Evaluate the policy of Government of India with regard to foreign investment in the country. Do you feel that there is a need for control of their activities?

Evolution of India’s FDI Policy

Prior to 1991, India followed a restrictive FDI policy, prioritizing self-reliance. The balance of payments crisis in 1991 forced India to embrace liberalization, including opening up to FDI. Key milestones include:

• 1991: Initial reforms allowing FDI in select sectors, primarily export-oriented and infrastructure.
• 2000s: Gradual liberalization across various sectors, including telecom, retail, and financial services.
• 2014 onwards: ‘Make in India’ initiative and further easing of FDI norms, particularly in manufacturing and services. Automatic route for many sectors, reducing bureaucratic hurdles.
• Recent Changes (2020-24): Increased scrutiny of investments from bordering countries, particularly China, citing national security concerns. Introduction of the National Security Doctrine for FDI.

Benefits of FDI

FDI has brought numerous benefits to the Indian economy:

• Economic Growth: FDI contributes to capital formation, boosting GDP growth.
• Technology Transfer: Foreign companies often bring advanced technologies and managerial expertise.
• Employment Generation: FDI creates direct and indirect employment opportunities.
• Infrastructure Development: FDI is crucial for funding infrastructure projects.
• Increased Competition: FDI fosters competition, leading to improved efficiency and lower prices.

For example, the automotive sector has benefited significantly from FDI, with companies like Maruti Suzuki and Hyundai contributing to both economic growth and employment.

Concerns Regarding FDI

Despite the benefits, FDI also raises several concerns:

• Dependence: Excessive reliance on FDI can make the economy vulnerable to external shocks.
• Crowding Out: FDI can potentially crowd out domestic industries, particularly small and medium enterprises (SMEs).
• National Security: Investments in sensitive sectors like telecom and defense can pose national security risks.
• Exploitation of Resources: Concerns about environmental degradation and exploitation of natural resources.
• Repatriation of Profits: Large-scale repatriation of profits can negatively impact the balance of payments.

The takeover of Indian companies by foreign entities, even in strategic sectors, has raised concerns about loss of control and potential job losses.

Need for Control and Mechanisms

Given the potential risks, some degree of control over FDI activities is necessary. However, this control should be balanced to avoid deterring investment. Mechanisms for effective regulation include:

• Sectoral Caps: Maintaining sectoral caps on FDI in sensitive sectors.
• Security Clearances: Rigorous security clearances for investments from countries with geopolitical concerns.
• Performance-Based Incentives: Linking FDI approvals to specific performance criteria, such as export targets and technology transfer.
• Monitoring and Enforcement: Strengthening monitoring mechanisms to ensure compliance with FDI regulations.
• National Security Vetting: Establishing a robust national security vetting process for all FDI proposals, particularly those involving critical infrastructure.

The government’s recent amendments to the FDI policy, particularly those related to investments from neighboring countries, reflect a growing recognition of the need for greater control.

Aspect	Pre-1991	Post-1991
FDI Policy	Restrictive, import substitution	Liberalized, export-oriented
Sectoral Caps	Generally prohibited	Gradually relaxed, varying by sector
Approval Process	Complex, bureaucratic	Streamlined, automatic route for many sectors