This article has been written by Miss Janhvi Upadhyay, a second-year student of Christ (Deemed to be) University Delhi NCR.
Abstract
Foreign Direct Investment (FDI) has emerged as a crucial driver of economic growth and development in the global arena. In recent years, many countries have undertaken significant liberalization of their FDI policies, aiming to attract more foreign investment and foster economic reforms. This abstract explores the pivotal role of FDI liberalization as a catalyst for economic reforms, shedding light on its impacts on various sectors and the overall economy.
The article begins by discussing the motivations behind FDI liberalization, emphasizing its potential to stimulate economic growth, enhance technological advancement, and create employment opportunities. It then delves into the key mechanisms and strategies employed by countries to liberalize their FDI policies, including the removal of entry barriers, simplification of regulations, and establishment of investor-friendly environments.
Furthermore, the article examines the empirical evidence on the effects of FDI liberalization on economic reforms, drawing insights from both theoretical frameworks and real-world case studies. It highlights the positive correlation between FDI inflows and economic reforms, illustrating how increased foreign investment often leads to improvements in infrastructure, productivity, and competitiveness.
Moreover, the article addresses the challenges and considerations associated with FDI liberalization, including concerns about sovereignty, national security, and the risk of capital flight. It underscores the importance of implementing effective regulatory frameworks and governance mechanisms to maximize the benefits of FDI while mitigating potential risks.
The article emphasizes the transformative potential of FDI liberalization as a catalyst for economic reforms, advocating for continued efforts to create an open and conducive environment for foreign investment. It underscores the need for policymakers to strike a balance between attracting FDI and safeguarding national interests, ultimately fostering sustainable economic growth and development.
Introduction
The stock of foreign direct investment (FDI) in India soared from less than US$ 2 billion in 1991, when the country undertook major reforms to open up the economy to world markets, to almost US$ 39 billion in 2004 (UNCTAD online database). Currently, it is being discussed to deregulate FDI restrictions further, e.g., by allowing FDI in retail trade. Policymakers in India as well as external observers attach high expectations to FDI. According to the Minister of Finance, P. Chidambaram, “FDI worked wonders in China and can do so in India” (Indian Express, November 11, 2005). The Deputy Secretary General of the OECD reckoned at the OECD India Investment Roundtable in 2004 that the improved investment climate has not only resulted in more FDI inflows but also in higher GDP growth (OECD India Investment Roundtable 2004). The implicit assumption seems to be that higher FDI has caused higher growth.1 Bajpai and Sachs (2000: 1) advise policymakers in India to throw wide open the doors to FDI which is supposed to bring “huge advantages with little or no downside.” Yet, as we discuss in more detail in Section II, it is far from obvious that FDI in India will have the desired effects. Skepticism may be justified for several reasons. The recent boom notwithstanding, FDI inflows may still be too low to make a big difference. For instance, Kamalanatha and Laurence’s son (2005) suspect that FDI cannot reasonably be considered an important driver of economic growth in India because its contribution to gross fixed capital formation has remained small.2 Moreover, some observers doubt that economic reforms went far enough to change the character of FDI in India and, thus, result in types of FDI that may have more favorable growth effects. For example, Balasubramanian and Mambare (2003) as well as Fischer (2002) argue that the reforms implemented so far have not eliminated the distinct anti-export bias of India’s trade policy. This may explain why, according to Arabi (2005) and Agarwal (2001), FDI in India has remained domestic market seeking. It is widely believed that the type of FDI and its structural composition matter at least as much for economic growth effects as does the overall volume of inward FDI. Agrawal and Shahani (2005) reckon that it is the quality of FDI that matters for a country like India rather than its quantity.3 FDI is often supposed to be of higher quality if it is export oriented, transfers foreign technologies to the host country, and induces economic spillovers benefiting local enterprises and workers (Endrick 2005). All the more surprisingly, the structure and type of FDI are hardly considered in previous empirical studies on the FDI-growth links in India. Against this backdrop, this paper raises two major questions: First, we assess in Section III whether India’s reforms in 1991, apart from giving rise to FDI, have also induced changes in the structure and type of FDI which may be relevant for its growth impact. Second, we evaluate in Section IV whether the growth impact of FDI differs between the primary, secondary and tertiary sectors. We apply cointegration and causality analyses on the basis of industry specific FDI stock data which are available for the period 1987-2000. We find some support to the proposition that the character of FDI in India has changed in the post-reform period, though possibly not to the extent as the proponents of a further liberalization of FDI regulations might implicitly assume. Moreover, the growth impact of FDI is shown to differ significantly across sectors. Most notably, there is at best weak evidence for a causal link between FDI and output growth in the services sector, which attracted the bulk of additional FDI in recent years. This leads us to conclude that the current euphoria about FDI in India rests on weak empirical foundations. FDI is rather unlikely to work wonders in India.
Liberalization of FDI in India
After Independence from Britain in 1947, Indian economy remained fairly close. In mid-1980s, India faced a severe deficit of balance of payment. The growth in export sector turned negative, and industrial production recorded negative growth. Thus, an attempt to liberalize economy in 1987 was made to overcome balance of payment issue, but that did not succeed. Later in 1990–1991, India’s inflation rate was 12% with current account deficits of 3.1%. During that period, China was an attractive destination for foreign investors; however, India was still facing difficulty. In mid-1991, Indian government foreign exchange reserves were very low, only having enough dollars for two weeks’ worth of import. To overcome the problem, India had pledge tons of gold to Bank of England and Union Bank of Switzerland. After the disaster of 1991, neoliberal reforms were introduced which was never previously allowed; by opening the economy to initiate privatization, changes in tax-reforms, deregulation of economic trade practices, allow international trades and investments, control inflation level. The policy of FDI under liberalization, privatization and globalization (LPG) was introduced (Kumar). Initially, very few sectors such as manufacturing, mining were liberalized, but later, more sectors like service, telecommunications, retail were liberalized. The liberalization is prone to affect various industries, and these effects may vary immensely across industries (Kamath). This research is mainly focusing on the retail sector of India and the impact of liberalization of FDI policies on retail sector of India.
In 1997, the government of India has approved 100% FDI in wholesale cash-and-carry market with automatic approval. Later in 2006, FDI of up to 51% in single-brand retail was allowed by the government subject to prior approval. It was a vital decision and brought huge transformation for the Indian economy and retail sector as well. Between the year 2006 and 2010, 94 proposals had been recorded out of which 57 were accepted and implemented for single-brand retailing. The flow of FDI had increased heavily due to the liberalization of the economy with FDI of $1.8 billion between 2000 and 2010 through retail sector singly (Shah and Parikh). According to Earnest and Young report, FDI is the best tool to enter in the attractive Indian market. It further explains that from last few years India’s retail sectors under single-brand retail have emerged as a big opportunity. Adding to it, the IMF’s World Economic Outlook report suggests that between years 2016–2018, Indian GDP growth will be even faster than China. Putting it together with a study by the PWC which states that, “Indian consumers are among the most confident consumers in the world”, it seems highly probable that we will see a surge in consumer spending. Perhaps, annual growth of 15–20 percent has been witnessed in the retail sector. Also, with a high rate of the population falling under 15–59 and being considered as a second largest populated country. A point to consider is that youth and elite consumers had an inclination towards brands and multi-brand supermarkets, whereas older generation and non-taxpayers preferred buying from convenience stores, discount stores (Jhamb and Kiran). Economic betterment is considered to be due to the liberalization of the FDI policies and rigid licensing systems. The retail sector is backbone of Indian economy and one of the fastest growing sectors (IBEF). With that in perspective, this study focuses on the impact of liberalization policies of FDI in India particularly on retail sector of India. Moreover, it investigates the trends and patterns of FDI flow in the economy and the implication of FDI flow in the organized retail sector. The government allowed 100% FDI in single-brand retail and 51% with multi-brand retail with some regulations in 2012. Therefore, following research is based on the impacts of liberalization of FDI policy in India in retail sector in order to prove the consideration.
Conclusion
In conclusion, the liberalization of Foreign Direct Investment (FDI) policies in India, particularly in the retail sector, has ushered in significant transformations and opportunities for economic growth. Beginning with the dire economic situation in the early 1990s, characterized by balance of payment crises and low foreign exchange reserves, India embarked on a path of neoliberal reforms aimed at opening up its economy and attracting foreign investment. This shift towards liberalization, privatization, and globalization (LPG) has been instrumental in reshaping India’s economic landscape.
The FDI liberalization policies, starting with the allowance of 100% FDI in wholesale cash-and-carry markets in 1997 and gradually extending to 51% FDI in single-brand retail in 2006, marked a pivotal turning point for the retail sector. The subsequent influx of foreign investment in retail, totaling $1.8 billion between 2000 and 2010, has contributed significantly to the sector’s growth and modernization. The retail industry, being a crucial component of India’s economy, has experienced substantial expansion and evolution due to increased FDI inflows.
The impact of FDI liberalization on the retail sector has been profound, with various studies indicating substantial growth in consumer spending, GDP, and overall economic performance. Reports from organizations such as Ernst and Young, the IMF, and PwC underscore the positive prospects for India’s retail market, fueled by rising consumer confidence, demographic trends favoring consumption, and a shift towards branded and multi-brand retail formats. This surge in consumer demand has propelled the retail sector to become one of the fastest-growing segments of the Indian economy.
Furthermore, the liberalization of FDI policies has not only spurred economic growth but also brought about structural changes and increased competitiveness within the retail industry. The entry of foreign retailers and investment in organized retail formats has led to enhanced efficiency, supply chain management, and product quality standards. Moreover, the introduction of 100% FDI in single-brand retail and 51% FDI in multi-brand retail with certain regulations in 2012 reflects the government’s continued commitment to fostering a conducive environment for foreign investment while safeguarding domestic interests.
Despite the undeniable benefits of FDI liberalization in the retail sector, challenges and concerns remain, particularly regarding the impact on traditional mom-and-pop stores and small retailers. It is imperative for policymakers to address these issues through appropriate regulatory frameworks and support mechanisms to ensure inclusive growth and mitigate adverse effects on local businesses.
The liberalization of FDI policies in India has had a transformative impact on the retail sector, driving growth, modernization, and increased competitiveness. While challenges persist, the overall trajectory indicates a positive outlook for the future of India’s retail industry. Continued efforts to attract foreign investment, coupled with measures to support local businesses and ensure equitable growth, will be essential in maximizing the benefits of FDI liberalization for India’s economy as a whole.
Reference
This article was originally written by Gray Christine published on Oxford Academic website. The link for the same is herein. https://academic.oup.com/book/10167/chapter-abstract/157745615?redirectedFrom=fulltext
- This article was originally written by Chatham House published on Chatham House website. The link for the same is herein. https://www.chathamhouse.org/sites/default/files/public/Research/International%20Law/ilpforce.doc
- This article was originally written by Mary Ellen published on Oxford Bibliographies website. The link for the same is herein. https://www.oxfordbibliographies.com/display/document/obo-9780199796953/obo-9780199796953-0028.xml
- This article was originally written by Robert H. McKinney published on McKinney Law website. The link for the same is herein. https://mckinneylaw.iu.edu/iiclr/pdf/vol19p1.pdf
- This article was originally written by Albert Camus published on Médecins Sans Frontières website. The link for the same is herein. https://guide-humanitarian-law.org/content/article/3/self-defense/#:~:text=168.,United%20States%20of%20America%20%2C%20paras.