Treatise 2010

There’s a raging debate today whether FDI in India drives growth or stunts it. Direct investors, typically, have a longer-term perspective when engaging in a host country. Since FDI causes sharing of risk between the host country and the investing firm, it provides a stronger stimulus to economic growth in host countries than other types of capital inflows. FDI is more than just capital, as it offers access to internationally available technologies and management knowhow⁶…

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Foreign direct investment (FDI) is now widely perceived as an important resource for expediting the industrial development of developing countries in view of the fact that it flows as a bundle of capital, technology, skills and sometimes even market access. Most of the developing countries, therefore, offer a welcoming attitude to multinational enterprises (MNEs) that are usually associated with FDI. India’s case is a typical in this context. After following a somewhat restrictive policy towards FDI, India liberalized her FDI policy regime considerably since 1991. This liberalization has been accompanied by increasing inflows. The liberalization has also been accompanied by changes in the sectoral composition, sources and entry modes of FDI. The increasing recognition of India’s locational advantages in knowledge-based industries among MNEs has also led to increasing investments by them in software development and in global R&D centres set up in India to exploit these advantages….

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FDI inflows into India during 2009 have crossed Rs. 80,000 crores and this is the highest ever flow into the country in rupee terms. The attractiveness of India for FDI is far from receding and can surely be expected to sustain over the next decade as well.

2008, the year of the greatest recession the world has seen since the Great Depression, has convincingly proved that India’s growth is not purely FDI dependant. India experienced a growth of over 6% during a year when the world economy contracted 5.5% and when there was a net exodus of capital to the tune of almost Rs. 50,000 crores. Despite huge withdrawal of capital to meet commitments in the home country, countries such as the United States saw a contraction in their economy by 3.5% while the United Kingdom is yet to emerge from the recession. On the other hand, the growth rate of India declined by a modest 2-3% and is on track to regain its 9% growth by the next fiscal year, according to recent projections released by the Finance Minister and Ernst & Young.

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Defending the proposition “FDI fuelled growth of India is sustainable”

There is no doubt that the world is moving toward a single global economy, where national economies are becoming more globally integrated and interconnected. The cornerstones of globalization are economic specialization and international exchange. It is this fundamental attribute of globalization which leads us to the natural conclusion that a positive relationship between FDI & growth is not incidental but a part and parcel of the new order of the world economy.

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There are many economic models which may be used to characterize and determine the rate of growth of an economy.  The one which projects the golden growth trajectory of India employs Foreign Direct Investment (FDI) as a pivotal factor.  In analyzing this growth model, the question of sustainability needs to be asked.  Such an all-round analysis of this model throws up unexpected answers, with not every answer being as rosy as previously thought.  Is India really heralding the new age of a global shift in economic power?
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