ITO and wto fdi

8/3/2019 ITO and wto fdi

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SCHOOL OF ECONOMICS

ITO and WTO Project On

Study of FDI in India

Submitted to: Submitted by:

Mrs. Sonal Goyal Knowledge Seekers

Batul Kudrati

Mansi Nandecha

Surbhi Kaushal

Madhu Nahar

Devangi Yadav

MBA (IB) I SEM


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CONTENTS

Executive Summary Chapter 1: Introduction Chapter 2: The Historical Perspective Chapter 3: Foreign Direct Investment(Basic Concept) Chapter 4: Policy Initiatives Chapter 5: Indias FDI Current Scenario Chapter 6:Growth Factors of FDI in India Chapter 7: Causes of Low FDI in India Chapter 8: Benefits of FDI in India Conclusion Future recommendations References Annexure

List of TablesTABLE 1: Sector-wise performance in FDI

TABLE 2: FDI Inflows in India (20002011)

TABLE 3: Sector-wise distribution of FDI equity inflows

TABLE 4: Distribution of FDI Equity Inflows in India (Top 5)

TABLE 6: Global competitive Index

List of FiguresFIGURE 1: % Share of Sectors

FIGURE 2: % Share of States

FIGURE 3: % Share of Countries


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EXECUTIVE SUMMARY

Foreign direct investment (FDI) has played an important role in the process of globalisation

during the past two decades. The rapid expansion in FDI by multinational enterprises since

the mid-eighties may be attributed to significant changes in technologies, greater

liberalisation of trade and investment regimes, and deregulation and privatisation of markets

in many countries including developing countries like India.

Capital formation is an important determinant of economic growth. While domestic

investments add to the capital stock in an economy, FDI plays a complementary role in

overall capital formation and in filling the gap between domestic savings and investment. Atthe macro-level, FDI is a non-debt-creating source of additional external finances. At the

micro-level, FDI is expected to boost output, technology, skill levels, employment and

linkages with other sectors and regions of the host economy.

The present study aims at providing a detailed understanding of FDI inflow in the country.

The study deals with the present FDI policy framework in the country following the various

institutions related to FDI in the country. The study largely deals with the current trends of

FDI in the country including the major sectors, countries and distribution of FDI in the

country. The study also examines the various growth factors of FDI in the country, the

benefits as well as the causes for low FDI in the country


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CHAPTER 1: INTRODUCTION

Foreign direct investment (FDI) plays a multidimensional role in the overall development of

the host economies. It may generate benefits through bringing in non-debt-creating foreign

capital resources, technological upgrading, skill enhancement, new employment, spill-overs

and allocative efficiency effects. While FDI is expected to create positive outcomes, it may

also generate negative effects on the host economy. The costs to the host economy can arise

from the market power of large firms and their associated ability to generate high profits.

India is the second largest country in the world. With a population of over I billion people.As a developing country, Indias economy is characterized by wage rates that are

significantly lower than those in most developed countries. These two traits combine to make

India a natural destination for foreign direct investment (FDI). Until recently. However, India

has attracted only a small share of global FDI. Primarily due to government restrictions on

foreign involvement in the economy. But beginning in l99l and accelerating rapidly since

2000, India has liberalized its investment regulations and actively encouraged new foreign

investment. a sharp reversal front decades of discouraging economic integration with the

global economy.

In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated

economic growth of the country, Government of India initiated a slew of economic and

financial reforms in 1991. India is now ushering in the second generation reforms aimed at

further and faster integration of Indian economy with the global economy. As a result of the

various policy initiatives taken, India has been rapidly changing from a restrictive regime to a

liberal one, and FDI is encouraged in almost all theconomic activities under the automatic

route.

Over the years, FDI inflow in the country is increasing. However, India has tremendous

potential for absorbing greater flow of FDI in the coming years. Serious efforts are being

made to attract greater inflow of FDI in the country by taking several actions both on policy

and implementation front.


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CHAPTER 2: THE HISTORICAL PERSPECTIVE

Till 1991, inflows of private capital from overseas were negligible and averaged less than

$200 mn a year in the period 1985-90. This was probably a superior situation to the negative

net flows caused by factors such as nationalization of foreign oil companies in the 1960s and

the closure or sell-out of foreign Companies in the 1970s. It took a very serious Balance of

Payments crisis and a possible defalcation in external payments obligations to make the

Indian Government decide on radical surgery, a process facilitated to some extent by the

pressures to ease up on regulation and liberalise the economy. Foreign investment which had

till then been viewed with mistrust and suspicion was overnight being welcomed, indeed

wooed. Initially, funds flowed in from Foreign Institutional Investors (FIIs) and Indian

Companies using the Global or American Depository Receipt (GDR/ADR ) route to raise

funds from overseas. The Indian Corporate sector was wary of Foreign Direct Investment

(FDI) and lobbied strongly with the Government to prohibit and if not, to defer the entry of

foreign Companies

Commencement of Investment Inflows:

3 years after the 1991 liberalisation, FDI became a significant component of total foreign

investment inflow. The initial impetus was with Portfolio Investment. In the main, foreign

Companies already operating in India but with a less than 50% equity stake took the

opportunity to raise their shareholding levels to the maximum permitted by the Government.

Additionally, a number of MNCs had entered into Joint Ventures of convenience with Indian

partners, this being the only way they could have established a presence in the Indian market.

Such MNCs bought out their local partners, thus contributing to FII inflows. Local

Companies were quicker off the mark and there was a spurt in inflows as the Indian

Corporate sector used the GDR route to raise funds overseas. It may be recalled that interest

rates in India during the early to mid-90s were significantly higher than overseas and were

18% p.a. (Prime Lending Rate) during the time that the new industrial policy was announced.


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The Fits and Starts Approach:

The original policy declaration in 1991 which laid the foundation for foreign investment in

India clearly laid down the Governments expectations, which were:

Technology transfer

Marketing expertise

Introduction of modern management techniques

Export promotion

In order to invite investment inhigh priority industries, requiring large investments and

advanced technology it has been decided to provide approval for direct investment up to 51%in such industries

(Statement on Industrial Policy, 1991, pg 4). [Emphasis added].

With the passage of time, it was becoming clear that the objectives were not being achieved.

Relaxations, further concessions and additional inducements were offered mostly as reactive

rather than proactive measures. Most important amongst these are:

1992: Foreign firms obtained automatic rights over international brand names.

1993: Requirement for industrial licensing in specified industries (white goods, entertainment

electronics) abolished

FIIs allowed to invest in new Mutual Fund schemes

1994: Banks allowed to set their own rates for lending

Companies allowed to issue preferential equity to FIIs

1996: Overseas pension funds, charities, foundations qualify as FIIs

FIIs allowed to invest in un-listed firms

FIIs allowed to invest 100% of funds (previous 30%) in debt Instruments

1998: Further concessions to FIIsnow allowed to invest in Government securities,

Treasury Bills, listed and un-listed debt securities.

1999: FIIs allowed conditional forward foreign exchange cover

FIIs could participate in open offers in accordance with take-over codes

2000: 100% foreign equity allowed in infrastructure projectsports, roads, highways.

2002: Limited FDI in print media permitted


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CHAPTER 3: FOREIGN DIRECT INVESTMENT (FDI)

BASIC CONCEPTS

DEFINITION

Foreign Direct Investment, or FDI, is a type of investment that involves the injection of

foreign funds into an enterprise that operates in a different country of origin from the

investor.

Investors are granted management and voting rights if the level of ownership is greater than

or equal to 10% of ordinary shares. Shares ownership amounting to less that the stated

amount is termed portfolio investment and is not categorized as FDI.

This does not include foreign investments in stock markets. Instead, FDI refers more

specifically to the investment of foreign assets into domestic goods and services. FDIs are

generally favoured over equity investments which tend to flow out of an economy at the first

sign of trouble which leaves countries more susceptible to shocks in their money markets.

Classifications of Foreign Direct Investment

INWARD FDIInward FDI occurs when foreign capital is invested in local resources. The factors propelling

the growth of inward FDI include tax breaks, low interest rates and grants.

OUTWARD FDIOutward FDI, also referred to as "direct investment abroad", is backed by the government

against all associated risk.


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Various Entry Modes of FDI

The foreign direct investor may acquire voting power of an enterprise in an economy through

any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Routes for receiving FDI in India

An Indian company may receive Foreign Direct Investment under the two routes as given

under:

i. Automatic Route

FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except

where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for

Investment'issued by the Government of India from time to time, are attracted.

FDI in sectors /activities to the extent permitted under the automatic route does not require

any prior approval either of the Government or the Reserve Bank of India.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the

Government which is considered by the Foreign Investment Promotion Board (FIPB),

Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-

IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying

all relevant details are also accepted. No fee is payable.

Indian companies having foreign investment approval through FIPB route do not require any

further clearance from the Reserve Bank of India for receiving inward remittance and for the

issue of shares to the non-resident investors.


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The sectors where FDI is not allowed in India, both under the Automatic

Route as well as under the Government Route

FDI is prohibited under the Government Route as well as the Automatic Route in the

following sectors:

i) Retail Trading (except single brand product retailing)

ii) Atomic Energy

iii) Lottery Business

iv) Gambling and Betting

v) Business of Chit Fund

vi) Nidhi Company

vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, AnimalHusbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled

conditions and services related to agro and allied sectors) and Plantations activities (other

than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).

viii) Housing and Real Estate business (except development of townships, construction of

residential/commercial premises, roads or bridges to the extent specified in Notification No.

FEMA 136/2005-RB dated July 19, 2005).

ix) Trading in Transferable Development Rights (TDRs).

x) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

substitutes.


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Sector-wise performance in FDI

TABLE 1: Sector-wise performance in FDI

SECTORS FDI ALLOWED DETAILS

1. Hotel & Tourism 100% FDI The term hotels include restaurants, beach

resorts, and other tourist complexes

providing accommodation and/or catering

and food facilities to tourists. Tourism

related industry include travel agencies, tour

operating agencies and tourist transport

operating agencies etc.2.Private Sector

Banking: non-

Banking Financial

Companies (NBFC)

49% FDI FDI/NRI/OCB investments allowed in the

following 19 NBFC activities shall be as per

levels indicated below:

i. Merchant bankingii. Underwriting

iii. Portfolio Management Servicesiv. Investment Advisory Servicesv. Financial Consultancy

vi. Stock Brokingvii. Asset Management

viii. Venture Capitalix. Custodial Servicesx. Factoring

xi. Credit Reference Agenciesxii. Credit rating Agencies

xiii. Leasing & Financexiv. Housing Financexv. Foreign Exchange Brokering

xvi. Credit card businessxvii. Money changing Businessviii. Micro Credit


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xix. Rural Credit

3.Insurance Sector 26% FDI It is subject to obtaining licence fromInsurance Regulatory & Development

Authority (IRDA)

4.Telecommunication 49% FDI i.ISPs with gateways, radio-paging and end-

to-end bandwidth, FDI is permitted up to

74%.

ii. FDI up to 100% is allowed for the

following activities in the telecom sector :

a. ISPs not providing gateways (both for

satellite and submarine cables);

b. Infrastructure Providers providing dark

fibre (IP Category 1);

c. Electronic Mail; and

d. Voice Mail

5.Trading Under automatic route

with FDI up to 51% is

allowed provided it is

primarily export

activities and the

undertaking is an

export house/trading

house/super trading

house/star trading

100% FDI is permitted in case of trading

companies for the following activities under

FIPB route:

exports; bulk imports with ex-port/ex-bonded

warehouse sales;

cash and carry wholesale trading;

other import of goods or services


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house. provided at least 75% is for

procurement and sale of goods and

services among the companies of the

same group and not for third party

use or onward

transfer/distribution/sales

6.Power 100% FDI FDI is allowed in respect of projects

relating to electricity generation,

transmission and distribution, other than

atomic reactor power plants

7.Drugs &Pharmaceuticals

100% FDI FDI proposals for the manufacture oflicensable drugs and pharmaceuticals and

bulk drugs produced by recombinant DNA

technology, and specific cell / tissue targeted

formulations will require prior Government

approval.

8.Roads, Highways,

Ports and Harbours

100% FDI FDI under automatic route is permitted in

projects for construction and maintenance of

roads, highways, vehicular bridges, toll

roads, vehicular tunnels, ports and harbours

9.Pollution Control

and Management

100% FDI FDI in both manufacture of pollution

control equipment and consultancy for

integration of pollution control systems is

permitted on the automatic route.

10.Call Centres in

India

FDI up to 100% is

allowed subject to

certain conditions

11.BPO 100% FDI


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12.Small scale

industriesFDI up to 100%

13. Public Sector

Units (PSU)

refineries

49% FDI

14. Civil aviation 74% FDI

15.Aircraft

maintenance and

repair operations

100% FDI

16.Commodity

exchanges

26% FDI

17. Mining of

titanium

100% FDI

Source: madaan article


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CHAPTER 4: POLICY INITIATIVES

FDI POLICY FRAMEWWORK

It is the intent and objective of the Government to promote FDI through a policy framework

which is transparent, predictable, simple and clear and reduces regulatory burden. The system

of periodic consolidation and updation is introduced as an investor friendly measure. Prior to

1991, the FDI policy framework in India was highly regulated. The government aimed at

exercising control over foreign exchange transactions. All dealings in foreign exchange were

regulated under the Foreign Exchange Regulation Act (FERA), 1973, the violation of whichwas a criminal offence. Through this Act, the government tried to conserve foreign exchange

resources for the economic development of the nation. Consequently the investment process

was plagued with many hurdles including unethical practices that became part of bureaucratic

procedures. Under the deregulated regime, FERA was consolidated and amended to introduce

the Foreign Exchange Management Act (FEMA), 1999. The new Act was less stringent and

aimed at improving the capital account management of foreign exchange in India. The Act

sought to facilitate external trade and payments and to promote orderly development and

maintenance of the foreign exchange market in India. It resulted in improved access to

foreign exchange.

POLICY INITIATIVES

The Circular 1 of 2010 and Circular 2 of 2010 issued by this Department on March 31, 2010

and September 30, 2010 respectively, consolidated into one document all the prior policies/

regulations on FDI which are contained in FEMA, 1999, RBI Regulations under FEMA,

1999 and Press Notes/Press Releases/Clarifications issued by DIPP and reflected the current

policy framework on FDI. The present consolidation subsumes and supersedes all Press

Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on

March 31, 2011, and reflects the FDI Policy as on April 1, 2011.It includes the following:

According to the modified policy, foreign investors can inject their funds though theautomatic route in the Indian economy. Such investments do not mandate any prior


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government permission. However, the Indian company receiving such investment

would be required to intimate the RBI of any such investment.

In a landmark decision, the Government has eased norms for investments by foreigncompanies that are present in India through a JV or a technical collaboration. Now,

the foreign company will not have to seek a no-objection certificate from the Indian

partner for investing in the sector where the joint venture operates.

The Government has also relaxed norms for downstream investments and convertibleinstruments, giving foreign companies more powers. The aim is to check a decline in

FDI inflows. The changes are part of the third revision of the Consolidated FDI

Policy. The new norms came into effect from April 2011.

The FDI policy unveiled by the DIPP brought out a clear picture on convertibleinstrument prices. DIPP announced companies would now have the option of

prescribing a conversion formula, instead of specifying the price of convertible

instruments. The instruments include compulsory convertible preference shares

(CCPS) and compulsory convertible debentures (CCDs). The parties are free to either

agree on a numerical price or a conversion formula, as long as the price at which the

conversion takes place is not less than the floor price prescribed by RBIs pricing

guidelines, as per DIPP.

The Securities and Exchange Board of India (SEBI) has permitted both existingmutual funds and non-banking finance companies (NBFCs) to launch infrastructure

debt funds (IDFs). The minimum investment into the fund would be US$ 2, 26,526

(Rs1crore). In addition, Sebi has announced that the limited liability partnership

(LLP) firms should be considered as a body corporate and would be eligible to

become members of stock exchanges.

In a move to enhance India's retail trade, 51 per cent FDI in multi-brand retail hasbeen allowed by the Committee of Secretaries (CoS), headed by Mr. Ajit Kumar Seth,

the Cabinet Secretary. This is awaiting approval from the Union Cabinet. Currently,

these companies are only permitted to operate cash-and-carry format stores catering to

wholesalers and business consumers.

All the above initiatives by the Government of India outline the Governments focus on

enhancing the FDI inflows, besides creating a conducive investor-friendly environment for

the foreign players.


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GOVERNMENT ORGANISATIONS

DIPP

The Department of Industrial Policy & Promotion was established in 1995 and has been

reconstituted in the year 2000 with the merger of the Department of Industrial Development.

Earlier separate Ministries for Small Scale Industries & Agro and Rural Industries

(SSI&A&RI) and Heavy Industries and Public Enterprises (HI&PE) were created in October,

1999.The role and functions of the Department of Industrial Policy and Promotion primarily

include:

Formulation and implementation of industrial policy and strategies for industrialdevelopment in conformity with the development needs and national objectives;

Monitoring the industrial growth, in general, and performance of industriesspecifically assigned to it, in particular, including advice on all industrial and

technical matters;

Formulation of Foreign Direct Investment (FDI) Policy and promotion, approval andfacilitation of FDI;

Encouragement to foreign technology collaborations at enterprise level andformulating policy parameters for the same;

Formulation of policies relating to Intellectual Property Rights in the fields of Patents,Trademarks, Industrial Designs and Geographical Indications of Goods and

administration of regulations, rules made there under ;

Administration of Industries (Development & Regulation) Act, 1951 Promoting industrial development of industrially backward areas and the North

Eastern Region including International Co-operation for industrial partnerships and

Promotion of productivity, quality and technical cooperation.

Foreign Investment Promotion Board (FIPB)

The Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA),

Ministry of Finance is the nodal single-window agency for all matters relating to FDI as well


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as promoting investment in the country. It is chaired by the Secretary, Industry (Department

of Industrial Promotion and Policy). Its objective is to promote FDI in India:

by undertaking investment promotion activities in India and abroad;

by facilitating investment in the country by international companies, non-residentIndians and other foreign investors;

through purposeful negotiations/discussions with potential investors; through early clearance of proposals submitted to it; and by reviewing policies and putting in place appropriate institutional arrangements,

transparent rules and procedures and guidelines for investment promotion and

approvals.

Secretariat for Industrial Assistance (SIA)

The Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in

the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry to

provide a single-window service for entrepreneurial assistance, investor facilitation, receiving

and processing all applications which require government approval, conveying government

decisions on applications filed, assisting entrepreneurs and investors in setting up projects

(including liaison with other organisations and state governments) and monitoring the

implementation of projects. It also notifies all government policy decisions relating to

investment and technology, and collects and publishes monthly production data for select

industry groups. The SIA website2 provides chat time during fixed hours when all questions

are answered. During other times, investors are encouraged to write e-mails and the

Secretariat assures a reply within 24 hours.

Foreign Investment Implementation Authority (FIIA)

The Government of India has set up the Foreign Investment Implementation Authority (FIIA)

to facilitate quick translation of Foreign Direct Investment (FDI) approvals into

implementation, and to provide a pro-active one-stop after-care service to foreign investors

by helping them obtain necessary approvals, sort out operational problems and meet with

various government agencies to find solutions to their problems. The proforma for making a

reference to the Foreign Investment Implementation Authority (FIIA) can be downloaded


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from the website.3 The Secretariat for Industrial Assistance (SIA) in the Department of

Industrial Policy & Promotion (DIPP) functions as the Secretariat of the FIIA.

FDI PROMOTION INITIATIVES

Several steps have been initiated to facilitate increased FDI inflows. These include, inter-alia,

the following:

On the policy front, the FDI policy is already very liberal & it is being furtherprogressively rationalized, on the basis of an exercise initiated for integration of all

prior regulations on FDI, contained in FEMA, RBI circulars, various Press Notes etc.,

into one consolidated document, so as to reflect the current regulatory framework.

The latest consolidated FDI policy document has been launched by Department of

Industrial Policy & Promotion on 30.09.2010, which is available at DIPPs website

(www.dipp.nic.in) for public domain.

On the investment promotion front, the Department organizes Destination India andInvest India events in association with CII and FICCI.

DIPP has been undertaking concerted efforts for improving the business environmentin the country. The business reforms aimed at improving the business environment

include setting up of single windows, online registrations, computerization of

information, simplification of taxes and payments, reduction of documents through

developing single forms for various licences/permissions and reduction of inspections

etc.

As a step towards promoting an online single window at the national level forbusiness users, the Department has undertaking e-Biz project, which is one of Mission

Mode Projects (MMPs) under the National eGovernance Plan (NeGP). The objectives

of setting up of the e-Biz Portal are to provide a number of services to

competitiveness through a service oriented, event-driven G2B interaction.


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The National Manufacturing Competitiveness Council (NMCC) has been set up toprovide a continuing forum for policy dialogue to energise and sustain the growth of

manufacturing industries.

The Department has regular interaction with foreign investors. Such interactions havebeen held in bilateral/regional/international meets such as Indo-ASEAN, Indo-EU,

Indo-Japan, etc. Meetings with individual investors were also held on a regular basis.

The Department website (www.dipp.nic.in) has been made both comprehensive andinformative, with an online chat facility. Business users covering the entire life cycle

on their operations. The project aims at enhancing Indias business


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CHAPTER 5: INDIAS FDI SCENARIO

OVERVIEW

The constant efforts of the Government of India in making the country an investor friendly

destination are reaping dividends. Alongside the United Nations Conference on Trade and

Development (UNCTAD) ranking India at second place in global foreign direct investments

(FDI) in 2010, in its report titled, 'World Investment Prospects Survey 2009-2012' has added

to the initiative to a great extent . The report further forecasts, India to be among the top five

attractive destinations for international investors during 2010-12.

FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the

highest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows

from April 2000 to August 2011 stood at US$ 219,143 billion, according to the latest data

released by the Department of Industrial Policy and Promotion (DIPP). The service (including financial and non-financial) sectors attracted highest FDI equity

inflows during April-May 2011-12 at US$ 910 million. India received maximum FDI from

countries like Mauritius, Singapore, and the US at US$ 56.31 billion, US$ 13.25 billion and

US$ 9.71 billion, respectively, during April 2000-May 2011.

India's foreign exchange (Forex) reserves have increased by US$ 2.29 billion for the week

ended July 22, 2011, according to the weekly statistical bulletin released by the Reserve Bank

of India (RBI). In the week under consideration, foreign currency assets went up by US$ 2.23

billion to US$ 284.53 billion.

Furthermore, India may emerge as US ExportImport Bank's (Ex-Im) largest market in next

12-18 months. During the last nine months, we have approved 173 transactions involving

100 companies and US$ 1.4 billion in financing of US exports to India, as per Fred P

Hochberg, the bank's Chairman and President.


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FDI INFLOWS IN INDIA (20002011)

TABLE 2: FDI INFLOWS IN INDIA (20002011)YEAR FDI INFLOW(in crores)

2000 104,411

2001 160,711

2002 161,344

2003 95,639

2004 147,814

2005 192,707

2006 503,573

2007 654,950

2008 1,397,255

2009 1,309,799

2010 960,149

2011(January June) 755,064

TOTAL 6,443,506(US$ 143,959)

Source: SIA newsletter, June 2011

FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is thehighest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows

from April 2000 to August 2011 stood at US$ 219,143 billion, according to the latest data

released by the Department of Industrial Policy and Promotion (DIPP).


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Sector-wise distribution of FDI equity inflows:

TABLE 3:Sector-wise distribution of FDI equity inflows

RANK SECTOR 2011-12(in

Crores)

(April-August)

Cumulative Inflows

(April00August11)

% Share

1 Service Sector 12892 134000 20%

2 Telecommunication 8405 56471 8%

3 Computer Software and

Hardware

1696 48010 7%

4 Housing and Real Estate 1764 48083 7%

5 Construction activities 3491 42072 6%

6 Power 4999 30535 5%

7 Automobile Industry 2113 28550 4%

8 Metallurgical Industries 5202 23790 4%

9 Drugs and pharmaceuticals 13437 21896 3%

10 Petroleum and Natural gas 690 14300 2%

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)From APRIL 2000 to AUGUST 2011, DIPP

FIGURE 1: % SHARE OF SECTORS

Service Sector,20%

Telecommunic

ation, 8%Computer

Software and

Hardware, 7%

Housing and

Real Estate, 7%

Construction

activities, 6%

Power, 5%

Automobile

Industry, 4%

Metallurgic

al

Industries,

4%

Drugs and

pharmaceutical

s, 3%

Petroleum and

Natural gas, 2%


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The sectors receiving the largest shares of total FDI inflows between August 199l and

December 2011 was services sector accounting for20%, These were followed by the

telecommunications, computer and hardware, housing and power. The top sectors attracting

FDI into India M&A activity were manufacturing; information: and professional, scientific

and technical services. These sectors correspond closely with the sectors identified by the

Indian government as attracting the largest shares of FDI inflows overall .

Distribution of FDI Equity Inflows in India

TABLE 4: Distribution of FDI Equity Inflows in India (Top 5) in crores

Rank RBIRegional

offices

Statescovered

2011-12(April-

August)

CumulativeInflows(April00-

August11)

% Share

1 Mumbai Maharashtra 28124 229,595 35

2 New Delhi Delhi,

Haryana &

U.P

22272 135,961 20

3 Bangalore Karnataka 3844 40502 64 Ahmedabad Gujarat 1908 33,601 5

5 Chennai Tamil Nadu 3177 34024 5

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)From APRIL 2000 to AUGUST 2011, DIPP

FDI inflows within India are heavily concentrated around two major cities. Mumbai and New

Delhi, with Chennai, Bangalore. Hyderabad and Ahmedabad also drawing significant sharesof FDl inflows. For statistical purposes, Indian Department of Industrial Policy and

Promotion (DlPP) divides the country into I6 regional offices. The main highlights are as

follows:

The key industries attracting FDI to the Maharashtra region are energy, transportation,services, telecommunications, and electrical equipment


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The key sectors attracting FDI inflows to Delhi are similar: telecommunications.transportation, electrical equipment (including software), and services

The status of Uttar Pradesh and Haryana are also contained in the New Delhi region.The geographic proximity of both status to New Delhi helps them to attract FD]. Dueto its abundance of natural resources, Uttar Pradesh attracts FDI in chemicals,

pharmaceuticals, and mining and minerals. Haryana attracts FDI in the electrical

equipment, transportation, and food processing sectors.

Automotive and auto components are the largest sectors attracting FDl into TamilNadu. Ford, Hyundai, and Mitsubishi all have muItimiIlion dollar investments in

Tamil Nadu. The state capital, Chennai, is sometimes called the Detroit of India.

Other sectors attractingFDI include port infrastructure, ICT, and electronics.

The same is true for of projects in Karnataka. where Bangalore is located: Karnatakaalso has a large number of projects in the automotive sector

FIGURE 2: % Share of States

Maharashtra,

8.2

Delhi,

Haryana &

U.P, 3.2

Karnataka,

1.4

Gujarat,

1.2

Tamil Nadu,

0


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Country-wise Distribution of FDI Equity Inflows

TABLE 5: Country-wise Distribution of FDI Equity Inflows

RANK COUNTRY 2011-12(in

Crores)

(April-August)

Cumulative Inflows

(April00August11)

In crores

% Share

1 Mauritius 26634 269,395 41%

2 Singapore 13350 66,407 10%

3 USA 2066 44,609 7%

4 UK 11311 40,744 6%

5 Japan 7855 31,813 5%

6 Netherlands 3207 28,834 4%

7 Cyprus 1830 23,778 4%

8 Germany 5737 19,113 3%

9 France 1668 11,936 2%

10 UAE 376 8,968 1%

Source: India FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)From APRIL 2000 to AUGUST 2011,DIPP

FIGURE 3: % SHARE OF COUNTRIES

Mauritius, 41%

Singapore,

10%

USA, 7%

UK, 6%

Japan, 5%

Netherlands,

4%

Cyprus, 4%

Germany, 3%France, 2%

UAE, 1%


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Some highlights:

Mauritius has been the single largest source of FDI into the country in the first10 years of the new millennium. As much as $55 billion worth of money has

been invested in India after being routed through Mauritius. This is 42 per cent

of the total FDI in the country in the past decade. This is due to the Double

Taxation Avoidance Agreement.

The United States is the third largest source of FDI in the country. The majorsectors attracting FDI from US are fuel, telecommunication, electrical

equipment, food processing and services.

Within the European Union, the largest country investors were UK, Netherlandsand Germany.FDI from EU to India are primarily concentrated into power/fuel,

telecommunications and transportation sectors.

Japan is the fifth largest investor in the country. India is one of the largestrecipients of Japan Official Development Assistance through which Japan has

assisted India in building infrastructure. However there has been a decreasing

trend in the inflows from Japan to India.


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FDI Performance and Potential Index

UNCTAD ranks countries by their Inward FDI Performance3 and Inward FDI Potential

Indices. While India is the second most attractive country in terms of the foreign investorsconfidence index, it does not rank high on either the performance or potential indices.

Indias FDI Performance Index in 2010 ranked at 97 out of 141 countries. However, it has a

relatively high FDI Potential Index at 79.

Global Competitiveness of Indias FDI

Another method of assessing the investment potential of an economy is its rank on global

competitiveness. The Global Competitiveness Index (GCI) is a comprehensive index

developed by the World Economic Forum (WEF) to measure national competitiveness and is

published in the Global Competitiveness Report (GCR). It takes into account the micro- and

macro-economic foundations of national competitiveness, in which competitiveness is

defined as the set of institutions, policies and factors that determine the level of productivity6

of a country and involves static and dynamic components. The overall GCI is the weighted

average of three major components: a) basic requirements (BR); b) efficiency enhancers(EE); and c) innovations and sophistication factors (ISF).

Within the information available for 142 countries, the GCI of some of the countries

including India is:

TABLE 6: Global competitive Index

Country Rank GCI Index

Switzerland 1 5-74

Singapore 2 5.70

U.S.A 5 5.43

U.K 10 5.39

China 13 5.26

India 56 4.30

Pakistan 118 3.58

Chad 142 2.87

Source: Global Competitiveness Report,2011World Economic Forum


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PROSPECTS

The positive efforts of the Government to improve the investment climate, including

sustained improvement on infrastructure front, have led to renewed optimism about India asan emerging investment destination. Some of the independent assessments in this regard

include:

The UNCTAD World Investment Report (WIR) 2009, in its analysis of the globaltrends and sustained growth of Foreign Direct Investment (FDI) inflows, has

reported India as the third most attractive location for FDI for 2009-2011.

According to the WIR 2009 report, the top five most attractive locations for FDI

for 2009-11 are China, United States, India, Brazil, and the Russian Federation.

India has retained the second place in A.T. Kearneys 2007 Foreign DirectInvestment Confidence Index, a position it has held since displacing the US in

2005. India continues to attract investors in the high value-added services

industries like financial services and information technology. The top position is

occupied by China, while the US is the fourth in the list. The report predicts

India to be on the cusp of FDI take off, in view of the Government maintaining

focus on reforms, overcoming narrow business interests, de-bottlenecking

infrastructure, logistics and regulatory barriers.

The 2009 survey of the Japan Bank for International Cooperation, conductedamong Japanese investors, continues to rank India as the second most promising

country for overseas business operations.


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CHAPTER 6: GROWTH FACTORS FOR FDI IN INDIA

Strong Economic Growth

Few countries have experienced the economic dynamism that India has enjoyed during the

past decade. This positive economic environment has attracted FDI by firms anxious to take

advantage of higher Indian living standards and increased demand for goods. The Indian

economy has grown, on average, more than 7 % annually since l994, and is forecast

to grow at comparable rate in 211. By 2004, India had become the tenth largest economy

in the world and the fourth largest in purchasing-power parity terms. With percapita incomehaving more than doubled since the mid80s. The Indian middle class has expanded and

Its purchasing power has increased significantly. Economic growth has not been

accompanied by high inflation-annual inflation in India has remained close to 4 %

since 2000. Increased FDI has stimulated both imports and exports contributing to rising

levels of international trade.

Low Wages

Foreign investors have been drawn to India not only by economic growth but also by low

labour costs. Indian salaries are considerably lower than those in the United States and other

industrialized countries. The average annual salary for all Indian employees in the

Manufacturing sector was approximately $l.080 in 20000l; by 2003-04 (latest data

available), the average annual salary had risen to approximately $l .270.' Annual salaries

for skilled workers in India arc much higher than these averages, but still substantially below

salaries in the United States and other developed countries.

Increased Opportunities for Private Sector Participation in Infrastructure Projects

To help alleviate the strains on the infrastructure, large government projects have been

Initiated including

(1)a National Highway Development Program to modernize roads connecting India s four

largest cities. Delhi. Mumbai, Chennai. and Kolkata ( the Golden Quadrilateral)(2) a rural roads program to better integrate rural areas into Indias transportation network


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(3) a National Railway Development Program to expand rail capacity between major cities

and provide better connectivity to Indian seaports

(4) a National Maritime Development Program to expand freight handling capacity in India`s

large seaports

( 5) a program to increase capacity at the New Delhi and Mumbai airports, which handle

about 50 %of the country's air traffic.

Educated Work Force

India`s educational system is vast, educates millions, and tums out thousands of well-trained

and skilled workers. India has an extensive system of schools, including primary and upper

primary schools, high schools, colleges for general education, colleges for professionaleducation (engineering. technology, medical. and teacher education), and

Universities/institutes.Many foreign investors have established R&D centres in India and

have made it an important location for software development. Indeed. 20 % of the Fortune

500 companies have R&D facilities in India, drawn in large part by this vast pool of scientific

and technical

Access to Capital

The Indian financial sector has experienced significant reforms in recent years. Government

control and regulation have been reduced; interest rates have been allowed to fluctuate with

the market, restrictions on capital inflows have been loosened, and private firms have been

encouraged to participate." Although the Indian government is still the dominant actor itt the

financial sector, foreign firms in India can access capital through bank loans, equity markets.

And international financial institutions.


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CHAPTER 7: CAUSES OF LOW FDI IN INDIA

Infrastructure bottlenecks: Globalization and economic liberalization have stepped upmany economic activities in the Indian economy, putting heavy stress on the available

infrastructure. The government has taken certain steps to increase facilities like transport,

power. and telecommunications. But these efforts haven't yielded the desired results. The

growth in infrastructure has not matched the demand. Thus the inadequate infrastructure has

become a major hurdle for inward FDI flows. The poor infrastructure facilities in the country

have discouraged foreign investors from investing their money in India.

Bureaucratic hurdles: The government has initiated several measures for smooth flow of Dl

into the country The Companies Act has been amended to ease restrictions on corporate

investments. There are provisions in the relevant act for automatic approvals in many cases

and for easy establishment of business units. Nevertheless, investors have to deal with

inefficient and slow-moving bureaucracy for several things. Although the economy is

progressing towards liberalization and globalization. The process of economic reforms is very

slow. The complex approval procedures confronting foreign investors also discourage FDl.

Tax and Tariff: India follows a complex tax and tariff structure, which makes it difficult for

potential investors to project their returns. The individual state governments in the country

have their own tax and tariff structures. Besides confusion, this adds to uncertainty of returns

for investors.

Labour laws: The labour laws in India are highly complex and inflexible. Existing Indian

labour laws forbid layoff of workers and. therefore; even legitimate attempts to restructure

business are thwarted. The lack of an exit policy is also responsible for India`s poor

performance in the area of FDl.

Political instability and Corruption: In recent years, the government at the Centre has

become shaky with a multiplicity of political parties having formed ruling coalitions. In

reality, regional political parties hold sway over the ruling coalition at the Centre. As the

political parties in the coalition government have divergent political agenda. It has become

highly difficult to push for sustained economic reforms and growth in India. Moreover, the

political system in general is highly corrupt.


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CHAPTER 8: BENEFITS OF FDI IN INDIA

Attracting foreign direct investment has become an integral part of the economic

development strategies for India. FDI ensures a huge amount of domestic capital, production

level, and employment opportunities in the developing countries, which is a major step

towards the economic growth of the country. FDI has been a booming factor that has

bolstered the economic life of India, but on the other hand it is also being blamed for ousting

domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of

investment patterns. The effects of FDI are by and large transformative. The incorporation of

a range of well-composed and relevant policies will boost up the profit ratio from Foreign

Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been

listed as under:

Economic growth- This is one of the major sectors, which is enormously benefited from

foreign direct investment. A remarkable inflow of FDI in various industrial units in India has

boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the

trading of goods and services in India both in terms of import and export production.

Products of superior quality are manufactured by various industries in India due to greater

amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities

by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing ofknowledge from India especially in the Information Technology sector. It helps in developing

the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spill over to domestic firms- Various foreign firms are now occupying a

position in the Indian market through Joint Ventures and collaboration concerns. The

maximum amount of the profits gained by the foreign firms through these joint ventures is

spent on the Indian market.


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Rising Salaries and High Turnover in Some Industries Strong demand for skilled workers

in India has led to rising salaries and high turnover. To expand their operations in India.

Large multinational computer firms, automotive firms, and electronic firms have offered to

double or triple the salaries of workers employed by Indian firms and have aggressively

recruited graduates from top Indian universities and technical schools. Scientists and

engineers in Indian government research laboratories haw lull to pursue opportunities and

higher salaries in the private sector. Indian companies have also inexperienced rapid turnover

as their skilled workers leave and go to work for other employers.


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CONCLUSION

Indias potential to attract increased FDI inflows is vast, although poor infrastructure,

excessive bureaucracy and interdepartmental wrangling will slow the pace of opening in

many sectors. The infrastructure, energy, telecoms, IT and insurance sectors are likely to be

the main magnets for FDI. Producers and assemblers of cars and automotive components are

also re-evaluating Indias potential, as are biotechnology firms. The establishment of special

economic zones, in which 100% foreign ownership is allowed, in order to promote exports

should attract increased FDI inflows into export-oriented industries.

India has been receiving increasing amounts of FDI since 1991-92. It received about $129million FDI in 1991-92, which went up to $613 million in 2001-02 and further up to $4.6

billion in 20011-12. The government has facilitated inflows of FDI by making its policies

relatively liberal since 1991-92. FDI inflows have complemented domestic investment and

hence contributed to capital formation as well as to bringing in new technologies and global

linkages.

Indias skilled, English-speaking workforce has been a significant attraction for FDI,

particularly in the information technology (IT) sector. Caps on FDI in protected industries

have been steadily lifted: in January 2004 the limits on foreign investment in oil production

and oil refining were abolished, and in private banking the limit was raised to 74%. In

October 2004 the pectoral caps were raised in insurance (to 26%), civil aviation (to 49%) and

telecoms (to 49%). The limit for some telecoms services, for example Internet service

providers (ISPs), was subsequently raised to 74% in February 2005, and all basic, mobile,

and value-added telecoms services were moved under the 74% limit in November 2005. In

February 2006 FDI up to 51% was permitted for retail trading of single brand products.

However, fuller liberalisation of the retail sector has been held up by political opposition,

and some sectors, such as agriculture, remain off-limits to foreign investment. The approval

process is gradually being simplified, and the government is expanding the number of

industries that are subject to automatic approval. However, state-level impediments can be

severe, and companies have been known to abandon FDI projects mid-way through the

implementation stage.


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FUTURE RECOMMENDATIONS

India should take steps to ensure an enabling business environment to improve Indias

attractiveness as an investment destination and a global manufacturing hub.

Some of them are:

India should put more focus in improving its infrastructural facilities. Government should take steps to enhance labor laws flexibility. Particular attention should also be paid to the removal of restrictions on FDI in the

services sectors -- including telecoms, banking and insurance, aviation, etcas this

will help ease transactions costs for both consumers and business.

Concurrent to the establishment of SEZs in strategic locations, the government shouldalso provide all necessary infrastructural facilities to ensure the success of the SEZ

because the fact is that for an SEZ to do well, there must some level of active

government intervention.

The effectiveness of the Foreign Investment Implementation Authority (FIIA) needsto be enhanced. There is a need to fast track FDI inflows via the provision of a one-

stop after-care service to foreign investors should be enhanced and be given wider

powers.

Image-building activities promoting the country and its regions and states asfavourable locations for investment should be undertaken.

Investment-generating activities should be undertaken through direct targeting offirms by promotion of specific sectors and industries, and personal selling and

establishing direct contacts with prospective investors

Efforts should be taken to curb corruption and remove bureaucratic hurdles in thecountry in order to attract more FDI.


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REFERENCES

Webliography

http://www.freewebs.com/rrajan1/IFDI.pdf

www.ibef.org/india/economy/fdi.aspxhttp://graphics.eiu.com/upload/WIP_2007_WEB.pdf

http://dipp.nic.in/English/Publications/FDI_Statistics/2011/india_FDI_August2011.pdf

http://dipp.nic.in/manual/manual_0403.pdf

http://www.rbi.org.in/scripts/FAQView.aspx?Id=26

http://www.madaan.com/sectors.html

http://planningcommission.nic.in/aboutus/committee/strgrp/stgp_fdi.pdf

http://business.mapsofindia.com/fdi-india/advantages.html

http://dipp.nic.in/English/Publications/Annual_Reports/AnnualReport_Eng_2010-11.pdf

http://dipp.nic.in/English/Publications/SIA_Newsletter/2011/jul2011/index.htm

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ITO and wto fdi