FDI and India Essay Example

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FDI in India


According to the 2013 AT Kearney FDI confidence index, India was the fifth most attractive FDI destination in 2012 (AT Kearney, 2013). According to AT Kearney (2013), India received over $25.5 billion in FDI inflows. British Brewer Diageo obtained a controlling stake in United Spirits for $2 billion. In the same year McDonalds opened its first restaurants in India.

FDI inflows are an indication of the capital invested by foreigners in the manufacturing, properties and service sectors of a host country. Good FDI levels are a good indicator of investors’ confidence in the geopolitical and business environment of the host country. India’s attractiveness to foreign direct investment can be owed to a conducive political, economic and legal environment. India is a fast expanding economy and its population continues growing unlike the developed World countries facing a deepening aging population problem. These factors overlap and complement to make India one of the most attractive destinations for FDI.

Political Factors

India is world largest democracy. India is a federal multiparty state that is divided into several states. India has three different codes of laws for Muslims, Hindus and Christians. Indian Party politics are dominated by the Indian National Congress, The Bharatiya Janata Party (BJP) and the Communist Party (CIA, 2013). The current government is a coalition between the India National Congress and the United Progressive Alliance (UPA), supported by other small parties.

Political interference in business is seen in policies tailored to serve personal or party interest (Acharya, 2007). For example, Bangalore a city favored by the present regime has become a major IT hub. India government now follows a policy of low trade regulation and allows foreign firms to do business in India freely (Subramanian, 2009). It has also relaxed many international trade regulations in the past two decades.

India arms race and rivalry with Pakistan is seen as a major political risk. In 1998, both India and Pakistan carried out nuclear weapons test (Dalal, 2012) In November 2008, Pakistan trained gunmen carried out shooting and bombing attacks in Mumbai. The bombings endangered the peace process between the two countries that had started in 2004 and which were helping ease tension between the two rival states (CIA, 2013).

India religious and ethnic diversity is also a possible source of strife. India has many different language, culture and religions. Caste, regional and communal tension remain an obstacle to India struggle for long-term political stability.

Economic Factors

The economic policies of an investment influence the activities of a firm greatly. Taxation structures, interest rates levels, inflation and foreign exchange controls play a great role in determining the attractiveness of a country to FDI.

Higher interest rates reduce the attractiveness of a country to investors. High interest rates increase the cost of borrowing money and may mean finance is unavailable. In 2012, rising interest rates were among the factors that slowed down India economic growth (Economist, 2012). Inflation was another negative factor which affects economies by making goods more expensive and increasing wage demand. India’s inflation rate was at 9.6 per cent in 2013 (CIA, 2013). The Rupee is getting stronger and sometimes it hurts India’s exports as it makes them more expensive. Higher national income means that individual income in India is rising. With both a rapidly rising population and economic growth recorded at 4.7 per cent in 2013, India provides a ready market for a firm’s products (CIA, 2013).

In the 1990, the Indian government took concrete steps to stabilize the country’s economy (Subramanian, 2009). India economic reforms were aimed at reducing poverty and unemployment and to raise the standard of living. India recorded an 8.8% unemployment rate in 2013 while less that 30% per cent of the Indian population was below the poverty line (CIA, 2013). By the end of 2010, India’s per capita income is expected to reach Rs. 33283 (Dalai, 2012).

India second goal for economic reforms was to become self-reliant and build a strong industrial base. To this end, India established industries across the Chemical, transportation equipment, automobile textiles, chemicals, food processing, cement, mining, Steel, machinery and pharmaceuticals (CIA, 2013). India is now a leading source of generic drugs and computer software. The Third goal of reducing the wealth gap and income inequality is still unrealized as section of India’s population is still very poor.

The industrial policy of the India Government initiated in 1991 is partly responsible for India’s present attractiveness to FDI inflows (Subramanian, 2009). India new industrial policy requires compulsory licensing in only six industries. Secondly, the government privatized public sector industrial enterprises. Thirdly, the capital market was liberalized and foreign entities were allowed to make 100 per cent Foreign Direct investment in most economic areas (Manian, 2011). Furthermore, Indian companies were automatically permitted to make technology agreements with foreign companies. Moreover, the Foreign Investment Promotion Board (FIPB) was created to promote India as Foreign Direct Investment destination. Over time these factors have gotten better and India now benefits with high FDI inflows.

Legal Environment

Many changes in India’s legal environment also affect the country’s FDI attractiveness. Firms have to observe recently legislated laws on disability and discrimination, minimum wage rules and a requirement to use recycled products as much as possible (Manian, 2011).

Most of India’s legislation that is concerned with business operations is in-line with international law (Subramanian, 2009). Business related laws include the Consumer Protection Act, the Commodities Act, the Trade Mark Act, the Standards of Weights and Measures Act (Manian, 2011). India has continued to defy pressure from western government to afford greater Intellectual property rights protection to drug technologies (Grover and Citro, 2011). However, India protects intellectual property rights unrelated to health at international levels.


India’s attractiveness to FDI can be owed to the economic changes the government undertook in the 1990’s. However, India lack of control over their strong currency and inflation sometimes affect the economy’s investment potential. However, a relatively stable and supportive political regime has ensured that India maintain a high rate of GDP growth and low unemployment. Per capita income growth combined with a rapidly growing population is turning India into one of the most attractive market for foreign investors.


Acharya, S. N. (2007). Can India Grow Without Bharat?» columnspeak». Academic Foundation.

AT Kearney (2013). The 2013 AT Kearney Foreign Direct Investment Confidence Index. Virginia: AT Kearney

CIA (2013), The World Fact book: India. Retrieved from https://www.cia.gov%2Flibrary%2Fpublications%2Fthe-world-factbook%2Fgeos%2Fprint%2Fcountry%2Fcountrypdf_in.pdf&ei=cPu8U56iEeml0QW5zYGwDQ&usg=AFQjCNHa7Y-Zj6puhdvozlQZzBMrTPkYQA&sig2=F-neuokozcYQPvd44Wlmnw accessed 4th July 2014.

Dalal, R. S. (2012). Recent Trends in Indian politics: An introspection. International Journal of Research in Social Sciences, 2(3), 412-423.

Economist (June 9 2012). ‘India’s Slowdown: Farewell to Incredible India’. Economist, print edition.

Grover, A., & Citro, B. (2011). India: access to affordable drugs and the right to health. The Lancet, 377(9770), 976-977.

Manian, R. (2011). Doing business in India for dummies. John Wiley & Sons.

Subramanian, A. (2009). India’s turn: understanding the economic transformation. New Delhi: OUP India,