Foreign Direct Investment in India: Evolution & The Legal Regime

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Evolution of Economic Liberalization

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Phases of Indian Economy1947-1980

• Command and Control Economy– Allocation of resources by the Government

(budgetary grants)– Government took active part in setting priorities for

the economy– Self-Reliance was the buzz word– Nationalisation of Banks– Limited scope for private participation

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Phases of Indian Economy1991-2000

• Liberalization and Globalization of Indian Economy– Increased emphasis on private sector

participation– Limited extent of FDI participation– Gradual improvement in the enabling

environment

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Phases of Indian Economypost 2000

• Political Coalitions have started providing stable governments

• Government to get out of owning and managing businesses: Disinvestment Policy

• Gradual relaxation in the FDI Policy

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Progressive Liberalisation Pre-1991 FDI was allowed selectively up to 40% under FERA

This period was dominated by the Congress party

1991 35 high priority industry groups were placed on the Automatic Route for FDI up to 51%

Minority Congress government: Initiated economic reforms in a big way

1997 Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/ 51%/50%

United Front Government: Inclusive of ‘left parties’, was perceived as traditionally opposed to FDI, but continued with the reforms.

2000 All sectors placed on the Automatic Route for FDI except for a small negative list

BJP coalition government:(coalition of Left and Right wing parties) was traditionally seen as opposed to FDI, but continued with economic reforms.

Post 2000 Many new sectors opened to FDI; viz., insurance (26%), integrated townships (100%), mass rapid transit systems (100%), defence industry (26%), tea plantations (100%), print media (26%).

Sectoral caps in many other sectors relaxed;

BJP coalition government: pursued reforms vigorously and initiated second generation reforms.

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Consensus on Economic Liberalisation

• Change in perception– Indian Business Houses– Government– Legal Framework: shift from a Positive List to

a Negative List (FERA FEMA)

• Gradually all sectors moving to ‘Choice’ and ‘Competition’ (Multiple Player Model)

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Present Picture• India: Fourth largest economy in terms of Purchasing

Power Parity• Tenth most industrialized economy• GDP growth rate of 8.1% - Second highest in the world.• Considerable improvement in FDI inflows• FII inflows:

– For the period, July 2003 – Jan 2004 FII inflow has exceeded USD 7 bn, which is more than the cumulative FII inflow in the last five years.

• Still a big gap between India and China

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Entry Process & Entry Strategies

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The Industrial Policy

Industrial Licensing• All Industrial undertakings exempt from obtaining an

industrial license to manufacture, except for:– Industries reserved for the Public Sector– Industries retained under compulsory licensing– Items of manufacture reserved for the Small Scale

Sector– If the proposal attracts locational restriction

• Industrial Entrepreneur Memorandum