The impact of FDI on Indian economy is on the demand and supply side. FDI comes in the form of products like machinery, automobiles, chemicals, petroleum products which are bought on the basis of their price and their ability to perform better than the ordinary products. Since they have very low overhead costs, they attract higher volumes of foreign investment. However, the demand-supply cycle also enters into the picture. As more foreign firms to enter the Indian market, the prices of developed country's commodities like oil, gas and coal get higher.
The impact of FDI on indirect tax regime is indirect in nature. Since most of the FDI comes through indirect means, it normally affects the tariffs and indirect tax structures of Indian economy. Direct taxes are generally imposed on the production of goods and services by an Indian firm. These taxes are mainly based on the price and quality factor. As FDI enters in, goods and services produced by foreign firms are brought under direct tax authority.
While FDI enters directly, indirect tax relief is provided to the importer. The main function of indirect tax relief is to reduce the burden on the importer. When there is a rise in the price of the imported good, the price of the domestic good also increases but the impact of FDI is counterbalanced by indirect tax relief that reduces the burden on the importer.
FDI also comes in various forms such as endowments, start-ups and acquisitions. Endowments are grants given to an individual or organization for the implementation of its activities. Most often than not, it is done through governments, tribunals and bodies set up for the same purpose. For instance, when an organization wants to set up a manufacturing unit, it needs to acquire land from the government, set up the factory there and then FDI in the form of plant rental and lease payments can be realized. Similarly, acquirement is another way of getting FDI for various business activities in the non-exporated sectors.
There are various indirect sources of FDI such as state owned enterprises (SOE), commercial institutions and organizations controlled by foreigners. One of the easiest ways of getting FDI into India is through the sale of properties by Indian citizens to foreigners. This sector is referred to as commercial real estate and it is the largest source of FDI in India. Major beneficiaries of commercial real estate include the builders and developers, property dealers and people involved in property-related activities.
While FDI is a great boon for the Indian economy, it has also created several problems. Problems like overpopulation, lack of skilled manpower and absence of requisite infrastructure are the major problems resulting from the impact of fdi on economic growth in India. On the one hand, the population is not large enough to absorb the increase in the population due to overall growth; on the other hand, skilled manpower and infrastructural development have been never completed in spite of huge investment. Apart from these, the land and the air are also polluted with heavy industrial wastes and the water quality is . . . . . . not ideal. All these hurdles need to be tackled and solved if growth of the economy is to achieve its potential.