • Ease listing norms for firms so that funds through public and private placement can be raised by wholly Indian owned companies.
  •  BSE SME & Start-ups Platform has helped 322 companies raise Rs. 3,320.48 crores from the market. Start-ups should be encouraged to make use of the platform wherever possible.
  • Domestic procurement of raw material and intermediate goods has to be non-negotiable as far as possible.

Consider the question “What are the challenges and opportunities associated with foreign investment and suggest the ways to address the challenges.”


From being treated as a ‘dumping bazaar’ to now attracting investors, India does not need to shy away from investments; it certainly needs to be wary of pure trade which limits India’s potential and drive to produce indigenously.

Back2Basics: Offset policy

  • The offset policy, introduced in 2005, mandates foreign suppliers to spend at least 30% of the contract value in India.
  • It was first revised in 2006 and then again in 2011 and in 2016. Another round of tweaking is currently underway.


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