Factors affecting Foreign Direct Investment in India

Many Foreign Direct Investors prefer India and China for their ultimate investment destination as it is one of the most favored nations in the world today with faster rate of growth and with an enviable foreign exchange reserve position. But there are still some factors that discourages the FDIs in India. They are as follows.

Factors that affects FDIs in India:

Factors affecting FDIs in India

(Image: Factors affecting FDIs in India)

Opposition from the Traders on FDI:

Many of the traders fear that the presence of FDI will drive them out of the market. At present, there is a move on the part of the government to allow FDls in retail business and this will certainly hamper the growth of domestic traders. In fact, the introduction of credit cards and debit cards has affected the business of many of the local traders who could not modernize their trading activities. So, they are opposing the entry of FDIs into the country.

Scope for Expansion:

The FDIs are entering the country with the hope that there will be more scope for expansion as they have a wider market. But, in the process, it will also affect the economy in the form of inflation and increasing demand for luxury products. But for the purpose of expansion, FDIs require more investment and more facilities in the form of infrastructure which are not in the hands of FDIs. There are certain industries which are still held by the local people and the FDIs have to depend on them for expansion.

Prevalence of Illiteracy and Mass Poverty:

With illiteracy and mass poverty contributing 40% of the population, there is less scope for the production of modern products. There will be a wider disparity in the living conditions of haves and have-nots. This is bound to affect the social setup. Already we see Eastern belt of different states coming under the influence of extremist activities which is the outcome of exploitation and mass poverty. If this is allowed to continue, it will disturb the peaceful atmosphere prevailing in the economy.

Shortage of infrastructure:

The availability of power, steel, fuel, etc., is far below the international standard and hence the government will not be in a position to provide adequate infrastructure to FDIs. There is also heavy shortage of capital which is hampering the investment in developmental activities. The major plan of linking all the rivers could not be undertaken for want of capital. This will also affect the expansion of FDIs in the country.

Total Convertibility of Currency:

Any Foreign Direct Investor would like to take a part of his earnings back to his country for which there should be adequate provision in the foreign exchange reserve. Though at present India has 350 billion dollars Forex reserve, this may be eroded with the increasing international oil price. As such, it will not be possible for the country to adopt a policy of total convertibility of currency whereby the FDls can take back any amount of foreign currency. Even now, the government and RBI are finding it difficult to maintain exchange rate stability. Unless total convertibility is adopted, FDIs will not be keen to invest in India.

Opposition from the Organized Sector:

Some of the activities of large scale industries are given on outsourcing basis to FDIs. For example, credit card facility, security system, foreign exchange transactions etc.

As a result of this, the employment opportunities and the scope of promotion for the existing employees are deprived. The trade unions in the banking sector are opposing the outsourcing of some of the banking activities in favor of FDIs. The FDIs have also changed the business transactions and the introduction of core banking is an example for this. All these affect the employment potentialities in the organized sector.


In view of the TRIPS (Trade related intellectual property rights) and TRIMS (Trade related investments) there cannot be any discrimination between domestic and foreign industry. Some of the medicines manufactured by the domestic industry will now be taken over by the foreign companies due to TRIPS, if not the domestic company will have to pay patent fee which will increase the cost of the medicine.

Thus, the presence of FDIs will not be helpful to the domestic consumers who may have to pay a higher price for essential products like medicine.