Evaluate the role of FDI in contributing economic growth of India.

Historical Trends and Current Status of FDI in India

Prior to 1991, FDI inflows were restricted due to a closed-door economic policy. The liberalization reforms initiated in 1991 significantly opened up the Indian economy, leading to a gradual increase in FDI. The initial focus was on infrastructure, financial services, and the telecom sector. Post-2014, the government has actively promoted FDI through policy reforms like easing FDI norms, streamlining approval processes, and focusing on ‘Make in India’ initiative. Currently, major FDI contributors include Mauritius, Netherlands, USA, UK, and Singapore. Sectorally, services, computer software & hardware, and manufacturing attract the largest share of FDI.

Positive Impacts of FDI on Economic Growth

• Capital Formation: FDI supplements domestic investment, bridging the savings-investment gap and boosting capital formation. This leads to increased productive capacity and higher economic growth rates.
• Technology Transfer: FDI often brings advanced technologies, managerial expertise, and innovative practices, enhancing productivity and competitiveness of domestic firms.
• Employment Generation: FDI creates direct and indirect employment opportunities, particularly in manufacturing and service sectors.
• Infrastructure Development: FDI in infrastructure projects (roads, ports, power) improves connectivity, reduces logistics costs, and facilitates economic activity.
• Increased Competition: FDI promotes competition in the domestic market, leading to improved efficiency, lower prices, and better quality products.
• Export Promotion: FDI can boost exports by establishing export-oriented industries and integrating domestic firms into global value chains.

Sectoral Contribution of FDI

Sector	Cumulative FDI Inflow (April 2000 – March 2023) (USD Billion)	Percentage Share
Services Sector	92.84	24.28%
Computer Software & Hardware	83.92	22.03%
Manufacturing	78.89	20.73%
Construction Activities	51.47	13.51%
Financial Services	36.69	9.62%

(Source: Department for Promotion of Industry and Internal Trade (DPIIT), as of knowledge cutoff 2023)

Potential Drawbacks and Challenges

• Crowding Out Effect: FDI in certain sectors might crowd out domestic investment, particularly for small and medium enterprises (SMEs) lacking the resources to compete.
• Income Inequality: The benefits of FDI may not be evenly distributed, potentially exacerbating income inequality. Skilled labor and capital owners tend to benefit more than unskilled workers.
• Repatriation of Profits: Repatriation of profits by foreign companies can lead to outflow of capital from the country.
• Dependence on External Factors: FDI flows are vulnerable to global economic conditions, geopolitical risks, and changes in investor sentiment.
• Environmental Concerns: Certain FDI projects may have negative environmental impacts if not properly regulated.

Government Policies to Promote FDI

• Automatic Route: Most sectors allow FDI under the automatic route, eliminating the need for government approval.
• Liberalized FDI Norms: The government has progressively liberalized FDI norms in various sectors, including retail, insurance, and defense.
• Production Linked Incentive (PLI) Scheme: The PLI scheme incentivizes domestic manufacturing and attracts FDI in key sectors.
• National Single Window System (NSWS): A digital platform to facilitate investment approvals and clearances.
• Focus on Ease of Doing Business: The government has undertaken various reforms to improve the ease of doing business in India, making it more attractive for foreign investors.