Indias Attitude Towards Foreign Investment Economics Essay

India follows a system called the Westminster model which is basically a democratic parliamentary system of government which is modeled after the UK political system. The supreme body of India is the parliament which consists of two houses; The Rajya Sabha & the Lok Sabha which is the upper house and the lower house respectively. The Indian government is formed when a particular political party or a combination of parties wins the Lok Sabha national elections by securing the majority votes. The constitutional head of India is the president and the executive head is the prime minister.

1. India’s attitude towards foreign investment:

Factors that help in influencing, attracting and increasing foreign investment in India:

Attractiveness of the country itself.

India has available a lot of potential market and high levels of GDP.

They have a skilled work force which comes with low labor costs and wages.

What’s attractive is that the taxation level is relatively lower in comparison to other markets of investment like US, UK, Europe etc.

Initially to get the approval for FDI in India the proposals for FDI must be approved by two bodies, the Foreign Investment Promotion board and the Reserve Bank of India. India’s attitude towards FDI has drastically changed during the past decade. Earlier FDI was allowed only in situations where in which a particular technology required for an operation wasn’t available or obtainable which resulted in a lesser number of firms showing interest in investing within the Indian market. But the situation changed when the Industrial Policy Statement was introduced, the Indian government moved onto taking a further liberal attitude towards FDI in India.

In particular industries which had high priority, automatic FDI approval was established up to 51% for FDI and also in trading companies primarily engaged in activities of export. Later the government of India further liberalized the FDI policy and now a 100% FDI for existing and new firms is permitted and does not require prior approval.

Just like most of the developing countries and their economies, the Republic of India to a great extent requires foreign direct investment in businesses and infrastructure.

In the Global FDI’s as of 2010 India has been ranked 2nd and is said to continue to be among the top 5 places for international investors to invest in. in the same year they survey of the Japan bank for international cooperation also ranked India 2nd as the country showed a lot of potential for international business operations. Along with the above mentioned India ranked the 4th most attractive FDI Destination for 2010 as per Ernst and Young’s Survey of Attractive Investment Destinations.

The government’s economic policy as it affects foreign business:

From the years 1945-1979 the government created industries run by states which in turn formed public corporations. By doing so this gave the government a chance to interfere with the economy easily. However after this period we saw a whole new era of privatization where in which to create a much more competitive environment for businesses, the industries were sold away to private shareholders.

Some areas of the government’s economic policy are:

Taxes – A policy on tax goes side by side with the costs of the foreign businesses. If there’s a raise in a particular tax say for example corporation tax on the firm’s profits it would affect and increase the costs in the same way. Businesses then have to share this cost burden with their consumers by hiking their prices.

There are other business taxes such as value added tax (VAT) and the environmental taxes. Value added tax is passed down to the buyer itself but acts as a cost for the firm in terms of administration of the VAT system.

Interest rates- In India the interest rates are set by the Indian monetary policy committee appointed by the government. When rates rise it increases the costs to firm’s of borrowing money and at the same time leads to a drop in sales as its makes consumers reduce their expenditure.

India was in a tight situation due to their set economic policies and it came to a time where the IMF and World Bank had to intervene and bail India out and change from a regulated regime to a free market economy. A series of economic policies were announced which included the devaluation of the in Indian rupee, a new and improved industrial, trade and fiscal policy and FDI was liberalized. This made India to be considered as one of the few emerging nations. The World Bank has forecasted that by the year 2020, India could possibly be the fourth largest economy in the world.

Findings and Recommendations:

With changes of each government there comes a change in the economic policies as well. Poor collaboration between the state and central governments also affect the firm’s growth. Not having a stable government environment disturbs the political and economic stability of India and hinders the possibility of MNC’s entering and investing in the Indian market. However, when India was financially liberated the situation changed. The Government relaxed their policies and also made a constant effort to be a magnet for foreign investors. India has a consumer base of over 1.2 billion people where in which Walt Disney can look as a potential profit pool and should consider not only giving India a try but also take advantage of the new FDI policies and overlook the obstacles.