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Foreign foreign direct investment can remain beneficial

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Foreign
direct investment may be very advantageous to the host country that is the country
which receives the investment flows in terms of helping the country progress
economically and financially. However, foreign direct investment can remain
beneficial only when the governments of the host countries put in needed
regulations so as to prevent the country from being exploited and used as a
profit generating machine for such corporate giants. The past has given many
examples of how foreign direct investment can also at times be detrimental to
the economy of a country, some examples of which are highlighted below:

 

Political Lobbying: In the past, there
have been many instances in which MNCs have resorted to political lobbying in
order to get certain policies and laws implemented in their favor. At times,
these MNCs are so large that their revenues even exceeded the Gross Domestic
Product (GDP) of some smaller nations and compel or threaten them to pass
judgments and policies in their favor.

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Exploitation of
Resources: Exploitation
of natural resources of a host country is not an very uncommon phenomenon in
the case of FDI. MNCs of other countries have been known to indiscriminately
exploit the resources of hosts countries in order to get short run gains and
profits and have even chosen to ignore the sustainability factors associated
with the local communities and local habitat, very much like what happened in
the 17th century colonialism.

Threaten
Small Scale Industries: MNCs have large economic and pricing power
due to their large sizes. They do not have much problem with regards to
financial capital and can hence resort to using advertising which is a costly
affair. Also, these companies are global players who have their operations
spread across countries and have effective supply chains which enable them to
have economies of scale which smaller players in the domestic market of the
host country cannot compete with. All this results in the MNC having cheaper
products and more visibility due to the higher amounts of advertising and have
been known to push out smaller industries out of business.

Technology: Although, the MNCs
have access to new and cutting edge technology, they do not transfer the latest
technology to the host country with a fear that their home country may loose
its competitive advantage, hence the maximum potential of the host economy
cannot be achieved as a result of old technology transferred.

 

 

 

 

 

 

 

 

 

CHAPTER-7

POLICY  REFORMS ON FOREIGN DIRECT INVESTMENT IN INDIA

 

FOREIGN DIRECT INVESTMENT IN INDIA

Investment in Indian market:-

India, among the European
investors, is believed to be a good investment despite political uncertainty,
bureaucratic hassles, shortages of power and infrastructural
deficiencies .India presents a vast potential for overseas investment and is
actively encouraging the entrance of foreign players into the market. No
company, of any size, aspiring to be a global player can, for long ignore this
country which is expected to become one of the top three emerging economies
.India has in the recent years emerged as a favored destination for
investment in various sectors like Power generation, Heavy Machinery,
Infrastructure project, Telecom, Communication, Software  etc. Various hurdles that existed in the
economy earlier have been removed as a result of the winds of
liberalization sweeping the country. India has now opened its doors to foreign
investment in a major way. Non-Resident Indians and Multinational

Companies have to
follow certain rules and regulations prior to investment.

 

Policy

FDI
upto 100% is allowed under the automatic route in all activities/sectors except
the following
which will require approval of the Government:

 

•Activities/items that
require an Industrial License;

 

•Proposals in which the
foreign collaborator has a previous/existing venture/ tie up in India in the
same or allied field,

 

•All  proposals relating to acquisition of shares
in an existing Indian company by a foreign/NRI investor.

 

•All proposals falling
outside notified sectoral policy/caps or under sectors in which FDI is not permitted.FDI
policy is reviewed on an ongoing basis and measures for its further
liberalization are taken. Change in sectoral policy/ sectoral equity cap is
notified from time to time through Press Notes by the Secretariat for
Industrial Assistance (SIA) in the Department of Industrial Policy &
Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA. 

 

7.1 REFORMS MADE BY THE GOVERNMENT FOR FDI IN INDIA

 

1.      Procedure under automatic
route

2.      Procedure under Government
Approval

3.      Prohibited Sectors

4.      General permission of RBI
under FEMA

5.      Industrial Licensing

6.      Procedure for obtaining an
industrial license

7.      Small Scale Sector

8.      Locational restrictions

9.      Environmental Clearances

10.       Foreign currency convertible Bonds

11.  Eligibility

12.      
Preference
shares

13.  FDI  IN  EOUs/
SEZs/Industrial Park /EHTP/ STP  Special
Economic Zones (SEZs)

14.  Industrial Park 

15.   Strong Debt Markets:

16.  Strong Deal destination:

17.  Robust Insurance Sector:

18.  DTAA:

 

 

India has among the most
liberal and transparent policies on FDI among the emerging economies. FDI up to
100% is allowed under the automatic route in all activities/sectors except the
following, which require prior approval of the Government:-
Sectors prohibited for FDI

Activities/items that require an industrial license
Proposals in which the foreign collaborator has an
existing financial/technical collaboration in India in the same field
Proposals for acquisitions of shares in an existing
Indian company in financial service sector and where Securities and
Exchange Board of India (substantial acquisition of shares and takeovers)
regulations, 1997 is attracted)
All proposals falling outside notified sectoral
policy/CAPS under sectors in which FDI is not permitted

Most
of the sectors fall under the automatic route for FDI. In these sectors, investment
could be made without approval of the central government. The sectors that are
not in the automatic route, investment requires prior approval of the Central
Government. The approval in granted by Foreign Investment Promotion Board
(FIPB). In few sectors, FDI is not allowed. 

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