FDI in the Way of Sustainable Development: An Analysis

With the advent of globalisation, developing countries, particularly those in Asia, have been witnessing a massive surge of FDI inflows during the past two decades. Even though India has been a latecomer to the FDI scene compared to other East-Asian countries, its significant market potential and a liberalised policy regime has sustained its attraction as a favourable destination for foreign investors. India's inward investment regime went through a series of changes since economic reforms were ushered in, two decades ago. The expectation of the policy makers was that an “investor friendly” regime will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite consistent attempts by policy makers to increase the attractiveness of India by making further changes in policies, which included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. However, after 20052006, official statistics started reporting steep increases in FDI inflows.

In most countries, particularly those that have faced chronic current account deficits, obtaining stable long-term FDI flows was preferred over volatile portfolio investments. This distinction between long-term FDI and the volatile portfolio investments has now been removed in the accepted official definition of FDI. From an analytical point of view, the blurring of the lines between long-term FDI and the volatile portfolio investments meant that the essential characteristics of FDI, especially the positive spillover that the long-term FDI was seen to result in, are being overlooked. FDI that is dominated by financial investments though, a little more stable than the portfolio investments through the stock market cannot deliver the perceived advantages of FDI. The net result is that while much of the FDI cannot enhance India's ability to earn foreign exchange through exports of goods and services and thus cover the current account gap on its own strength; large inflows of portfolio capital causes currency appreciation and erodes the competitiveness of domestic players. The falling share of manufacturing and even of IT and ITES means that there is less likelihood of FDI directly contributing to export earnings. India seems to have been caught in a trap wherein large inflows are regularly required in order to finance the current account deficit. To keep FDI flowing in the investment regime, it has to be liberalised further and mergers and acquisitions are allowed freely. In this article, we have tried to outline a range of positive aspects of FDI as a source of development for developing countries (like India) and the role and responsibilities of various institutions in the way of sustainability. We also tried to state the features where FDI can be better applied to foster sustainable development.