Potential and Opportunity Foreign Direct Investment

Question: Discuss about the Potential and Opportunity for Foreign Direct Investment. Answer: Introduction: According to the International Monetary Fund, India is one of the fastest growing economies in the world. Similarly, an economic survey between 2015 and 2016 suggests that its growth will continue at beyond 7 percent in the preceding 2016-2017 financial year regardless of the uncertainties in the global market (Overview 2016). Additionally, India has been ranked as the nation with the highest consumer confidence globally. Primarily, the improvement in the countrys economic performance is attributed to the combined effort of strong government reforms, benign global commodity prices, and RBIs inflation focus. Since its independence, the nation has brought about a landmark of the agricultural development that has significantly transformed the nation from over reliance on imports to a net exporter. As a result, the life expectancy in the country has doubled. Similarly, the literacy levels have improved and increased tremendously. Health conditions have also improved. Over time, a significant middle class has developed in the country. Today, India is home to internationally recognized companies in sectors such as the pharmaceuticals, information and space technologies and even the steel industry (India Economic Review 2016). Additionally, the country is developing a voice on the international stage. There are also many foreign companies that have moved their operations to India. This is attributed to the numerous initiatives in the country such as the Digital India and the Make in India Initiative. The Make in India program formed with the goal of improving the manufacturing sector of the Indian economy. Over time, the program is expected to enhance the purchasing power of the average consumer. In turn, this would enhance demand and lead to economic growth. Likewise, the Digital India initiative emphasizes on the establishment of digital infrastructure, increase digital literacy and deliver services digitally. Furthermore, the Indian government has created various plans for the resolution and reforms of the pending tax disputes. In turn, this has created a platform to reform tax problems and encourage investors to invest in the country. It is noteworthy that the government has completed the double taxation avoidance agreement negotiations with the Government of Cyprus (India Country Profile 2016). The aftermath of these negotiations is expected to enhance greater development in business and economic relationships among the two nations. The Union cabinet has sanctioned the launching of a Funds for Funds Startup that would extend financial support to startups to boost private enterprise in India. Additionally, the Indian government has marked sustainability as a key objective in the development of India. In order to achieve this, the government has instigated initiatives to encourage skill development, education, entrepreneurship and digital connectivity in a sustainable manner. Further, the Indian government intends to build new railway links with countries such as Nepal. In the long run, such links will boost the nations economic ties with neighboring countries and promote prosperity, sustained growth, and employment in the region. The Political Economy of India The political economy of India gradually transformed with the liberalization of its economy during the 1990s (Bideleux 2013). However, before liberalization, the countrys development was based on the socialist-inspired policies that were prominent after independence. At the time, the economy was characterized by state ownership of various sectors, red tape, and strict regulations. Today, the country has transformed into a market-based system. The system now focuses on public sector reforms, the removal of labor regulations, agricultural advancements, rural development and national reforms. The Indian political economy also includes reforms for the construction of a network of highways. The liberalization of the economy of India was instigated in the 1980S by Prime Minister Rajiv Gandhi. In 1991, the IMF denied India funding due to its inability to repay its loans. As a result, the prime minister came up with new reforms to encourage growth in the country. The new reforms opened the path for easier international trade, privatization of industries, foreign investments, and deregulation policies. In addition, inflation control measure and tax reforms were created. Since then, liberalization in India has remained the same regardless of the party that heads the government. It is, however, noteworthy that no reforms have been made to the labor laws or the reduction of agricultural subsidies. India is among the largest democracies and is governed by a federal government administration. The political environment is mainly influenced by aspects such as government policies, politicians interests, and the ideologies of several political parties. In this regard, the business environment is affected by many political factors. Its taxation system is imposed governed by the Union Government. The main form of taxes includes service tax, sales tax, and income tax. The local authorities govern and control the collection of taxes such as sales tax and octroi. Privatization is also a component of the political environment, but the government emphasizes on free trade through various programs. Socio-cultural factors in India The general agreement among experts is that the socio-cultural impact on the general behavior and nature of the people of India is significant (Shivani, Mukherjee Sharan 2006). The country has an incessant history that is greater than 3000 years with strong historical and cultural roots. Religion is a crucial and vital part of the Indian culture. Therefore, businessmen must respect religion in order to conduct business in this country successfully. The idea of Karma remains significant in business decision making and has great influence on the peoples perception of time. For this reason, negotiations are done carefully and may take longer than those in other countries. In addition, Indians are more receptive to the idea of hierarchy and power distance that may prevail among a group of people. Business interactions are often indirect, and participants strive to maintain peace. The Indians appreciate punctuality. Often, business appointments are organized for an early afternoon or late morning. During negotiations, deadlines are not rushed, and impatience is regarded as disrespectful and aggressive. Normally, business meeting begins with friendly small talk that may include personal questions (Venkatesh 1994). This is usually the case to build trust and understanding before embarking on serious business. Typically, disagreements during business meetings are not expressed directly. Instead, non-verbal cues and other forms of indirect communication are employed. Technological Influences in India Indias technological background is a major driving force in the achievements of the country. The government of India has installed a strategic plan whose primacy is the expansion of research and development in Indian universities. In turn, this creates great prospects in the scientific fields of study. As at 2013, India was the last among the BRIC countries with a gross expenditure of less than 1 percent in the field of research and development. However, the low costs and strong support for RD through progressive legislation has made India a great place for the investment of RD. A study analyzing the exports of technology in developing nations ranked India as the most profound and diverse with regards to capability and basic design of products. By and large, India has the capability to offer the operating knowledge to set up and operate industries. It can also provide the design and manufacture of the plant and equipment designed according to the specifications of the client. As such, India possesses both the know-how and know-whys of technological innovations. The nation's achievement are viewed as great due to the fact that India seems to have the least dependence on foreign technology (Mallampally Saunavent 1999). India is also has 3G and 4G connectivity. It is this form of technology that has facilitated technological projects in the country. Besides, the nation has one of the strongest Information Technology (IT) sectors in the world. Consequently, this ensures that there are continual IT development, technological improvements, and software upgrades within the nation. Additionally, the intensive national transportation system act as a significant factor in boosting trade in the country. Recently, India attempted to launch their satellites into space. Natural Resources and Factor Endowments that Create Competitive Advantage Today, India remains as one of the fastest emerging economic power having a great endowment of both the natural and human resources. The main factor endowments that have contributed to the countrys economic growth include the natural resources, human resources, capital formation and technology. The human resources in India comprise of the labor supply, education, and motivation among the skilled and unskilled labor force. On the other hand, natural resources in India includes factors such as land, minerals, environmental quality and fuels. Capital formation refers to the availability of roads, machines and factories in the country for production purposes. Lastly, technological endowments refer to factors such as science, engineering, entrepreneurship and management factors (Resources in India 2016). It is noteworthy that India contains a multitude of resources and its economy is heavily dependent on their export and consumption. Land that can be cultivated is approximated as being about 56.78 percent of Indias total land mass (Resources in India 2016). In addition, the nation is endowed with the fourth largest coal reserve in the world. It also has iron ore, zinc, manganese ore, diamonds, natural gas, and chromite. Indias oil reserve in Bombay High and in eastern Assam provide and meets 25 percent of the domestic demand (Resources in India 2016). In addition to the minerals, the nation is endowed with great forest products. It is the possession of these factors of production that allow the country to produce goods and services for local consumption and export at a low cost (India 2016). This, in turn, gives the country competitive advantage against other countries that lack resources. Foreign Currency and Exchange Influences Transactions of foreign exchange in India are more relaxed with the Foreign Exchange Management Act, 1999 (FEMA). The Act was set into operation in June 2000 (Patel et al. 2014). Today, foreign exchange dealers in India have the power and mandate to make all forms of transfers in foreign exchange with respect to the prevailing rules. Initial, the requirements necessitated that exchange dealer to seek permission from the Reserve Bank of India have been eliminated for a majority of the foreign exchange transactions. Furthermore, the exchange bureaus and authorized foreign exchange dealers can buy from and sell to public foreign currency coins and notes at the prevailing rates of exchange as determined by the market conditions (Chand 2016). Similarly, exchanges of foreign currency between authorized dealers and money changers are also done at the rates determined by market conditions (Chand 2016). The rate of exchange is determined by various factors in the market. Inflation rates, the prevailing interest rates, the countrys balance of payments and government debt may decrease or increase the value of the Indian rupee against other nations currencies. Similarly, economic recessions, speculation, and political stability may influence the exchange rate. Policies, Incentives, and Barriers to FDI in India FDI has become a vital source of private external finance for most developing nations. In India, there are various policies put in place with regard to FDIs in the country. The attitude towards inward FDI has changed over the past years, and India has liberalized its policies to entice the investments from foreign firms (Dadush 2013). The expectation is that FDI will lead to increased levels of employments, tax revenue, and even exports. As a result, India offers incentives to encourage foreign firms to invest within India (Framework 2016). The enticements include preferential loans to MNCs, grants, market preferences and infrastructure. For highly efficient firms, they are provided them with monopoly powers (Incentives 2016). Trade Barriers Regardless of the Incentives, there are trade barriers that may discourage FDI in India. Particularly, trade in India is characterized by many bureaucratic delays, corruption, and inadequate infrastructure. Also, the cultural differences between the foreign firms and the local people may pose a significant challenge for foreign investors. In addition, the nation has significant tariff barriers that may discourage FDI (Trade Barriers 2010). As such, tariffs vary from one sector to another. There are also non-tariff barriers that may hinder trade. Although tariff rates have reduced over time, they are still high compared to other countries. India is also characterized by extremely high levels of import duties of approximately 180 percent (Bimal 2014). There are also import restrictions and prohibitions on certain items of trade. Therefore, certification may be required before a foreign firm completely starts its operation in India (Bimal 2014). In addition, India is associated with exit barriers for firms and strict labor laws that may be very harsh for FDI. What is more, the poor quality infrastructure in the country and the limited scale of EPZs may make the country an unappealing investment destination for foreign direct investment (Bajpai Sachs 2000). Recommendations The economic conditions in India are promising and have prospects for improvement. To maintain this situation, the government has to focus on convincing foreign companies and private investors that are unlikely to consider any form of investment in the country that India is the best investment destination (Panagariya 2008). It should also nurture the already existing foreign investors in the country and plan to continue to build a positive working and operational environment for these firms. Most importantly, India should reconsider its trade barriers and purpose to remove the most stringent barriers that may discourage FDI in the country. This way, India will guarantee that the country will be a favorite destination for FDI. Today, India boasts a vibrant private and public sector of business that is continuously attracting foreign direct Investment. It is one of the fastest developing economies in the world. Forecasts show that its GDP is expected to continue growing due to better policy reforms, lower food prices, and increased investor confidence. India has been proactive in implementing programs and initiatives that encourage economic growth in the nation through trade agreements and alliances, infrastructural change, and incentives for FDI in the country. Consequently, numerous foreign companies are setting up their operations in the country. The standards of living have also improved, and a middle class of citizens has emerged. Even so, there are various barriers to trade in India that may pose significant barriers to FDI in India. As such, the country has stringent trade policies with regards to imports and imposes high tariffs and import duties on imports. There are also many restrictions and barriers to exit that may restrict foreign companies operations in India. Additionally, strict labor laws in India may act as a disincentive for foreign investors to move their production operations to the country. Apart from the barriers, there are government incentives set in place to encourage FDI. Incentives include grants, monopoly power, and even market preferences. Today, India stands out as an attractive destination for FDI with great prospects for growth and high profitability. References Bajpai, N., and Sachs, JD (2000). Foreign Direct Investment in India: Issues and Problems. [Online] Columbia University Libraries. Available from: https://academiccommons.columbia.edu/catalog/ac:123752 [Accessed 9 Dec. 2016]. BBC News (2016), India country profile [Online] Available at: https://www.bbc.com/news/world-south-asia-12557384 [Accessed 9 Dec. 2016]. Bideleux, R (2013), India's Political Economy: a Cultural Perspective. [Online] Academic Foresights. Available at: https://www.academic-foresights.com/Indias_Political_Economy.html [Accessed 9 Dec. 2016]. 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