In response to a query in the Lok Sabha, Minister of State in the MSME Ministry, Bhanu Pratap Singh Verma, acknowledged the absence of a dedicated study on the advantages and disadvantages of Foreign Direct Investment (FDI) in the Micro, Small, and Medium Enterprises (MSME) sector. Despite an investor-friendly policy fostering FDI in various sectors, including MSMEs, there’s a dearth of specific analysis concerning the competitiveness and viability of such investments.
Government’s FDI Promotion: Verma highlighted the government’s initiative to boost FDI through a favorable policy allowing 100% FDI under the automatic route in most sectors, barring strategically vital ones. This, however, is contingent upon adherence to sectoral laws, regulations, security conditions, and local laws.
FDI Trends and Concerns: Official data reveals a 24% decline in FDI equity inflows from $26.91 billion to $20.48 billion during April-September 2023. The overall FDI flows for FY23 also decreased by 16.3%, raising concerns about the attractiveness of the Indian market for foreign investors.
RBI Working Paper Insights: A working paper by the Reserve Bank of India earlier in the year delved into the impact of FDI on profitability. Notably, it found that FDI tends to have a more substantial positive effect on the profitability of larger companies compared to their smaller counterparts. The age and size of a company emerged as crucial factors, with older and smaller companies exhibiting lower profitability in the context of FDI.
Conclusion: The revelation of a lack of sector-specific analysis raises questions about the nuanced effects of FDI on MSMEs. As the government continues to advocate for foreign investment, a targeted examination of its impact on the MSME sector becomes imperative for informed policymaking and sustainable economic growth.
