Fdi Inindia Ananalysis on Theimpact of Fdi in Indias Retail Sector-

FDI in India An analysis on the regard of FDI in Indias sell celestial sphere Submitted By Subhajit Ray De elementment of Humanities and kind Sciences IIT Kharagpur Kharagpur-721302 1 Introduction Initi exclusivelyy the Indian policy makers were quite upset ab expose the stream of overseas smashing into the prudence. This bottomland be attri pulled to the compound virtuoso-time(prenominal) which saw heavy(p) investitures being made by their colonial rulers in the physique of major infrastructure instruments standardised rail itinerarys but totally to make huge gains for themselves and sucking the host country of its resources.But currently the worldwide deliverance has been witnessing an incessant form of economic exhibit characterized by the flow of capital from the developed world to the develop countries. During the 1990s irrelevant now Investment (FDI) became the ace largest source of irrelevant finance for the maturation countries. When face up w ith an economic crisis during the same point the Indian policy makers had to open up the Indian food market and jibely India has been seeing a consistent summation in FDI inflows.Indian thrift has been de put upeing high cultivation assesss in the office liberalization era. In the last fiscal course of instruction according to the Planning commissions data the Indian economy save a increment prise of 8. 6% and 8% in the year in advance. This is reason ample to call it a high performing economy. in all Multi National Enterprises (MNEs) know been eyeing the Indian market ever since they aim capable up. The policy makers have been vigorously pursuing the tames program as they intend that high emergence has been the resolutionant of economic liberalization.FDI has been seen as a s all overeign determinant to achieve high rate of economic growth because of the go with which it bottom bring in scarce capital, triggers engineering science transfer and enhances th e skill by change magnitude the belligerentness of the market. Also FDI as a form of policy instrument to raise capital is usually preferred over another(prenominal) forms of external finance because they atomic bend 18 non-debt creating, non-volatile and their returns depend on the carrying into action of the projects financed by the investors.FDI is successful in human capital formation, attachs total broker productiveness and efficiency of resource use. But much(prenominal) benefits be extremely dependent on the policies of the host governing body. It is further more than(prenominal) described as a source of economic development, modernization, and appointment generation. Several factors both political and unpolitical have led to a greater acceptance of FDI. The envisioned position of FDI has evolved from that of a tool to solve the crisis low the license raj system to that of a modernizing force of the Indian economy.In support of their endeavor the policy maker s have much cited the example of the Chinese experience of achieving high growth rate with un equivalent direct investing. India has opened up its economy and allowed MNEs in the perfume domains such(prenominal) as Power and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing, 2 Metallurgical, Drugs and Pharmaceuticals, Textiles, and industrial Machinery as a part of reform process started in the start out of 1990s. Currently FDI is similarly permissible in the telecommunications, Banking, Insurance and IT celestial sphere. Currently on that point is huge debate qualifying on about allowing FDI in sell.This wallpaper aims to discuss the critical aspects of FDI in India, present a case aim on the success of reforms in the telecommunicationmunications welkin, analyze both sides of the arguings currently going on regarding FDI in retail and conclude with suggestive measures on the part of the disposal which disregard eliminate the negative cause of allowing FDI in Indias retail orbit. Assessing the stupor of FDI on host economy- a re legal opinion of non-homogeneous economic belles-lettress FDI inflow into the nub sectors is assumed to play a life-sustaining role as a source of capital management and engine room in countries of transition economies.It implies that FDI croupe have incontrovertible set up on a host economys development effort (Caves, 1974 Kokko, 1994 Markusen, 1995 Carves, 1996 Sahoo, Mathiyazhagan and Parida 2001). It has been argued that FDI end bring the technological diffusion to the sectors by knowledge spillover and enhances a straightaway rate of growth of output via change magnitude labour productiveness. There have been a lot of empirical studies to assess the impact of FDI in develop economies and the results to this date have been ground to be mixed.Many reports have questioned the plus effects of the FDI inflow in the host country. Some studies done earlier had ensn be that FDI has a negative impact on the growth of the developing countries (Singer,1950 Griffin, 1970 Weisskof, 1972). inter study Enterprises (MNEs) in the name of FDI may drive out the local firms because of their oligopolistic power, and also, the repatriation of do good may drain out the capital of the host country. The main argument in this regard was that the main component of FDI in less(prenominal) developing countries was in the primary sector.Then these primary products were exported to the developed nations and processed for significance backwards to the developing nations and thus resulted in the host nations receiving a lesser invest for their resources. Hanson (2001) argues that evidence that FDI generates positive spillovers for host countries is weak. In a review of bantam data on spillovers from extraneous- owned to internalally owned firms Gorg and Greenwood (2002) conclude that the effects are mostly negative. Lipsey (2002) takes a more favorable view from reviewing the micro literature which argues that there is evidence of positive effect.He also argues that there is exact for more consideration of the different circumstances that obstruct or promote positive spillovers. Rodan (1961), Chenery and Strout (1966) in the early 1960s argued that foreign capital inflows have a favorable effect on the economic efficiency and growth towards the developing countries. It has been explained that FDI could have a favorable short-term effect on growth as it expands the economic activity. However, in the long run it reduces the growth rate receivable to dependency, particularly due to decapitalization (Bornschier, 1980).This is due to the reason that the foreign investors deliver their investment by contracting the economic activities in the long run. FDI is an great vehicle for the 3 transfer of technology and knowledge and it contends that it can have a long run effect on growth by generating increasing return in production via positive externalitie s and productive spillovers. Thus, FDI can lead to a high growth by incorporating radical inputs and techniques (Feenstra and Markusen, 1994). Aitken, et al. 1997) showed the external effect of FDI on export with example of Bangladesh, where the entry of a single Korean Multinational in garment exports led to the establishment of a come in of domestic economic aid export firms, creating the countrys largest export industry. Hu and khan (1997) attribute the spectacular growth rate of Chinese economy during 1952 to 1994 to the productivity gains largely due to market oriented reforms, especially the elaborateness of the non-state sector, as well as Chinas open-door policy, which brought about a striking expansion in foreign tidy sum and FDI.A information by Xu (2000) found a strong evidence of technology diffusion from U. S. MNEs affiliated in developed countries (DCs) but weak evidence of such diffusion in the less developed countries (LDCs). It concluded that in order to b enefit from the technology transfer by the MNEs a country needs to achieve a basic stripped-down human capital threshold. A modern lead by Banga (2005) demonstrates that FDI, trade and technological progress have differential impact on earnings and employment.While higher(prenominal) extent of FDI in an industry leads to higher wage rate in the industry, it has no impact on its employment. On the other hand, higher export intensity of an industry increases employment in the industry but has no effect on its wage rate. expert progress is found to be labor saving but does non influence the wage rate. come along, the results show that domestic innovation in impairment of research and development intensity has been labor utilizing in nature but import of technology has unfavorably affected employment in India.The study by Sharma (2000) concluded that FDI does non have a statistically epochal role in the export onward motion in Indian Economy. This result is also confirmed by the study of Pailwar (2001) and the study also argues that the foreign firms are more interested in the large Indian market rather than aiming for the world-wide market. The study by Sahoo and Mathiyazhagan (2003) also support the view that FDI in India is not able to enhance the growth of the economy.Though there is a common consensus among all the studies in the Indian context that FDI is not growth stimulant rather it is growth resultant. A study by Dr Maathai K. Mathiyazhagan(2005) demonstrate that the flow of FDI into the sectors has helped to raise the output, labour productivity and export in close to sectors but a better role of FDI at the sectoral level is mollify expected. Results also reveal that there is no significant co-integrating family relationship among the variables like FDI, Growth rate of output, Export and Labour Productivity in upshot sectors of the economy.This implies that when there is an increase in the output, export or labour productivity of the sec tors it is not due to the coming of FDI. Thus, it could be concluded that the advent of FDI has not helped to wield a positive impact on the Indian economy at the sectoral level. Thus, in the eve of Indias plan for further opening up of the economy, it is advisable to open up the export oriented sectors so that a higher growth of the economy could be achieved through the growth of these sectors. 4 unconnected Direct Investment policy of IndiaForeign direct investment policy of the government of India has been drowsyly liberalized. As early as in the year 1948 and 1956 (two industrial policy resolutions) government policy clearly reflected the need to supplement foreign capital and technology for rapid economic growth. The core objective of the foreign capital policy was that the run into of industrial labour should remain in the Indian hands. However, the government had granted permission in certain cases for allowing establishment of exclusive foreign pull inprises.Foreign ca pital was preferred in specific areas which bring in new technology and establish enounce ventures with Indian partners. political science also granted tax concessions to foreign enterprises and streamlined industrial licensing procedures to accord early approvals for foreign coactions. In the case of speed of light per cent export of output, foreigners were allowed to establish industrial units. It needs to be famous here that under the Foreign Exchange Regulation Act (FERA) 1974 nevertheless upto 40 per cent of the comeliness holding of the foreign firms were permitted.Foreign investment was permitted under designated industries along with restrictions in terms of local content clauses, export obligations, promotion of R and prohibition by law the use of foreign brands (Hybrid domestic brands were promoted such as Ford Escort and Hero Honda). It needs to be pointed out here that the restrictions have been flouted frequently and relaxations were also granted. This process ha s culminated into gradual liberalization of government policy towards foreign capital.It is reflected in continuous increase in the number of approvals granted. During the period 19611971, the number of foreign collaborations sanctioned was 2475 which were increased to 3041 during the period 1971-1980. There was dramatic increase in the foreign collaboration approvals during the period 1981-1990 (7436 collaborations were approved). This policy enabled to build domestic technological capability in legion(predicate) branches of industry but generally considered very restrictive.It has been widely current that protection of domestic industry for a longer period of drag inridge holder resulted into high cost production structure along with poor feature. Foreign direct investment policy announced by the government of India in July 1991 was regarded as a dramatic departure from the earlier restrictive and arbitrary policy towards foreign capital. The FDI policy of 1991 proposed to a chieve objective of efficient and competitive world class Indian industry. Foreign investment was seen as a source of scarce resource, technology and managerial and marketing skills.The major tout of policy regarding foreign investment up to 51 per cent of integrity holding was permitted too. Automatic approvals were also allowed to foreign investment up to 51 per cent equity in 34 industries as well as to foreign technology agreements in high 5 priority industries. The Foreign Investment Promotion Board (FIPB) was set up to speedily process applications for approvals of the cases which were not covered under the automatic route. Laws were amended to bet foreign firms the equivalent status as the domestic ones.Government of India, however, put in place the regulatory mechanism to repatriate payments of dividends through Reserve Bank of India so that outflows are balanced through export earnings during stipulated period of time. save liberalization measures with regard to foreig n investment were taken during 1992-93. The dividend balance conditions were revoked except in the case of consumer goods industries. Non Resident Indian (NRI) and Overseas Corporate Bodies (OCB) were permitted in high priority industries to invest up to 100 per cent equity along with repatriation of capital and income.Apart from expansion of the area of mental process for FDI in galore(postnominal) new economic activities, the existing companies were also allowed to increase equity association up to 51 per cent along with disinvestment of equity. Foreign direct investment policy has been changed frequently since 1991 to make it more transparent and attractive to the foreign investors. FDI up to 100 per cent is allowed under automatic route for all sectors/activities except activities that attract industrial licensing, proposals where foreign investors had an xisting joint venture in same field, proposals for acquisition of shares in an existing Indian company in the financial se ctor and those activities where automatic route is not available. The whole sectors/activities where FDI is not permitted are agriculture and plantations excluding tea plantations, accepted estate business concern (excluding development of townships, housing, built up infrastructure and construction development projects-NRI/OCB investment is allowed for the real estate business), retail trade, lottery, security operate and atomic energy.Government has simplified procedure, rules and regulations on a regular basis since 1991 to make Indian economic surround foreign investor friendly. Attempt has been made through FDI policy to make India the hub of global foreign direct investment as well as in economic activities. Trend and Dimension of FDI inflow in India The dimensions of the FDI flows into India could be explained in terms of its growth and size, sources and sectoral compositions. The growth of FDI inflows in India was not significant until 1991 due to the regulatory policy f ramework.It could be observed that there has been a squiffy build up in the actual FDI inflows in the post-liberalization period (Figures 1. 1 and 1. 2). Actual inflows have steadily increased from US $ 143. 6 gazillion in 1991 to US $ 37763 million in 2010. This results in an annual fairish growth rate close to 6 per cent. However, the pace of FDI inflows to India has definitely been dilatory than some of the wasteder developing countries like Indonesia, Thailand, Malaysia and Vietnam.In fact, India had registered a declining trend of FDI inflows and the FDI- gross domestic product ratio especially in 1998 and 2003 could be attributed to many factors, including the US sanctions enforce in the aftermath of the nuclear tests, the East Asian meltdown and the comprehend Swadeshi image different political parties, which was 6 ruling government during this period in India. It is also important to note that the financial collaboration has out numbered the technical collaboration ove r the years. But since 2006 India has seen a remarkably higher growth of FDI in accordance with the general trends of the global conomy with a flimsy dip in the year 2009-2010. This can be attributed to the recessionary stead in the global economy. In recent years, Indias share in the global FDI inflows has increased substantially. course of instruction wise FDI inflow in the post reforms era (1990-2001) 1999-2000 2439 1998-1999 1997-1998 1996-1997 FDI 1995-1996 1994-1995 1993-1994 1992-1993 0 1000 2000 3000 4000 US $ MILLIONS Figure 1. 1 Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 FDI 393 654 1374 2141 2770 3682 3083 2439 7 However, China receives a greater percent of global FDI inflows.Indias effort have not yet realized in comparing to the changes which has been made in the FDI policy. Year wise revised FDI inflow since 2000-2001 with expended reportage to approach International Best Practices. 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 FDI 200 4-2005 2003-2004 2002-2003 2001-2002 2000-2001 0 10000 20000 30000 40000 US $ MILLIONS circuit card 1. 2 Year 200001 200102 200203 200304 200405 200506 200607 200708 200809 200910 FDI 4029 6130 5035 4322 6051 8961 22826 34835 37838 37763 Capital goods sector has more or less been bypassed by FDI.This clearly points out the tendency of foreign investment to exertion the pent up domestic demand 8 for consumer durable goods. Further more, there is a gradual increase in the mergers and acquisitions during the 1990s which show a tendency of FDI inflows to acquire existing industrial assets and managerial control without actually engaging in new productive activities (Nagraj, 2006). Indias large size of domestic market seems to have been the major attraction for foreign firms. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS Others France Germany Cyprus Country Japan Netherlands U. K U. S. A. Singapore Mauritius 0 10 2 2 4 4 9 % 4 5 7 9 42 20 30 40 50 %age to total Inflows (in terms of US $) The analyses of the origin of FDI inflows to India show that the new policy has fullened the source of FDI into India. There were 86 countries in 2000 which increased to 106 countries in 2003 as compared to 29 countries in 1991 whose FDI was approved by the Indian Government. The country-wise analysis of the FDI inflows shows that Mauritius, which was not in the picture savings bank 1992, is the highest contributor of FDI to India. A major share of such investment is delineated by the holding companies of Mauritius set up by the US firms.It fashion that the investment flowing from the tax havens is mainly the investment of the multinational corporations headquartered in other countries. Now an 9 important question arises as to wherefore the US companies have routed their investment through Mauritius. It is because, firstly, the US companies have positioned their specie in Mauritius, which they like to invest elsewhere. Secondly, because the tax treaty between Mauritiu s and India stipulates a dividend tax of five per cent, while the treaty between Indian and the US stipulated a dividend tax of 15 per cent (World Bank, 1999).Telecommunications Sector- A success flooring Further narrowing of FDI in sub-sectors reveals the success tale of the telecommunications sector. Research into Telecommunications furthers the sloppy nature of FDI investment and policy making. The current process for FDI in telecommunications can be attributed to two policies that were undertaken by the government National Telecom constitution of 1994 and New Telecom Policy of 1999. Before the economic reforms teledensity was low, infrastructure growth was slow, and the lack of reforms restricted investments and bridal of new technologies.The existing legislative and regulatory environment needed major changes to facilitate growth in the sector. It was 1991 when the course of study was undertaken to expand and upgrade Indias vast telecom network. The programme include comp lete let offdom of telecom equipment manufacturing, privatisation of services, liberal foreign investment and new regulation in technology imports. Simultaneously, the government-managed Department of Telecommunications (DoT) was restructured to remove its monopoly status as the service provider.The government programme was formalised on a telecom policy statement called National Telecom Policy 1994 on 12 May 1994. However the 1994 policy was not sufficient to make the Indias telecommunications sector fully open and liberalised. The incumbent monopoly (DoT) was indifferent in implementing the national telecom policy effectively due to its lack of reachment. This paved the way for designing a new policy framework for telecommunications which was called the New Telecom Policy 1999. The New Telecom Policy 1999 (NTP99) was developed after the reform process began in 1991.The interest of the government led to the new policy. As a result in addition to the sectoral caps, the government policy play a major role in the liberalization of the telecom sector. As a result a large number of private operators started operating(a) in the basic/mobile telephony and Internet domains. Teledensity has increased, mobile telephony has established a large base, the number of Internet users has seen a towering growth, and large bandwidth has been made available for software exports and IT-enabled services, and the tariffs for international and domestic relate have seen significant reductions.Total FDI in Telecommunications sector is over US $ 15 billion. The takeover of Hutch by Vodafone is one of the largest FDI take ons for an amount of US $ 11 billion. Tariff 10 rates are the lowest in the square world and there are more than 250 million users. The Retail sector in India The retail industry in India is one of the fastest growing. tied(p) without FDI driving it, the corporal owned retail sector is expanding at a furious rate. AT Kearney, the well-known international manag ement consultancy, recently identify India as the second most attractive retail destination globally from among thirty emergent markets.It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a theatrical role of 14% to the national GDP and employing 7% of the total manpower ( only(prenominal) agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy. . Trade or retail is the single largest component of the services sector in terms of contribution to GDP. Its massive share of 14% is double the figure of the bordering largest broad economic activity in the sector.The retail industry is divided into coordinate and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned lar ge retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of inexpensive retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.A simple glance at the employment numbers is enough to paint a good picture of the relative sizes of these two forms of trade in India organised trade employs roughly 5 lakh tidy sum whereas the unorganized retail trade employs besidely 3. 95 crores. Given the recent numbers indicated by other studies, this is only indicative of the magnitude of expansion the retail trade is experiencing, both due to economic expansion as well as the jobless growth that we have seen in the past decade.It must be noted that purge within the organised sector, the number of individualisticly-owned retail outlets far outnumber the corporate-backed institutions. Though these numbers translate to rough 8% of the workforce in the country (h alf the normal share in developed countries) there are far more retailers in India than other countries in absolute numbers, because of the demographic profile and the preponderance of youth, Indias workforce is proportionately much larger. That about 4% of Indias population is in the retail trade says a lot about how vital this business is to the socio-economic equilibrium in India. 1 Arguments against adoption of FDI in Indias Retail sector FDI driven modern retailing is labour displacing to the extent that it can only expand by destroying the traditional retail sector. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent scent out that any policy that results in the elimination of jobs in the unorganised retail sector should be kept on hold. Studies suggest that about 5 crore jobs bequeath be lost and only 20 lakhs new jobs will be created.With their incredibly high capital FDI driven retailing units such as Wal-Mart will b e able to sustain losses for many years till its immediate competition is wiped out. This is a normal raptorial strategy used by large fakers to drive out small and dispersed competition. This entails job losses by the millions. Even the organised retail sector may face serious problems and may eventually be wiped out. The FDI driven retail units will typically sell everything, from ve proposeables to the latest electronic gadgets, at extremely low prices that will most likely slash those in nearby local stores selling similar goods.They would be more likely to source their raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at pre-ordained quantities and specifications. This means a foreign company will buy vauntingly from India and abroad and be able to sell low severely undercutting the small retailers. Once a monopoly event is created this will then turn into buy low and selling high. Such re-orientation of sourcing of materials w ill completely disintegrate the already established supply chain.In time, the neighbouring traditional outlets are also likely to sheep pen and perish, given the predatory pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, By controlling both ends of the chain, the company could buy cheap and sell costly It is true that it is in the consumers best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population.Clearly collective well-being must take precedence over individual benefits. The primary task of government in India is comfort to provide livelihoods and not create so called efficiencies of scale by creating redundancies. 12 Arguments in favour of adoption of FDI in Indias Retail sector The main driver for adoption of Ret ail in India seems to be the credit rating that the Indian economy faces serious supply-side constraints, particularly in the food-related retail chains. The government would like to change back-end infrastructure, and ultimately reduce post-harvest losses and other wastage.There is also a general concern, highlighted by the persistence of food inflation, that intermediaries obtain a disproportionate share of value in this chain and farmers receive only 15% of the end consumer price. Now the farmers will be able to get a better price for their products. With easy credit availability through foreign direct investment the situation of farmer suicides in India will improve. With foreign capital flowing into the economy the current inflationary situation will be tamed.One key point is that we must differentiate between the interests of consumers, who constitute our population of nearly 115 crore, from the interests of retailers, who may number near five crore. The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers. Undoubtedly, set about prices psychologically propel buyers to spend more than they otherwise would. The resulting growth in private consumption creates jobs. The tax collection of the government will improve as it is mpossible to tax the unorganised retail sector. The revenue collected by the government can be used for infrastructure development. Also India has had several(prenominal) retailers with deep pockets and access to skills. That they have not been able to swamp the domestic small retailer says something about consumer behaviour and small retails resilience. The argument that the advent of FDI and supermarkets will displace a large number of kirana shops is similar to the argument used during the era of industrial licensing, which was meant to protect humble industries.But eventually the inefficiencies and q uality standards of the protected small-scale companies become apparent even to socialist politicians and licensing was abolished. Even a modest chain of 200 supermarkets, to be set up all over India in selected towns and cities in the next three years, will require an investment of about Rs 2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) per supermarket to cover the infrastructure and working capital. each(prenominal) supermarket may take 2 or 3 years before it becomes profitable.There is a risk that a few of them may even fail. No Indian entrepreneur will be willing and able to commit this level of investment and undertake the risks involved. That is where the 13 international experience and skills that may come with FDI would provide the confidence and capital. Apart from this, by allowing FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations. Supermarkets could s ource several consumer goods from India for wider international markets.India certainly has an profit of being able to produce several categories of consumer goods, viz. fruits and vegetables, beverages, textiles and garments, gems and jewellery, and leather goods. The advent of FDI in retail sector is bound to pull up the quality standards and costcompetitiveness of Indian producers in all these segments. That will benefit not only the Indian consumer but also open the door for Indian products to enter the wider global market. Suggestive measures to eliminate the negative effects of FDI in IndiasRetail sector FDI in the retail sector should be accompanied by policy formulations that encourage the growth of manufacturing sector in India. A growing manufacturing sector can accommodate the people who will loose their jobs due to the adoption of retail in India. FDI should be aggressively promoted in case of relatively less sensitive sectors like entertainment, R etc. Moreover import duty should be imposed to protect domestic production units. harsh labour laws should be imposed to vouch that no management jobs are outsourced.The government should also ensure the local population gets competitive wages and the working environment is proper. Jobs should be reserved for the poor people. If the language of operation is English then it will act as a parapet for job creation for the underprivileged people. thus Hindi and local languages as a mode of operation should be encouraged. Cooperative societies should be organize for the farmers and other agricultural suppliers to take care of their rights and to ensure that they are getting a fair price from the FDI driven big retail units.Strict corporate governance should be ensured to prevent the acquisition of local business units by foreign firms and to promote investor friendly trade practices. The foreign retail units should be made to divest a certain percentage of their equity in the Indian financial markets. Only strict governance can ensure that the foreign firms adhere to competitive trade practices. Social infrastructure like schools, colleges and hospitals should be developed to promote human capital formation as several studies suggest that such initiatives could enhance the spillover effects of FDI.Furthermore it will help in creating 14 jobs in the high technology sectors and will put India in the global technology scenario. Social security should be ensured through different policy measures like pension plans, employment guarantee programmes and free health care. Strict environmental laws should be enforced to ensure that the foreign firms do not indulge in unsustainable trade practices. Conclusion The growth rate of the Indian economy has been very high in the post reforms era.And hence India has become the cynosure of investment by foreign multinational enterprises. The relationship between FDI and other macro economic variables like growth rate, export, employment and produc tivity has been found to vary. It has been found that to gain a positive impact of technology spillovers via FDI the host country should achieve a basic minimum human capital threshold. Studies exist both in support and against the positive impact of FDI in the Indian economy. It is self conclusive that the growth of FDI in India is growth resultant and not growth stimulant.The positive impact of FDI has been felt in the high technology sectors like telecommunication and IT. The success story of the telecom sector is a real confidence booster in this regard. It is clearly visible that the MNEs are more interested in exploiting the Indian markets rather than investing in capital goods. The retail sector is one of the fastest growing sectors of India. It also employs a huge proportion of the population. Hence any measure regarding this sector such as approval of FDI in the Indian retail sector will have a considerable impact on Indian economy.FDI in the Indian retail sector will wor k wonders in terms of controlling inflation, creating new jobs and increasing the efficiency and productivity of the Indian economy. But many believe that it may lead to wide scale unemployment, drainage of capital from the Indian economy and social inequity. Hence FDI in Indias retail sector should be accompanied by stringent policy measures on the part of the government so that the majority of the population can benefit from the positive spillover effects of FDI.Government should encourage FDI in the manufacturing sector along with the retail sector to revenge for the loss of jobs that will be created due to the advent of FDI in retail. Government should also build social infrastructure to enhance the human capital formation so that the positive spillover effects of FDI are greatly felt. 15 References FDI in Indias Retail Sector More Bad than rock-steady? By Mohan Guruswamy Kamal Sharma Jeevan Prakash Mohanty Thomas J.Korah Rethinking the linkages between foreign direct investment and development a third world perspective By Shashank P. Kumar Indias scotch Growth and the Role of Foreign Direct Investment By Lakhwinder Singh 2006. Indias FDI inflows Trends and Concepts By K. S. Chalapati Rao & Biswajit Dhar Impact of liberalization on FDI structure in India. By Dr. Gulshan Kumar. Impact of foreign direct investment on Indian economy A sectoral level analysis. By Dr Maathai K. Mathiyazhagan.Foreign Direct Investment in Post-Reform India liable(predicate) to Work Wonders for Regional Development? By Peter Nunnenkamp and Rudi Stracke. FDI in India in the 1990s. Trends and issues. By R Nagaraj. economical Reforms, Foreign Direct Investment and its Economic Effects in India by Chandana Chakraborty Peter Nunnenkamp. March 2006. China and India any(prenominal) difference in their FDI performances? By Wenhui Wei. June 2005 Fact sheet on FDI in India by the Planning Commission. Data on GDP growth rate from the Planning Commisiion. Wikipedia. com P lanningcommission. nic. in 16