Presentation by :

Gourav Ranjan Sinha

FDI scenario in India

FDI –Foreign Direct InvestmentAn investment made by a company or entity based in one country into a company or entity based in another country

Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made

Threshold-10% of voting stock or shares of investee company as by OECD

Ways of Overseas

Investment

By acquiring shares of overseas

company

Setting up a subsidiary or associate company

Merger or a joint venture

Types of FDI-Horizontal, Vertical and Platform

1.Horizontal FDIWhen a firm duplicates its home country based activities at the same value chain stage in a host country through FDIDecreases international trade as the product of them is usually aimed at host country E.g. Toyota assembling cars in both Japan and UK

2.Vertical FDI

When a firm through FDI moves upstream or downstream in different value chains

•Backward Vertical FDI ( as a supplier) e.g. Toyota acquires tyre manufacturer

•Forward Vertical FDI (as a distributor) e.g. Toyota acquiring distributorship in USA

Platform FDI adds to the export-led growth of both source as well as destination countries

3. Platform FDI

Source Country

INVESTMENTDestination

Country

EXPORTS

Third Country

( High -Cost Economy )

( Low-Cost Economy )

Liberalisation policies helped FDI enter India in 1991 and since then it has seen unprecedented growth

Causes•India faced a balance of payment crisis. •IMF required India to take a series of structural economic reforms

Key features of the reforms•Opening up of international trade and investment•De-regulation•Initiation of privatisation•Tax reforms•Inflation controlling measures

After independence in 1947,FDI gained attention of the policy makers for acquiring advanced technology and to mobilize foreign exchange resources. However the socialist policies of the leaders hindered the approach

Due to the liberalisation policies undertaken in 1991, the FDI inflows had seen a boom

1992-93 1997-98 2001-02 2007-08 2009-100

0.5

1

1.5

2

2.5

3

0.094471

0.8611400000000010.981493999999999

2.530522

2.745551FDI as % of GDP

Mid 1948

Mar-64 Mar-74 Mar-80 Mar-90 Mar-00 Mar-100

20000

40000

60000

80000

100000

120000

140000

256 565.5 916 933.2 2705

18486

123378Amount of FDI (in crore)

Source: Research Journal of Management Sciences, Sept. 2012 Source: Reserve Bank of India (RBI), various bulletins

The marked transition in the FDI inflows from 1990 to 2000 proves the positive impact of liberalisation policies in India on the FDI inflows

There is a significant increase in the % contribution of FDI to GDP

and is expected to grow in the coming years

Approval of FDI in various sectors in India

1. Automatic route• Without prior approval either of Government or RBI in all activities/sectors as specified in the consolidated FDI policy issued by Government of India e.g. Agriculture , Civil Aviation etc.

2. Government route• FDI in activities not covered under the automatic route requires approval of Government of India considered by Foreign Investment Promotions Board ( FIPB )• FIPB set up the government for processing of FDI proposals in the country e.g. Print Media, Multi-brand retail etc.

FDI is permitted up to some extent in the below mentioned Sectors

Sector FDI Cap / Equity Route

Agriculture 100 % Automatic

Mining & Iron-Steel industry

100 % Automatic

Alcohol 100 % Automatic

Defence production 26 % FIPB

Drugs and Pharmaceutical

100 % Automatic

Power 100 % Automatic

Civil Aviation 49 % FIPB

Banking( Pvt.) 74 %( FDI + FII ) Automatic

Retail 100 %- single brand51 %- multi-brand

AutomaticFIPB

Insurance 26 % Automatic

Petroleum and Refining

49 %( PSUs), 100 %( Pvt. Companies)

FIPB( PSUs), Automatic ( Pvt. )

Telecommunications 100 % Automatic

Source : Reserve Bank of India ( RBI )

The Government of India (GoI) has been selective in opening various sectors for FDI.

Gradually different sectors were opened for investment in FDI with varying rates ofsectoral caps.

The services sector accounts for most of the FDI inflows relatively than the manufacturing and primary sector

Serv

ices

sect

or

Tele

com

mun

icatio

ns

Ener

gy

Compu

ter s

oftw

are

and

hard

ware

Housin

g an

d re

al e

stat

e

Tran

spor

t

Const

ruct

ion

activ

ities

Other

serv

ices

Hotel

and

tour

ism

Trad

ing

(incl. r

etai

l tra

ding

)

Minin

g0

5

10

15

20

25

19.9

87.4 6.9 6.8

2

6.5

2.2 2 20.600000000000001

Percent Share ( 2000-2011)

Telecom, software, Housing and Real estate and construction have witnessed more than 5% increment of FDI during 2000 and 2012

The sectors who have given support by the government have got good share of FDI inflow

Source: International Journal of Scientific and Research Publications, Volume 2, Issue 12, December 2012

The conditions for the growth of services

sector is apt in India

Though India constitutes very less amount of the total share of FDI of the world, it has the potential to increase it significantly

USA China Brazil Russia India Germany Japan0

2

4

6

8

10

12

14

% of world FDI

12.41

8.96

4.83

3.81

1.89

0.49 0.13

Source : UNCTAD, 2012

India with 1.89% of world FDI inflows is catching up major economies like USA and China and emerging economies of

Brazil and Russia

China (1) USA (2) India (3) Indonesia(6)Brazil(4) Australia(8)0

5

10

15

20

25

30

35

40

45 42

38

25

1815

12

Developed EconomiesDeveloping Economies

( x )- Ranking in 2011

Source : UNCTAD

(Percentage of respondents selecting economy as a top destination)

India is turning out to overtake developed economies to become the

best host country for FDI

Few Policy recommendations for enhancing FDI inflows into India

Particular attention should also be paid to the removal of restrictions on FDI in the services sectors -- including telecoms, banking and insurance, aviation etc as this will help ease transactions costs for both consumers and business

Over and above the creation of a business-friendly environment, it may be important for a potential host country to actively undertake investment-promotion policies to fill in information gaps or correct perception gaps that may hinder FDI inflows

While India must do image-building exercises to promote it as a favourable investment location; it desperately needs to get rid of the tag that it can only do services and not manufacturing

India needs to put in place a comprehensive development strategy, which includes being open to trade and FDI

There need to be greater coordination between the centre and states to ensure that the substantial foreign interest in investing in India gets translated into actual investment flows to the state

India should continue to work towards developing a deep and liquidcorporate debt market

India should consciously work towards attracting greater FDI into R&D as a means of strengthening the country’s technological prowess and competitiveness

India needs massive investments to sustain high-qualityeconomic growth, particularly in the energy and infrastructure sectors

Thank You!"There is a need of minutely analysing the effects of FDI in a country and the economic rationale behind it and it is not correct to look for a general consensus of whether FDI should be allowed or protested“ - Amartya Sen , Nobel laureate