Free «Foreign Direct Investment and Trade in India» Essay Sample

Foreign Direct Investment and Trade in India

While a minor global FDI player in 2000, India is now the world’s 13th largest host of foreign domestic investment. In 2008, India attracted the inflows of $42 billion and $27 billion in 2009, which made it one of the top three global preferred investment destinations. This research provides an expanded view of the relationship between India’s EG and FDI. The study will also analyse the factors, on which FDI is built and see how they interrelate to achieve developments in the economy.

Factors that Attract Foreign Investors to India

Size of the Economy

The size of the population is a major determinant that attracts foreign investors. For example, a small country like North Korea will be disregarded since investors will prefer a larger country like India or China in terms of population and opportunity of the market. India, with its population of more than 1 billion people, has seen more than 7% economic growth in the last decade.

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Highly Qualified Workforce

India has one of the largest workforces in the world - 430 million. Moreover, it has the world’s third-largest skilled labour force due to the large numbers of institutions of higher learning such as tertiary colleges and universities where the English language is studied extensively. Some industries, such as drug pharmaceuticals and engineering, require highly skilled and qualified workforce who can communicate in English. This makes India an attractive country for foreign companies that seek for high skilled workers with low wages to outsource and invest (Mondal, n.d.)

Low Wage Rates

Although India has a workforce of 430 million people, a significant part of the population is uneducated, which forms the unskilled labour sector. One of the major incentives of multinational companies to invest is the availability of mass labour for large-scale production for lower wages, for example, the textile industry. Therefore, India is a convenient country for such investments.

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Transport and Infrastructure

The central and state government in India have increased infrastructural budget spending in the last 10 years. For example, India has spent $59,7 billion in the past two and a half years to build world-class highways and shipping systems, which has caused an increase in FDI. A well-developed infrastructure reduces the transport costs for the distribution of goods and services throughout the country and the whole world market. Therefore, these factors attract investors.

Access to Capital and Financial Institutional Support

India has a well-developed banking system as well as an extensive road system that allows access to rural countryside regions. However, India’s stock market has attracted large corporations, while the small and mid-sized companies have not been tapped enough. Consequently, there has been a rise in financial institutions that offer capital to small and medium enterprises, thus resulting an increase in outsourcing of investment managers who have the skills to identify and research such industries to maximize available opportunities (Siva, 2016)

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India’s Stock Markets Meet World-class Standards

The first Asian stock market was the Bombay Stock Exchange (BSE) founded in Mumbai, India in 1875. After the 1991 economic crisis, the Indian capital market has grown tremendously, with over 6,000 companies listed in two stock markets that are the biggest ones in the world. About 2,000 of these companies trade daily, and the sector is estimated at $2 trillion, which is a major incentive to foreign investors.

Leading Location for Manufacturing Facilities

The manufacturing industry in India mostly targets the domestic market, and the country intends to generate 25% of the GDP by 2020 from manufacturing products. This will involve internal research in the industry to modernize the manufacturing infrastructure.

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Political Stability

India provides a business-friendly political environment, which is a major concern amongst investors. Indian Prime Minister Narendra Modi has been vocal in creating political stability and has attributed the growth to strong reform measures, generated by a favorable political environment.

Support for Innovation and Youth Demography

India’s more than half of the population is comprised of youths below 25 years of age. The International Monetary Fund (IMF) has calculated an annual increase of GDP by 2% as the result of government’s emphasis on youth innovations since the young generations are more educated and technology savvy.


India is expected to have 69 cities by the year 2025 with populations exceeding one million in each city. This will create a wide market for products and services for both local and foreign investors

The Trade Policy in India

  1. The document prerequisite for foreign investors to conduct business in India are passport with the date of births of the holders, some address proof (driving license, bank statement, residence card, or government proof of identity containing address) (Sharma, 2016). Furthermore, investors must provide passport photos, sample signature, resident proof (bank statement, mobile phone bill or any bill that can prove one’s residency status), and registered office address of the company (Sharma, 2016).
  2. Any company can invest in any sector of the economy in India apart from the prohibited sectors such as gambling and betting and lottery business as well as manufacture of cigarettes. These government-controlled sectors are also closed to investors – nuclear energy, construction of roads, bridges, or other forms real estate developments as well as nidhi companies and chit funds.
  3. Taxes, duties, fees, and levies are collected by the Government of India. The following are applicable to new businesses establishing operations in India: during first five years, export revenue in Special Economic Zones receives 100% income tax exempt. After this, this sum is reduced by half for five years more. Finally, 50% of back export income can be credited to Special Economic Zones Reinvestment Reserve Account (SupportBiz Bureau, 2014).

Trade Agreements Between India and the UAE

  1. MOU between the Military of Defence of India and the Ministry of Defence of the UAE on the cooperation of military and defence, which allows the sharing of new technology and armaments in the military sector.
  2. An agreement between the Governments of India and the UAE on promoting marine transport, which eases the clearance of ships at the ports and other marine activities.
  3. An agreement between the Ministry of Roads and Transport of India and the Federal Authority of Transport of the UAE to build a good cooperation in the transport and infrastructure industry in order to facilitate a smooth movement of goods and services as well as the sharing technology to achieve the optimum benefits of the sector.
  4. MOU between the Government of India and the Government of the UAE to curb the human trafficking between both nations, which will help rescue women and children from slavery.
  5. An agreement between the Ministry of Economy of the UAE and the State Department of Small and Medium Enterprises of India to promote the growth of small and medium enterprises between both countries through the sharing of information and reducing the bureaucracy and documentation, required in opening SMEs.
  6. MOU between the Ministry of Agriculture of India and the Ministry of Climate change of the UAE to share information on the modern practices of farming and crop production to maximize yield.
  7. An agreement between Abu Dhabi National Oil Company and Indian Strategic Reserves Management, according to which India stores and manages crude oil for the UAE, which strengthens bilateral relations in the field of energy.
  8. An agreement between both countries on developing a strategic partnership to hold a generalized mutual cooperation on any issues affecting them.

Recommendations on Improving the Trade Policy in India

  1. Encourage states to participate in the export industry. In India, such two states as Gujarat and Maharashtra contribute towards 45% of the country’s exports merchandise, according to the Associated Chambers of Commerce of India. The government can improve infrastructure, which will increase accessibility of all regions and open the trade systems.
  2. Streamline the tax on trade policy. India’s tariff rates are relatively higher than neighbouring Asian ones at 10.1%. To obtain a suitable trade policy, a streamlined tax regime will enable policy-makers to develop rules that will reduce the import duty.

Recommendations on Encouraging FDI in India

  1. Decrease bureaucracy and increase fight against corruption. Investment policies by the Indian government take time to implement, thus limiting the fast-paced growth of the sector through time spent in approving bills and developing strict rules and regulations regarding corrupt government officials.
  2. State levied taxes also hinder the growth of the industry since taxes are chargeable when transporting goods from one state to another. The state can overcome this obstacle by eliminating interstate taxes

Positive Impacts of Foreign Direct Investments in India

  1. A stimulation of economic activity. FDI has brought large multinational corporations that understand the laws of consumption and the existence of diversified products (Banerji, 2013) as well as creating income, which encourages consumption
  2. The incentive to local companies. The presence of multinationals has challenged local companies to be more efficient in order to be able to compete effectively.
  3. Employment creation. Large corporations, which have opened branches in India, have created numerous jobs for the locals, and this has caused the growth in disposable income.
  4. Revenue to India. FDI brings in revenue through taxation as well as the purchase of local raw materials from suppliers.
  5. Localities can save time and money on upgrading infrastructure since companies with FDI will provide all their equipment that will only need servicing.
  6. India can benefit from working with more developed countries with FDI since they can bring new ideas to the host country.


India has experienced a tremendous growth in FDI since 1991 economic crisis. However, in the recent years, this growth has stagnated due to various modern obstacles arising from an unfavourable tax policy. In the conditions of growing globalization and competition for superiority between countries, India has decided to continue the growth in FDI since it has been identified as one pillar prerequisite in economic growth. With appropriate amendments, India is quite capable of growing into an economic giant of the global scale.

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