A Critical Analysis of Fdi in India

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Foreign Direct Investment: A Critical Analysis of FDI from 1991-2005

Kulwindar Singh Centre for Civil Society, New Delhi Research Internship Programme, 2005

The Concept of Foreign Direct Investment is now a part of India’s economic future but the term remains vague to many, despite the profound effects on the economy. Despite the extensive studies on FDI, there has been little illumination forthcoming and it remains a contentious topic. The paper explores the uneven beginnings of FDI, in India and examines the developments (economic and political) relating to the trends in two sectors: Industry and Infrastructure and sub sector Telecom, to illustrate that.

Centre for Civil Society


Table of Contents

Introduction Uneven Beginning Maintaining the Flow Another Beginning Sector Analysis Significant Change versus Struggling On Understanding FDI A Procedural Battle FDI Redux Sub sector: Telecommunications FDI Culture Conclusion Annexure Bibliography

3 4 8 9 10 10 12 13 15 15 16 19 20 23

There is hardly a facet of the Indian psyche that the concept of ‘foreign’ has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Centre for Civil Society


Indian Government in 1991. Contrary to the grand narrative ‘opening of flood-gates idea’ of 1991, what took place was a gradual process of changes in policies on investment in certain sub-sections of the Indian economy. As a result of controversy surrounding Foreign Direct Investment owing to a lack of understanding, it has become the eye of a political storm. The paper aims to present a unique understanding of FDI in the context of liberalisation and the prevailing political climate. FDI eludes definition owing to the presence of many authorities: Organisation for Economic Co-operation and Development (OCED), International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) and United Nations Conference on Trade and Development (UNCTAD). All these bodies attempt to illustrate the nature of FDI with certain measuring methodologies. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are “usually preferred over other forms of external finance because they are nondebt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.”1 It is furthermore described as a source of economic development, modernization, and employment generation, whereby the overall benefits (dependant on the policies of the host government) …triggers technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.2 Changes in the national political climate have precipitated a marked trend towards greater acceptability of FDI. The envisioned role of FDI has evolved from that of a tool to solve the crisis under the license raj system to that of a modernising force that has been given special agencies and extensive discourse. This evolution is illustrated by analysis of the Economic policies of the Indian government from 1991 to 2005. The primary focus of this analysis will be towards the industrial and infrastructural sectors which form the beginning of the gradual liberalization process that was started in 1991. A complete understanding of these two sectors will provide interesting statistics and information regarding trends of FDI.

Uneven Beginning
In most narratives on India’s liberalization, 1991 has acquired a revolutionary status as a time of...
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