Professional Documents
Culture Documents
Made By:
Vinisha Singh
A2424515011
Garima Bhatia
A2424515010
MBA-FM
Table of Contents
Introduction...........................................................................................4
What is Foreign Direct Investment?.........................................................5
Advantages of Foreign Direct Investment................................................6
Disadvantages of Foreign Direct Investment............................................7
Conditions to be fulfilled by foreign countries to enter Indian markets......8
FDI and India.........................................................................................9
Problems for low FDI flow to India.........................................................12
Suggestions for increased flow of FDI in India........................................13
Sectoral Analysis..................................................................................15
Manufacturing Sector........................................................................15
Energy Sector....................................................................................16
Service Sector...................................................................................17
Automobiles Sector............................................................................19
IT Sector...........................................................................................20
FDI inflow to India................................................................................21
Recent policy measures........................................................................23
Incentives............................................................................................23
Central government incentives ..........................................................23
State government incentives .............................................................23
Conclusion...........................................................................................24
References...........................................................................................25
Introduction
Foreign capital plays a constructive role in a countrys economic development.
Sometimes domestically available capital is inadequate for the purpose of various
developmental processes. Foreign capital is seen as a way of filling in gaps between
the domestically available supplies of savings, government revenue, foreign
exchange and the planned investment necessary to achieve developmental targets.
This is very true in case of various developing countries like India.
India is the second fastest growing major economy in the world. Indian economy is
diverse and encompasses agriculture, handicrafts, manufacturing, textile and a
multitude of services. India adopted a socialist inspired approach for most of its
independent history with the strict government control over private sector
participation, foreign trade and foreign direct investment. In 1991, Government of
India initiated a no. of economic reforms. As a result of the various policy initiatives
taken, India has rapidly changing from restrictive regime to a liberal one Kadam
(2012). The various forms of foreign capital flowing into India has helped to bring in
huge amounts of Foreign Direct Investment (FDI) into the country, which in its turn
has given a major boost to the Indian economy.
Greenfield Investment
A form of foreign direct investment where a parent company starts a new venture in
a foreign country by constructing new operational facilities from the ground up. In
addition to building new facilities, most parent companies also create new long-term
jobs in the foreign country by hiring new employees. For example, Volkswagen
acquired Skoda following the latter's string of losses.
Brownfield Investment
When a company or government entity purchases or leases existing production
facilities to launch a new production activity. This is one strategy used in foreigndirect investment. For example, Vodafone Group is a mobile network operator
headquartered in Newbury, Berkshire, England, UK and took over Hutchison Essar in
India.
Developing countries, which invite FDI, can gain access to a wider global and better
platform in the world economy.
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
FDI apparently helps in the outsourcing of knowledge from India especially in the
Information Technology sector. Developing countries by inviting FDI can introduce
world-class technology and technical expertise and processes to their existing
working process. Foreign expertise can be an important factor in upgrading the
existing technical processes. For example, the civilian nuclear deal led to transfer of
nuclear energy know-how between the USA and India.
Increased competition
FDI increases the level of competition in the host country. Other companies will also
have to improve on their processes and services in order to stay in the market. FDI
enhanced the quality of products, services and regulates a particular sector.
Linkages and spillover 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.
Employees of the country which is open to FDI get acquaint with globally valued
skills.
Employment
FDI has also ensured a number of employment opportunities by aiding the setting
up of industrial units in various corners of India.
Disadvantages of Foreign Direct Investment
Although FDI brings with it lot of advantages but it is not free from disadvantages as
well. Following are some of its demerits:
The biggest fear from FDI is that it is likely to destroy the small entrepreneurs or
small kirana shops as they will not be able to withstand the tough competition of
big entrepreneurs as these entrepreneurs are going to provide all the goods to
the consumers at much lesser prices.
Shrinking of jobs
Many critics of FDI are of the view that entry of big foreign chains like Wal-Mart,
Carrefour etc. are not going to generate any jobs in reality in India. At best the
jobs will move from unorganized sector to organized sector while their number
will remain the same or lesser but not more.
Critics of FDI are also of the view that it is a fallacy that the farmers are going to
benefit in any way because of the entry of foreign chains in India rather it will
make the Indian farmers a slave of these big chains & the farmers will entirely be
on their mercy. Thus, FDI is only going to deteriorate the already miserable
conditions of Indian farmers.
Foreign
direct
investment (FDI) has played an important role in the process of globalization 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
liberalization of trade and investment regimes, and deregulation and privatization 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. At the 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.
In India FDI inflow made its entry during the year 1991-92 with the aim to bring
together the intended investment and the actual savings of the country. To pursue a
growth of around 7 percent in the Gross Domestic Product of India, the net capital
flows should increase by at least 28 to 30 percent on the whole. But the savings of
the country stood only at 24 percent.
The gap formed between intended investment and the actual savings of the country
was lifted up by portfolio investments by Foreign Institutional Investors, loans by
foreign banks and other places, and foreign direct investments. Among these three
forms of financial assistance, India prefers as well as possesses the maximum
amount of Foreign Direct Investments. Hence FDI is considered as a developmental
tool for growth and development of the country. Therefore, this study is undertaken
to analyze the flow of FDI into the country identifying the various set of factors
which determine the flow of FDI.
The below table and chart shows that FDI inflow into India before 1991 was minimal
with the Compounded Annual Growth Rate showing only 25.46 percent. During this
period, foreign investments into India were restricted and allowed moderately in few
sectors. This is mainly because of the kind of policies which the government of India
has adopted over the years which includes, `inward looking strategy'; and
dependence of external borrowings. In turn, the borrowings resulted in foreign debts
which were preferred to the foreign investments to bridge the gap between
domestic savings and the amount of investments required. In 1991, when the
government of India started the economic reforms program, FDI had suddenly
become important for India which was looked upon as a key component of economic
reforms package. The New Industrial Policy of 1991 gave utmost priority in
attracting FDI inflows. In this process, the government started opening up of
domestic sectors to the private and foreign participation which was earlier reserved
only for the public sector. This was followed by slow but with significant relaxation of
regulatory and entry restrictions on FDI inflows. Later substantial increase in the
volume of FDI inflows into India was observed during the Post Liberalization period.
During the initial phase of post liberalization period i.e., from 1991 to 1998, there
was continuous increase in the FDI inflows. The total amount of the FDI inflows
during the period 1991-92 to 1997-98 had amounted to US$10,868 million. The
increase was largely due to the expanded list of industries or sectors which were
opened up for foreign equity participation. This was followed by relaxation of
various rules, regulations and introduction of various policies by the government to
promote the FDI inflows. FDI inflows declined to the level of US$2,462 million in the
year 1998-99 and further to US$2,155 million in 1999-2000. The reasons for the
declining trend of FDI inflows were due to various set of factors. Firstly, the most
important factor was the several restrictions imposed on India by the USA on
account of the nuclear test carried out by India at Pokhran. The second factor was
the slowdown of the Indian economy due to the mild recession in US and global
economy. The third one was about unfavorable external economic factors such as
the financial crisis of South-East Asia. Fourthly, the decline was due to the political
instability and the poor domestic industrial environment.
In 2002-03, FDI inflows were declined to US$ 5035. They were also reduced to US$
4322 during 2003-04. This fall in flow of FDI into the country was due to the Global
economic recession. Then, from 2004-05 onwards, there has been steady increase
in the flow of FDI into the country with highest annual growth rate which has
reached 154.72 percent during 2006-07. Further, the table shows that the
compounded annual growth rate (CAGR) which was 25.46 percent during Pre
liberalization has increased to 34.73 percent during the Post liberalization period.
This shows the openness of the Government in liberalizing and globalizing the
economy to the outside world through relaxation of regulatory and entry restrictions
on FDI inflows. Thus, on analyzing FDI inflows into the country over a period of 30
years it is observed that the compounded annual growth rate (CAGR) is 25.46
percent during 1980-81 to 1990-91 i.e., during the pre liberalization period. On
comparison with the post liberalization period, it is found that the annual
compounded growth rate has excavated to 34.73 percent showing the relaxation of
regulatory and entry restrictions on FDI inflows in the economy. This shows that the
importance of FDI into the country is realized by the Government during the Post
liberalization period. In this period of 19 years, steady increase of FDI inflow was
observed from 1991-92 to 2009-10 except the period from 1998-99 to 1999-00 and
again the period from 2002-03 to 2003-04.
It is cited as a major hurdle for FDI inflows into India. This bottleneck in the form of
poor infrastructure discourages foreign investors in investing in India. Indias age
old and biggest infrastructure problem is the supply of electricity. Power cuts are
considered as a common problem and many industries are forced to close their
business.
Large firms in India are not allowed to retrench or layoff any workers, or close down
the unit without the permission of the state government. These laws protect the
workers and thwart legitimate attempts to restructure business. To retrench
unnecessary workers, firms require approval from both employees and state
governments-approval that is rarely given. Further, Trade Unions extort huge sums
from companies through over-generous voluntary retirement schemes.
Corruption:
The reform process of liberalizing the economy is concentrated mainly in the Centre
and the State Governments are not given much power. In most key infrastructure
areas, the central government remains in control. Brazil, China, and Russia are
examples where regional governments take the lead in pushing reforms and
prompting further actions by the central government.
Indias export processing zones have lacked dynamism because of several reasons,
such as their relatively limited scale; the Governments general ambivalence about
attracting FDI; the unclear and changing incentive packages attached to the zones;
and the power of the central government in the regulation of the zones. India which
established its first Export Processing Zone (EPZ) in 1965 has failed to develop the
zones when compared to China which took initiative for establishment only in 1980.
Corporate tax rates in East Asia are generally in the range of 15 to 30 percent,
compared with a rate of 48 percent for foreign companies in India. High corporate
tax rate is definitely a major disincentive to foreign corporate investment in India.
There were too many anomalies on the government side during past two decades
and they are still affecting the direct inflow of FDI in India such as mismanagement
and oppression by the different company, which affect the image of the country and
also deject the prospective investor, who is very much conscious about safety and
constant return on their investment.
Suggestions for increased flow of FDI in India
China gets maximum FDI in the manufacturing sector, which has helped the country
become the manufacturing hub of the world. In India the manufacturing sector can
grow if infrastructure facilities are improved and labour reforms take place. The
country should take initiatives to adopt more flexible labour laws.
Though the Government has hiked the sectoral cap for FDI over the years, it is time
to revisit issues pertaining to limits in such sectors as coal mining, insurance, real
estate, and retail trade, apart from the small-scale sector. Government should allow
more investment into the country under automatic route. Reforms like bringing
more sectors under the automatic route, increasing the FDI cap and simplifying the
procedural delays has to be initiated. There is need to improve SEZs in terms of
their size, road and port connectivity, assured power supply and decentralized
decision-making.
Indias volume of FDI has increased largely due to Merger and Acquisitions (M&As)
rather than large Greenfields projects. M&As not necessarily imply infusion of new
capital into a country if it is through reinvested earnings and intra company loans.
Business friendly environment must be created on priority to attract large
Greenfields projects. Regulations should be simplified so that realization ratio is
improved (Percentage of FDI approvals to actual flows). To maximize the benefits of
FDI persistently, India should also focus on developing human capital and
technology.
India has a well developed equity market but does not have a well developed debt
market. Steps should be taken to improve the depth and liquidity of debt market as
many companies may prefer leveraged investment rather than investing their own
cash. Therefore it is said that countries with well-developed financial markets tend
to benefits significantly from FDI inflows.
India has a huge pool of working population. However, due to poor quality primary
education and higher education, there is still an acute shortage of talent. FDI in
Education Sector is lesser than one percent. By giving the status of primary and
higher education in the country, FDI in this sector must be encouraged. However,
appropriate measure must be taken to ensure quality education. The issues of
commercialization of education, regional gap and structural gap have to be
addressed on priority.
India should consciously work towards attracting greater FDI into R&D as a means of
strengthening the countrys technological prowess and competitiveness.
Sectoral Analysis
Manufacturing Sector:As rising labor costs constrain Chinas manufacturing output, India is well positioned
to become a larger player in the manufacturing game. In an effort to increase
manufacturing investment and output in the country, India instituted the National
Manufacturing Policy. This policy, the first of its kind in India, facilitates Public
Private Partnerships (PPP) as a means to entice investment into the countrys
National Investment and Manufacturing Zones (NIMZs).
The policy has several main objectives:
Sectoral regulations, including FDI caps and entry route requirements; and
The necessity for an industrial license if FDI is greater than 24 percent in a
non-MSE enterprise that produces MSE reserved products.
Energy Sector:As the fourth largest energy consumer, India faces many challenges when tasked
with meeting domestic demand. The country currently relies on imports to meet the
majority of its energy needs. Coal consumption is the largest source of energy in
India, followed by oil and natural gas. Many investment opportunities will be
available as India continues down the path of energy market liberalization and
reform in an effort to balance its international energy trade.
Coal
Despite large domestic coal production, India still faces high domestic demand and
must import coal to feed its needs. Furthermore, demand for coal is expected to
grow as Indias population expands. To increase coal production, the Indian
government has set up captive consumption coal blocks to dedicate land and
resources to mining efforts.
The following are some of the vital points for investment in the coal sector:
FDI inflows up to 100 percent are permitted in the coal and lignite mining for
captive consumption in the power generation sector
FDI inflows up to 74 percent are permitted for exploration and mining of
captive consumption coal and lignite
FDI inflows up to 100 percent are permitted for coal processing plants as long
as the processed coal is sold back to the supplying company
Foreign investors holding less than a 50 percent share in coal production
units in India can invest in coal mining or other related activities through the
automatic route, which does not require approval from the Foreign
Investment Promotion Board
Electricity
Indias electricity capacity is the fifth largest in the world, but further investment is
needed to provide stable electricity to the entire country. Blackouts are common
and rural areas lack access to power supplies. Because of this, FDI policy for
electricity is one of the most liberal of Indias foreign investment schemes.
Renewable Energy
The government of India allows 100 percent foreign direct investment in the
renewable energy sector and has put in place policies conducive to attracting
foreign companies to the market. These incentives include:
Service Sector:
The services sector, with around 52 per cent contribution to the Gross
Domestic Product (GDP) in 2014-15, has made rapid strides in the past
decade and a half to emerge as the largest and one of the fastest-growing
sectors of the economy.
The services sector is not only the dominant sector in Indias GDP, but has
also attracted significant foreign investment flows, contributed significantly to
exports as well as provided large-scale employment.
Indias services sector covers a wide variety of activities such as trade, hotel
and restaurants, transport, storage and communication, financing, insurance,
real estate, business services, community, social and personal services, and
services associated with construction.
The Indian services sector has attracted the highest amount of FDI equity inflows in
the period April 2000-May 2015, amounting to about US$ 43.35 billion which is
about 16.8 per cent of the total foreign inflows, according to the Department of
Industrial Policy and Promotion (DIPP).
Some of the developments and major investments by companies in the services
sector in the recent past are as follows:
Amazon, the world's largest online retailer, plans to invest Rs 31,700 crore
(US$ 5 billion) in India in addition to the US$ 2 billion investment it committed
two years ago, in expanding its network of warehouses, data centers and
increasing its online marketplace, besides launching an instant video and
subscription-based ecommerce services for high-end buyers, called Amazon
Prime, later this year.
Automobiles Sector
The anticipated reasons to invest in the automobiles sector in India are mainly:
IT Sector
If the latest figures on Indias inbound investment show growing ground for hope,
there is however narrowing room for complacency. Echoing the views conveyed in
the mid-year economic analysis 2014-2015 tabled in Parliament, in terms of FDI too,
a robust recovery has still to take hold.
Indian authorities expect the economy to grow 5-5.5% in the current fiscal year
before accelerating to 6-6.5% in 2015-16 as the impact of the reform measures
According to the World Bank, by 2016, the Indian economy is forecast to grow at
7%, equaling Chinas pace of 7%. Lower oil prices are creating a window of
opportunity for oil-importing countries like India and it is critical that this window be
used to usher in fiscal and structural reforms that will boost long-term growth and
development says the World Bank.
Each state government has its own incentive policy, which offers various
types of incentives based on the amount of investments, project location,
employment generation, etc. The incentives differ from state to state and are
generally laid down in each states industrial policy.
The broad categories of state incentives include: stamp duty exemption for
land acquisition, refund or exemption of value added tax, exemption from
payment of electricity duty etc.
Conclusion
Indias Foreign Direct Investment (FDI) policy has been gradually liberalised to make
the market more investor friendly. The results have been encouraging. These days,
the country is consistently ranked among the top three global investment
destinations by all international bodies, including the World Bank, according to a
United Nations (UN) report.
For Indian economy which has tremendous potential, FDI has had a positive impact.
FDI inflow supplements domestic capital, as well as technology and skills of existing
companies. It also helps to establish new companies. All of these contribute to
economic growth of the Indian Economy.
References
http://study.com/academy/lesson/what-is-foreign-direct-investment-definitionadvantages-disadvantages.html
http://www.investopedia.com/terms/
http://www.ibef.org/industry/services.aspx
http://www.makeinindia.com/policy/foreign-direct-investment/