Role of Foreign Capital and Multinational companies in Indian Economy

<2/”>a >The development of any Society or country without Economic Development is a myth. Economic development brings prosperity which in turns is directly proportional to the amount of goods and Services produced quantitatively or in broad sense we can say in Money equivalent.

So the factor of production depends on the following parameters.

  • Land
  • Labour
  • Capital

 

 

For a country like India which is the second largest populous country in the world, expected to become most populous by 2050 if Population Growth is continuing at the current pace, where labour is available in abundance. Similarly, land is also available where more economic prosperity can be brought than the currently pursued economic activity. So after considering all these factors, capital played a crucial role.

 

So to fulfill the aspirations of common masses and general wellbeing of the society various governments are competing against each other to attract the foreign capital.

 

 

 

This theory is particularly gained ground after the Latin American crises which resulted in the Washington Consensus/Washington model. This is further ascertained by East Asian miracle. India has also experienced the taste of after Economic Reforms of 1991, which is better known as LPG Reforms. However from the experience of various countries various model of foreign capital and model have emerged. It also requires some kind of reduction regulation and restraint.

 

Why there is a need of foreign capital?

 

Foreign capital is required because of following reasons.

  1. Inadequate domestic capital to fuel the economic growth.

Foreign capital is perceived as a resource of filling the gap of the capital scarce country. It helps in maintaining the Foreign Exchange, accelerating government revenue, planning the Investment necessary to achieve development target.

For example ‘Savings-investment’ gap

To achieve a planned growth rate of 7 percent per annum and the capital-output ration of 3 percent, rate of saving should be 21 percent. For domestic mobilization of 16 percent, there will be a shortfall of 5 percent. Thus the foremost contribution of foreign capital to national development is its role in filling the resource gap between targeted investment and locally mobilized savings.

 

 

 

  1. Stability of Foreign exchange.

Foreign capital is needed to fill the gap between the targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. This is generally called the foreign exchange or trade gap.

  1. Reducing the Balance of Payment deficit.

An inflow of private foreign capital helps in removing deficit in the Balance of Payments over time if the foreign-owned enterprise can generate a net positive flow of export earnings.

  1. Helps in realizing the estimated tax revenue of government

The third gap that the foreign capital and specifically, foreign investment helps to fill is that between governmental tax revenue and the locally raised taxes. By taxing the profits of the foreign enterprises the governments of developing countries are able to mobilize funds for projects (like energy, Infrastructure-2/”>INFRASTRUCTURE) that are badly needed for economic development.

  1. Foreign investment meets the gap in management, Entrepreneurship, technology and skill.

These can be transferred to the host country through suitable training programmes and the processes. Further foreign companies bring with them

 

 

 

sophisticated technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.

In fact, in this era of Globalization/”>Globalization-3/”>Globalization, there is a general belief that foreign capital transforms the productive structures of the developing economics leading to high rates of growth. Besides the above, foreign capital, by creating new productive assets, contributes to the generation of EMPLOYMENT a prime need of a country like India.

Forms and types of foreign Capital

Foreign capital flow in a country can take place either in the form of investment, concessional assistance, foreign aid.

  1. Foreign Investment includes Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII).

FPI includes the amounts raised by Indian corporate through Euro Equities, Global Depository Receipts (GDR’s), and American Depository Receipts (ADR’s).

  1. Non-Concessional Assistance mainly includes External Commercial Borrowings (ECB’s), loans from governments of other countries/multilateral agencies on market terms and deposits obtained from Non-Resident Indians (NRIs).

 

 

 

  1. Concessional Assistance includes grants and loans obtained at low rates of interest with long maturity periods. Such assistance is generally provided on a bilateral basis or through multilateral agencies like the World Bank, International Monetary Fund (IMF), and International Development Association (IDA) etc.

Grants do not carry any obligation of repayment and are mostly made available to meet some temporary crisis. Foreign Aid can also be received in terms of direct supplies of agricultural commodities or industrial raw materials to overcome temporary shortages in the economy. Foreign Aid may also be given in the form of technical assistance.

 

 

 

 

 

 

 

 

 

 

 

Role of Multinational Corporations in the Indian Economy

Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre-reform period the Indian economy was dominated by public enterprises.

Earlier Industries and firms are regulated through Industrial Policy, 1956 put some kind of restraint on private firms, as a consequence of which they didn’t able to expand beyond a limit.

While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play much role in the Indian economy where import-substitution development strategy was followed. Since 1991, with the adoption of industrial policy of Liberalization-2/”>Liberalization, Privatization

And globalization role of private foreign capital has been recognized as important for rapid growth of the Indian economy. So Multinational corporations have been allowed to operate in India subjected to some regulations.

 

Impact of Multinational countries on the country and general population.

  1. Promotion Foreign Investment:

In the recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a

 

larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India.

The liberalized foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects. However, in some industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like domestic investment, foreign investment has also a multiplier effect on income and employment in a country.

For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are employed in dealer firms who sell Maruti cars.

Moreover, many Intermediate Goods are supplied by Indian suppliers to Maruti Udyog and for this many workers are employed by them to manufacture various parts and components used in Maruti cars. Thus their incomes also go up by investment by a Japanese multinational in Maruti Udyog Limited in India.

2. Non-Debt Creating Capital inflows:

In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on External Commercial Borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of External Debt and debt service payments reached an alarming figure of our Current Account receipts.

 

 

 

This created doubts about our ability to fulfill our debt obligations and there was a flight of capital from

India and this resulted in balance of payments crisis in 1991. As direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments. Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate Thus, MNCs can play an important role in reducing Stress strains and on India’s balance of payments (BOP).

3. Technology Transfer:

Another important role of multinational corporations is that they transfer  sophisticated technology to developing countries which are essential for raising productivity of working class and enable us to start new productive ventures requiring high technology. Whenever, multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.

As a result, the Indian workers and engineers come to know of new superior technology and the way to use it. In India, the corporate sector spends only few Resources on Research and Development (R&D). It is the giant multinational

 

 

 

corporate firms (MNCs) which spend a lot on the development of new technologies can greatly benefit the developing countries by transferring the new technology developed by them. Therefore, MNCs can play an important role in the technological up-gradation of the Indian economy.

4. Promotion of Exports:

With globalization and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest. For example, the rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various fields of Chinese Industry.

Historically in India, multinationals made large investment in plantations whose products they exported. In recent years, Vistara airlines made a large investment in airline industries with a joint collaboration with Tata Industries.

BrahMos missile is a joint venture of Govt. of India with Russia, which is being sold to Vietnam, will bring income to India.

As a matter of fact until recently, when giving permission to a multinational firm for investment in India, Government granted the permission subject to the condition that the concerned multinational company would export the product so as to earn foreign exchange for India.

 

 

 

However, in case of Pepsi, a famous cold -drink multinational company, while for getting a product license in 1961 to produce Pepsi Cola in India it agreed to export a certain proportion of its product, but later it expressed its inability to do so. Instead, it ultimately agreed to export things other than what it produced such as tea.

5. Investment in Infrastructure:

With a large command over financial resources and their superior ability to raise resources both globally and inside India it is said that multinational corporations could invest in infrastructure such as power projects, modernization of Airports and posts, Telecommunication.

The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the India economy. The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.

In view of above, Make in India initiative, Skill India Initiative, current demographic scenario of India, foreign direct investment (FDI) will be encouraged and actively sought, especially in areas of (a) infrastructure, (b) high technology and (c) exports, and (d) where domestic assets and employment are created on a significant scale

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The Role of Foreign Capital and multinational companies in the Indian economy is a complex and multifaceted issue. On the one hand, foreign investment can bring in much-needed capital and technology, and help to create jobs and boost economic growth. On the other hand, multinational companies can sometimes exploit their market power to the detriment of local businesses and workers.

The history of foreign investment in India dates back to the colonial era, when British companies invested heavily in the country’s infrastructure and industries. After independence, the Indian government adopted a policy of economic nationalism, which limited foreign investment. However, in the 1990s, the government began to liberalize its economy, and foreign investment has since increased significantly.

There are a number of different types of foreign investment in India. Direct investment (FDI) refers to investment in which a foreign company acquires a controlling interest in an Indian company. Portfolio investment refers to investment in Indian stocks and Bonds. Foreign Institutional Investors (FIIs) are institutional investors, such as Mutual Funds and pension funds, that invest in Indian Financial Markets.

Foreign investment can bring a number of benefits to the Indian economy. FDI can help to increase the country’s capital stock, which can boost economic growth. FDI can also help to transfer technology and skills to Indian companies. In addition, FDI can create jobs and boost exports.

However, there are also some potential drawbacks to foreign investment. Multinational companies may sometimes exploit their market power to the detriment of local businesses and workers. For example, multinational companies may be able to pay lower wages than local companies, or they may be able to use their market power to force local suppliers to lower their prices. In addition, multinational companies may sometimes repatriate their profits back to their home countries, rather than reinvesting them in India.

The Indian government has a number of policies in place to regulate foreign investment. The Foreign Exchange Management Act (FEMA) is the main law governing foreign investment in India. FEMA regulates the entry and exit of foreign capital, and it also regulates the activities of foreign companies in India.

The Indian government also has a number of policies in place to promote foreign investment. The government offers a number of incentives to foreign companies, such as tax breaks and subsidies. In addition, the government has set up a number of special economic zones (SEZs), which offer a number of benefits to foreign companies, such as tax breaks and duty-free imports.

The future of foreign investment in India is uncertain. The global economic slowdown has led to a decline in foreign investment in India. In addition, the Indian government has recently tightened its regulations on foreign investment. However, the Indian economy is still growing rapidly, and there is still a lot of potential for foreign investment in India.

Foreign capital and multinational companies have played a significant role in the development of the Indian economy. They have brought in new technologies, skills, and management practices, and have helped to expand the country’s manufacturing and service sectors. Foreign investment has also helped to create jobs and boost exports.

However, there have also been some concerns about the impact of foreign capital and multinational companies on the Indian economy. Some critics argue that they have led to the concentration of economic power in the hands of a few large companies, and that they have contributed to the decline of small and medium-sized enterprises. Others argue that they have led to the loss of jobs in traditional sectors, such as agriculture and manufacturing, and that they have contributed to the growing inequality in India.

Despite these concerns, the role of foreign capital and multinational companies in the Indian economy is likely to continue to grow in the years to come. The Indian government is committed to attracting foreign investment, and it is likely to continue to offer incentives to foreign companies to invest in the country. As the Indian economy grows, it is likely to become an even more attractive destination for foreign investment.

Here are some frequently asked questions about the role of foreign capital and multinational companies in the Indian economy:

  1. What is the role of foreign capital in the Indian economy?

Foreign capital has played a significant role in the development of the Indian economy. It has helped to finance the country’s infrastructure projects, such as power Plants, roads, and airports. It has also helped to expand the country’s manufacturing and service sectors.

  1. What are the benefits of foreign capital?

Foreign capital brings in new technologies, skills, and management practices. It also helps to expand the country’s manufacturing and service sectors. Foreign investment has also helped to create jobs and boost exports.

  1. What are the risks of foreign capital?

Some critics argue that foreign capital has led to the concentration of economic power in the hands of a few large companies. They also argue that it has contributed to the decline of small and medium-sized enterprises. Others argue that it has led to the loss of jobs in traditional sectors, such as agriculture and manufacturing, and that it has contributed to the growing inequality in India.

  1. What is the future of foreign capital in the Indian economy?

The role of foreign capital in the Indian economy is likely to continue to grow in the years to come. The Indian government is committed to attracting foreign investment, and it is likely to continue to offer incentives to foreign companies to invest in the country. As the Indian economy grows, it is likely to become an even more attractive destination for foreign investment.

Question 1

Which of the following is not a benefit of foreign direct investment (FDI)?

(A) Increased competition
(B) Increased innovation
(C) Increased employment
(D) Increased government revenue

Answer
(D) Increased government revenue

FDI can lead to increased competition, which can lead to lower prices and better quality goods and services for consumers. FDI can also lead to increased innovation, as foreign companies bring new technologies and ideas to the market. FDI can also lead to increased employment, as foreign companies create new jobs in the host country. However, FDI does not necessarily lead to increased government revenue. In fact, FDI can sometimes lead to a decrease in government revenue, as foreign companies may be able to avoid paying taxes.

Question 2

Which of the following is not a challenge of foreign direct investment (FDI)?

(A) Outflow of capital
(B) Loss of national Sovereignty
(C) Displacement of local businesses
(D) Environmental damage

Answer
(A) Outflow of capital

FDI can lead to an outflow of capital, as foreign companies repatriate their profits back to their home countries. However, this is not always the case. In some cases, FDI can lead to an inflow of capital, as foreign companies invest in the host country.

Question 3

Which of the following is not a way to mitigate the challenges of foreign direct investment (FDI)?

(A) Imposing performance requirements
(B) Screening FDI
(C) Investing in Human Capital
(D) Providing subsidies to local businesses

Answer
(C) Investing in human capital

Investing in human capital can help to mitigate the challenges of FDI by creating a more skilled workforce that is able to compete with foreign companies. However, this is not the only way to mitigate the challenges of FDI. Other ways to mitigate the challenges of FDI include imposing performance requirements, screening FDI, and providing subsidies to local businesses.

Question 4

Which of the following is not a factor that affects the impact of foreign direct investment (FDI) on a country’s economy?

(A) The size of the FDI
(B) The sector of the FDI
(C) The source of the FDI
(D) The host country’s policies

Answer
(A) The size of the FDI

The size of the FDI is not the only factor that affects the impact of FDI on a country’s economy. Other factors that affect the impact of FDI on a country’s economy include the sector of the FDI, the source of the FDI, and the host country’s policies.

Question 5

Which of the following is not a reason why countries attract foreign direct investment (FDI)?

(A) To increase economic growth
(B) To create jobs
(C) To improve technology
(D) To reduce government revenue

Answer
(D) To reduce government revenue

Countries attract FDI in order to increase economic growth, create jobs, improve technology, and increase tax revenue. However, FDI does not necessarily lead to a decrease in government revenue. In fact, FDI can sometimes lead to an increase in government revenue, as foreign companies may pay taxes in the host country.

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