ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES

FDI IN INDIA PAST, PRESENT AND FUTURE

PROFESSOR Pushan DUTT INSEAD SINGAPORE CAMPUS

TEAM MEMBERS Ajay BANSAL Gurjeet SINGH

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE Introduct on to FDI Foreign Direct Inve t!ent "FDI# $roa%&y enco!'a e any &ong(ter! inve t!ent $y an entity t)at i not a re i%ent o* t)e )o t country+ ,y'ica&&y- t)e inve t!ent i over a &ong %uration o* ti!e an% t)e i%ea i to !a.e an initia& inve t!ent an% t)en u$ e/uent&y .ee' inve ting to &everage t)e )o t country0 a%vantage 1)ic) cou&% $e in t)e *or! o* acce to $etter "an% c)ea'er# re ource - acce to a con u!er !ar.et or acce to ta&ent 'eci*ic to t)e )o t country ( 1)ic) re u&t in t)e en)ance!ent o* e**iciency+ ,)i &ong(ter! re&ation )i' $ene*it $ot) t)e inve tor a 1e&& a t)e )o t country+ ,)e inve tor $ene*it in getting )ig)er return *or )i inve t!ent t)an )e 1ou&% )ave gotten *or t)e a!e inve t!ent in )i country an% t)e )o t country can $ene*it $y t)e increa e% .no1 )o1 or tec)no&ogy tran *er to it0 1or.er - increa e% 're ure on it0 %o!e tic in%u try to co!'ete 1it) t)e *oreign entity t)u !a.ing t)e in%u try i!'rove a a 1)o&e or $y )aving a %e!on tration e**ect on ot)er entitie t)in.ing a$out inve ting in t)e )o t country+ Ind a!s " stor ca# Econo$ c D r%ct on and th% Rat ona#% &or E$%r'%nc% o& FDI as a Sourc% o& Econo$ c Gro(th A*ter getting in%e'en%ence in 2345- t)e govern!ent o* In%ia envi ione% a ocia&i t a''roac) to %eve&o'ing t)e countrie econo!y 6 $roa%&y $a e% on t)e USSR y te!+ ,)e govern!ent %eci%e% to a%o't an econo!ic agen%a t)at 1ou&% *o&&o1 *ive year '&an + Eac) *ive year '&an 1a *ocu e% on certain ector o* t)e econo!y t)at t)e govern!ent *e&t nee%e% to $e %eve&o'e% *or t)e countrie 'rogre + ,)e govern!ent *o&&o1e% an interventioni t 'o&icy an% %ictate% !o t o* t)e nor! o* running a $u ine certain ector an% ignoring ot)er + Unti& 2332- In%ia 1a 'ri!ari&y a c&o e% econo!y+ ,)e in%u tria& environ!ent in In%ia 1a )ig)&y regu&ate% an% a &icen e y te! 6 .no1n a 7 licence raj8 ( 1a in '&ace to en ure co!'&iance 1it) t)e govern!ent regu&ation an% %irective + Un%er t)e In%u trie Deve&o'!ent an% Regu&ation act "2392# tarting an% o'erating any in%u try re/uire% $y *avoring

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE a''rova& ( in t)e *or! o* a &icence ( *ro! t)e govern!ent+ Any c)ange in 'ro%uction ca'acity or c)ange in t)e 'ro%uct !i: a& o ca&&e% *or o$taining govern!ent a''rova&+ ,)i &e% to t)e %eve&o'!ent o* increa ing&y co!'&e: an% o'a/ue 'roce%ure *or o$taining a &icence an% &e% to a $urgeoning $ureaucracy+ ,)e &icence y te! t)u )i*te% &ot o* 'o1er an% 'erver e incentive in t)e )an% o* *i&e 'u )ing $ureaucrat "or 7 Babus8#+ ,)i %irect&y &e% to increa e% corru'tion a t)e 'roce%ure *or o$taining a &icence 1a vague&y %e*ine% an% &e*t o'en to in%ivi%ua& inter'retation + In a%%ition- t)ere 1a no !onitoring y te! in '&ace to en ure 'ee%y %i 'o a& o* &icence a''&ication + A& o- t)e &a$or !ar.et 1ere )ig)&y regu&ate% an% t)e govern!ent %i% not a&&o1 t)e co!'anie to &ay o** it 1or.er + ,)i !eant t)at even in evere %o1nturn t)e co!'anie .e't $&ee%ing $ut cou&% not rationa&i;e it 1or.*orce+ Eventua&&y t)e e co!'anie ( !ajority o* t)e! 'u$&ic ector co!'anie 6 1ou&% $eco!e c)ronica&&y ic. an% t)e govern!ent .e't u$ i%i;ing t)e! at )uge co t to t)e ta:'ayer+ One %raconian !ea ure 1a t)e intro%uction o* t)e Foreign E:c)ange Regu&ation act "FERA# o* 235< 1)ic) curtai&e% *oreign inve t!ent to 4=> in In%ian co!'anie + ,)i )a% a very a%ver e i!'act an% co!'anie uc) a Coca(Co&a an% IBM e:ite% t)e country+ ,)e i!'act o* t)i cou&% $e een in t)e &o1 gro1t) o* t)e In%ian econo!y a co!'are% to it neig)$or over a <= year 'erio%+ ,a$&e 2 )o1 a co!'ari on $et1een t)e In%ian in%u tria& %eve&o'!ent an% t)at o* o!e o* t)e ot)er %eve&o'ing countrie in t)e region+ Fro! t)e %ata it i c&ear t)at In%ia &agge% $e)in% ot)er countrie in it gro1t) rate over a u taine% 'erio% o* ti!e an% t)i &e% to increa e% 'overty+ Sur'ri ing&y- t)ere 1ere o!e very trange rea on given *or t)i &ag in econo!ic 'er*or!ance+ ,)e e:cu e 1ent to uc) ri%icu&ou e:tent a to t)e %eve&o'!ent o* a 7Hin%u rate o* return8 t)eory 1)ic) tate% t)at t)e 7Hin%u rate o* return8 1a &o1er t)at t)at o* t)e 1e tern nation an% t)u a co!'ari on o* In%ia0 econo!ic return 1it) t)at o* 1e tern nation 1a ina''ro'riate ,)e govern!ent a& o a%o'te% a 'o&icy o* i!'ort u$ titution an% t)e i%ea 1a to )e&' t)e %o!e tic in%u try i!'rove in a a*e environ!ent unti& t)e &oca& in%u trie cou&% co!'ete internationa&&y+ ,)i 1a i!'&e!ente% $y &evying e:tre!e&y )ig) tari** or co!'&ete&y $anning i!'orte% goo% + ,a$&e ? in t)e a''en%i: )o1 t)e no!ina& tari** rate in e**ect

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE in 23@9+ Due to t)e govern!ent0 'rotection !o t o* t)e in%u trie *ai&e% to catc) u' 1it) t)e tec)no&ogica& innovation ta.ing '&ace aroun% t)e 1or&%+ A t)ey 1ere )ie&%e% *ro! i!'ort %ue to e:tre!e&y )ig) i!'ort tari** t)e in%u trie )a% no incentive to i!'rove t)eir o'eration + ,)i &e% to a viciou circu&ar &ogic 1)ere t)e tari** 1ere not re%uce% ince %o!e tic co!'anie cou&% not co!'ete an% t)e )ig) tari** 'revente% in%u trie *ro! innovating+ Corru'tion an% o'a/uene t)e ituation $eca!e e:tre!e&y co!'&e:+ Th% BoP Cr s s Gu&* 1ar $ro.e out in 233= an% t)e re u&ting oi& )oc. 1a enoug) to trigger a eriou $a&ance o* 'ay!ent "BoP# cri i *or In%ia in 2332+ ,)e co t o* oi& i!'ort 1ent u' to 2=-@?= crore *ro! t)e e ti!ate% A-4== crore 2+ ,ra%itiona&&y- In%ia receive% &ot o* re!ittance *ro! t)e e:'atriate 1or.ing in t)e Gu&* countrie an% t)i ource a& o %rie% u' a t)e !igrant In%ian 1or.er 1ere *orce% to return )o!e %ue to t)e 1ar+ ,)e 'ro$&e! 1a co!'oun%e% %ue to an e:tre!e&y )ig) in*&ation o* a$out 2A> an% a *i ca& %e*icit o* a$out @+9>+ ,)e ituation 1a o evere t)at In%ia )a% *oreign re erve o* on&y aroun% B2 Bi&&ion ( $are&y enoug) to cover t1o 1ee. o* it 'ay!ent o$&igation + In%ia0 cre%it rating 1a %o1ngra%e% a it %e$t ervicing ca'a$i&ity 1a critica&&y i!'aire% an% t)e govern!ent )a% to '&e%ge it go&% re erve to oot)e cre%itor + O ten i$&y- t)e trigger *or t)e BoP cri i 1a t)e oi& )oc. $ut t)e %ee'er i ue 1a t)at t)e govern!ent0 )eavy )an% in trying to regu&ate $u ine e an% to !ove t)e country to1ar% econo!ic 'rogre )a% *ai&e% to 'ro%uce re u&t an% %ra tic !ea ure 1ere no1 ca&&e% *or+ Face% 1it) t)e e in ur!ounta$&e 'ro$&e! - t)e In%ian govern!ent turne% to t)e IMF an% t)u $egan a erie o* *ar reac)ing re*or! in t)e In%ia econo!y 1)ic) envi ione% tran *or!ing t)e country0 econo!y *ro! an interventioni t an% over&y(regu&ate% econo!y to a !ore !ar.et oriente% one+ o* t)e y te! a%%e% to t)e %i**icu&tie an%

Fro! cri i to recovery- In%ia0 e:'erience 1it) econo!ic re*or! o* 233=0 - C+G Sa)a%evan)tt'DEEganga+ii!&+ac+inEF%evanEeco&i$( aj!+'%*

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE " stor ca# tr%nds n FDI n Ind a Starting 1it) t)e !ar.et re*or! initiate% in 2332- In%ia gra%ua&&y o'ene% u' it econo!y to FDI in a 1i%e range o* ector + ,)e 7&icence(raj8 y te! 1a %i !ant&e% in a&!o t a&& t)e in%u trie + ,)e in*ra tructure ector 1)ic) 1a in %ire nee% o* ca'ita& 1e&co!e% *oreign e/uity+ FDI 1a e 'ecia&&y encourage% in 'ort - )ig)1ay - oi& an% ga in%u trie 'o1er generation an% te&eco!!unication+ Con u!er goo% an% ervice ector 1)ic) 1a once co!'&ete&y o**(&i!it *or *oreign e/uity 1a a& o gra%ua&&y o'ene% u'+ ,)e re erve $an. o* In%ia et u' an auto!atic a''rova& y te! 1)ic) a&&o1e% inve t!ent in &a$ o* 9=- 92 or 54> %e'en%ing on t)e 'riority o* t)e in%u try- a %e*ine% $y t)e govern!ent+ ,)e *oreign inve t!ent &i!it 1ere &o1&y rai e% an% o!e ector to 2==>+ ,)e re*or! t)u &e% to a gra%ua& increa e in FDI in In%ia+ ,a$&e < )o1 t)e FDI *&o1 to In%ia a*ter t)e tructura& re*or! $egan in 2332+ A can $e een *ro! t)e ta$&e- FDI increa e% *ro! a non(e:i tent va&ue in t)e tart to a$out B4 $i&&ion a year+ It )ou&% $e note% t)at ti&& ?===- t)e *igure o* FDI re'orte% actua&&y un%ere ti!ate t)e a!ount o* FDI accor%ing to IMF %e*inition+ ,)i i $ecau e t)e In%ian govern!ent )a% it o1n %e*inition o* FDI an% %i% not inc&u%e )ea% &i.e reinve te% earning - 'rocee% o* *oreign &i ting an% *oreign u$or%inate% &oan to %o!e tic u$ i%iarie + But- t)e govern!ent recogni;e% t)i 'ro$&e! an% a*ter a tu%y un%erta.en in ?==<- t)e tan%ar% %e*inition o* FDI a ugge te% $y t)e IMF 1a a%o'te% $y t)e In%ian govern!ent+ a1 t)e &i!it rai e%

Pr%s%nt Sc%nar o More an% !ore !u&ti(nationa& cor'oration )ave co!e to rea&i;e t)at In%ia i t)e '&ace to $e+ In%ia i t)e 1or&%0 econ% &arge t econo!y "in ter! o* 'o'u&ation# 1it) a tota& Nationa& Inco!e < "B95= 'o'u&ation o* ju t over one $i&&ion- *ort) &arge t in t)e 1or&% in ter! o* GDP ? "B<+< tri&&ion# an% ran.e% t1e&*t) in t)e 1or&% in ter! o* Gro
? <

,)e Gor&% Fact$oo. ?==9- )tt'DEE111+cia+govEciaE'u$&ication E*act$oo.Ein%e:+)t!& Gor&% Deve&o'!ent In%icator %ata$a e- Gor&% Ban.- A'ri& ?==9)tt'DEE111+1or&%$an.+orgE%ataE/uic.re*erenceE/uic.re*+)t!&

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE $i&&ion#+ It i 'otentia&&y a very *a t gro1ing !ar.et an% a&& t)e !u&ti(nationa&

cor'oration rea&i;e t)e *act t)at to ta.e a%vantage o* t)i ever gro1ing econo!y t)ey nee% to 're ent in t)e country+ It )a $een !ore t)an a %eca%e ince t)e re*or! *ir t $egan an% to%ay in t)e ?2 t Century- In%ia )a co!e a &ong 1ay *ro! t)e ear&y %ay o* licence raj an% Babus+ In%ia )a $een a$&e to !a.e it !ar. in t)e 1or&% tan%ing a a &ucrative country *or FDI $y $eco!ing !ore an% !ore co!'etitive on t)e 1or&% tan%ar% + Accor%ing to t)e A+ ,+ Cearney0 re'ort on t)e FDI Con*i%ence In%e: 4 in Octo$er ?==4In%ia 1a ran.e% t)ir% ju t $e)in% C)ina an% t)e Unite% State a t)e c)oice country *or *oreign inve t!ent u' *ro! it 'reviou ran.ing o* i:t) in ?==< an% *i*teent) in ?==?+ Hu t &oo.ing at 'ure nu!$er t)e a!ount o* FDI in t)e &a t cou'&e o* year )ave gone u' *ro! B?+< $i&&ion in t)e year ?=== to B<+4 $i&&ion in ?==2 an% ?==? an% eventua&&y B4+< $i&&ion in t)e year ?==<9 an% ti&& gro1ing+ A&& t)i gro1t) )a $een ac)ieve% t)roug) a nu!$er o *actor a!ong t 1)ic) t)e !ain *actor are 'roactive govern!ent 'o&icy an% regu&ation an% *avora$&e econo!ic uc) a )ig)&y e%ucate% $ut uc) a cu to!er con%ition + One e:a!'&e 1ou&% $e t)e *avora$&e con%ition

co!'arative&y c)ea' &a$or *orce *or out ourcing to In%ia- ervice

ervice ca&& centre an% re earc) an% %eve&o'!ent *aci&itie - 1)ic) 'ave% t)e 1ay *or o !any *uture inci%ence o* inve t!ent+ Ot)er e:a!'&e inc&u%e t)e a%o'tion o* nu!erou Dou$&e ,a:ation Avoi%ance Agree!ent 1it) ot)er countrie - creation o* nu!erou E:'ort Proce ing Ione an% S'ecia& Econo!ic Ione - &i$era&i;ation o* tra%e 'o&icie re&a:ation in i!'ort tari** in a&!o t a&& area an% on a&& 'ro%uct - increa e% i!'&i*ication o* t)e 1)o&e inve t!ent 'roce $y '&acing !ore an% !ore ector on t)e

auto!atic a''rova& route 1it) on&y &i!ite% ector re/uiring &icen ing- 'rovi ion o* ea y avai&a$i&ity o* in*or!ation on 'o&icie an% 'roce%ure o* FDI an% !o t o* a&& creation o*

4 9

FDI Con*i%ence In%e:- ,)e G&o$a& Bu ine Po&icy Counci&- Octo$er ?==4- Jo&u!e 5- A+ ,+ Cearney UNC,AD- FDI Data$a e On(Line- )tt'DEE tat +uncta%+orgE*%iEengERe'ortFo&%er ER*vie1EE:'&orer'+a 'K CSLre*ererM

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE in%e'en%ent in titution an% aut)oritie to a i t in t)e 'ro!'t an% !oot) *&o1 o* FDI into t)e country+ So!e o* t)e .ey )ig)&ig)t o* t)e current 'roce%ure an% 'o&icie o* Inve ting in In%ia are a *o&&o1 AD a# FDI o* u' to 2==> i a&&o1e% in nu!erou ector an% activitie 1)ic) inc&u%e !o t ervice o*t1are %eve&o'!ent-

!anu*acturing activitie - non($an.ing *inancia&

)o 'ita&- 'rivate oi& re*inerie - e&ectricity generation "non(ato!ic# E tran !i ion E %i tri$ution- roa% N )ig)1ay - 'ort N )ar$or - )ote& N touri !- re earc) an% %eve&o'!ent etc+ On&y a )ave $een &i!ite% to in%u tria& &icen ing an% a cou'&e $eing tota& 'ro)i$ite% e+g+ ato!ic energy- rai&1ay tran 'ort5 etc+ Ot)er '&ace 1)ere 2==> FDI i 'er!itte% are *or etting u' S'ecia& Econo!ic Ione "SEI# Unit an% 2==> E:'ort Oriente% Unit "EOU#+ $# ,)ere are !u&ti'&e *or! o* entry *or a cor'oration %e'en%ing on it nee% an% re/uire!ent 1)ic) inc&u%e entry t)roug) etting u' Hoint Jenture - G)o&&y O1ne% Su$ i%iarie - Liai on E Re're entative O**ice- Project O**ice or Branc) O**ice+ c# Li$era& *oreign e:c)ange regu&ation - un%er t)e ru&e o* t)e Centra& Ban.- na!e&y t)e Re erve Ban. o* In%ia e+g+ a&& *oreign inve t!ent an% %ivi%en% %ec&are% t)ereon i *ree&y re'atria$&e un&e aut)ori;e% %ea&er+ %# Favora$&e 'o&icie *or Foreign In titutiona& Inve tor "FII # &oo.ing to ju t inve t an% tra%e in a 1e&& a out o* t)e Stoc. E:c)ange un%er t)e Port*o&io Inve t!ent Sc)e!e "PSI#+ ,)ey )ave t)e o'tion o* inve ting in $ot) e/uity an% %e$t in tru!ent - t)e on&y catc) $eing t)at t)e inve t!ent )a to $e '&it in t)e ratio o* 5=D<=- an% a& o t)e ot)er
A

ot)er1i e 'eci*ie% un%er a 'articu&ar c)e!e an% t)roug) an

Manua& on Inve ting in In%ia(Foreign Direct Inve t!ent( Po&icy an% Proce%ure - Mini try o* Co!!erce an% In%u try- De'art!ent o* In%u tria& Po&icy an% Pro!otion- )tt'DEE%i''+nic+inE 5 Con*e%eration o* In%ian In%u try- )tt'DEE111+ciion&ine+orgE ervice E54E%e*au&t+a 'KPageMFDI>?=in >?=In%ia+)t!

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE o'tion o* %ec&aring t)e! e&ve $eco!ing a 2==> %e$t FII+ e# A !ature an% *avora$&e ta:ation y te! 1it) &o1 cu to! an% e:ci e %utie an% &o1 cor'orate ta:e + It cater *or nu!erou ta: )o&i%ay or re$ate %e'en%ing u'on t)e ector o* inve t!ent an% geogra')ica& &ocation e+g+ t)ere i a ta: )o&i%ay o* 2= year *or *oreign inve t!ent in in*ra tructure 'roject - variou 'roject ta.en u' in certain $ac.1ar% area in t)e Nort) Ea tern State an% Si..i!- unit &ocate% in 'eci*ie% ;one - 'roject 1)ic) are 2==> e:'ort oriente% etc+ Moreover In%ia )a a&rea%y entere% into a Dou$&e ,a:ation Avoi%ance Agree!ent "D,AA# 1it) A9 ot)er countrie - un%er 1)ic) t)e inco!e generate% in In%ia 1i&& $e ta:e% in In%ia an% t)en 1ou&% not $e re(ta:e% in t)e )o!e country o* t)e inve tor- on&y t)e %i**erence in t)e ta: rate $et1een t)e )o!e country an% In%ia 1ou&% $e 'aya$&e+ *# Cee'ing in !in% t)e gro1ing concern over inte&&ectua& 'ro'erty rig)t - In%ia )a $een 'ro!'t to enact nu!erou ru&e an% regu&ation e+g+ ,)e Patent Act- ,)e ,ra%e!ar. Act- ,)e Geogra')ica& In%icator o* Goo% Act an% ,)e De ign Act+ g# ,o a i t in 'rovi%ing a 'ro!'t an% Govern!ent )a !oot) inve t!ent 'roce t)e In%ian 'ure&y intere te% in %e$t in tru!ent an% t)en

et u' nu!erou in%e'en%ent in titution e+g+ ,)e e ta$&i )!ent o*

Foreign Inve t!ent I!'&e!entation Aut)ority "FIIA# to a i t in t)e 'ro!'t i!'&e!entation o* FDI a''rova& - t)e *or!ation o* t)e Foreign Inve t!ent Pro!otion Boar% "FIPB# to a e co!'&aint variou FDI 'ro'o a& an% to cater to t)e grievance an% t)e a''oint!ent o* a Bu ine O**icer(Cu!(Hoint Secretary in t)e Mini try o* o* 'otentia& an% current inve tor

O!$u% 'er on an% Grievance Co!!erce an% In%u try+

)# A& o- to en ure a%e/uate an% u'(to(%ate in*or!ation on current 'o&icie

an%

'roce%ure i avai&a$&e at a&& ti!e to inve tor variou 'oint o* ca&& )ave $een et u' 1)ic) can $e ea i&y acce e% e+g+ t)e Secretariat *or In%u tria& A i tance "SIA# )a $een et u' *or t)i 'articu&ar 'ur'o e+ Ot)er !ean are t)roug) t)e internet on

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ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE variou 1e$ ite "e+g+ )tt'DEE%i''+nic+in#- on&ine c)at - $u&&etin $oar% ervice -

*re/uent 'u$&ication an% !ont)&y ne1 &etter + i# Focu ing in on !ore recent event in In%ia an% 'eci*ica&&y in t)e Ban.ing an% In urance Sector- in 'reviou year t)e FDI &i!it in 'rivate ector $an. 1a rai e% to 54> *ro! t)e e:i ting 43> an% t)e in urance ector to $e )i.e% *ro! ?A> to 43> @$ut t)ere 1a a caveat o* on&y )aving 2=> voting rig)t )are)o&%ing- 1)ic) 1a irre 'ective o* t)e een a a !ajor con traint+ In ?==9- a ne1 regu&ation na!e&y

t)e Ban.ing Regu&ation "A!en%!ent# Bi&& ?==9 )a $een 'ro'o e% 1)ic) 1i&& give 'rivate inve tor voting rig)t 1)ic) 1i&& $e in &ine 1it) t)eir current )are)o&%ing+ Once t)i regu&ation i given t)e no%- it i &i.e&y to increa e *oreign inve t!ent igni*icant&y3+ Ind a co$1ar%d ( th Ch na Since In%ia an% C)ina are 'erceive% to $e t)e t1o !o t attractive &ocation *or FDI in t)e *uture a'art *ro! t)e Unite% State 2=- it 1ou&% $e goo% to ju t co!'are o!e .ey tati tic o* t)e t1o countrie +
Ind a Po'u&ation "?==9 e t+# La$or *orce "?==4 e t+# Po'u&ation gro1t) rate "?==9 e t+# In*ant Morta&ity "'er 2-=== &ive $irt) # Po'u&ation $e&o1 'overty &ine "?==2E? e t+# GDP "B- ?==4 e t+# GDP ( rea& gro1t) rate "?==4 e t+# Foreign Direct Inve t!ent "B- ?==<# No+ o* 'roject "Han(Se' ?==4# ,o' < FDI %e tination ector 2 $i&&ion 4@?+? !i&&ion 2+4> 9A+?3 %eat) ?9> <+<23 tri&&ion A+?> 4+?A3 $i&&ion 3@A I, N o*t1are Bu ine ervice Con u!er e&ectronic Re earc) N %eve&o'!ent Manu*acturing Sa&e !ar.eting N u''ort US- UC- Ger!any Ch na 2+< $i&&ion 5A=+@ !i&&ion =+9@> ?4+2@ %eat) 2=> 5+?A? tri&&ion 3+2> 9<+9=9 $i&&ion ?-9?= C)e!ica& Mac)inery N in%u tria& goo% I, N o*t1are Manu*acturing Sa&e !ar.eting N u''ort Bu ine ervice Ha'an- US- Ger!any

,o' < $u ine

*unction

,o' < ource countrie

@ 3

Bu%get ?==4- )tt'DEE111+e/uity!a ter+co!E$u%get=4=9E ector E$an.ing+a ' ,)e Econo!ic ,i!e On&ine- )tt'DEEecono!icti!e +in%iati!e +co!Eartic&e )o1E22=33?<+c! 2= FDI Con*i%ence In%e:- ,)e G&o$a& Bu ine Po&icy Counci&- Octo$er ?==4- Jo&u!e 5- A+ ,+ Cearney

Pa'% 2 o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE
Ind a LG- Genera& E&ectric- Inte& Ear&y 3=0 Ch na ,oyota- LG- For!o a P&a tic Grou' Late 5=0 E Ear&y @=0

,o' < inve tor Beginning o* FDI re*or!

SourceD CIA Gor&% Fact Boo. ?==9 ")tt'DEE111+cia+govEciaE'u$&ication E*act$oo.Ein%e:+)t!&#- FDI Fact*i&e ?==9 ")tt'DEE111+*%i!aga;ine+co!#- UNC,AD- FDI Data$a e On(Line ")tt'DEE tat +uncta%+orgE*%iEengERe'ortFo&%er ER*vie1EE:'&orer'+a 'KCSLre*erer#

On co!'aring t)e .ey attri$ute $et1een C)ina an% In%ia 3- C)ina co!e out !ore *avora$&e in ter! o* !ar.et i;e an% gro1t) 'otentia&- acce to e:'ort !ar.et - )ig)er govern!ent incentive - *inancia&Eecono!icE'o&itica&E ocia& ta$i&ity- /ua&ity o* &i*e an% In*ra tructure avai&a$i&ity 1)erea In%ia co!e out on to' 1it) re 'ect to 'rovi%ing a )ig)&y e%ucate% 1or.*orce- !anage!ent ta&ent- ru&e o* &a1- tran 'arency- *e1er cu&tura& $arrier an% a re&ative&y trong regu&atory environ!ent+ Ba e% on t)e e %i**erent attri$ute inve tor 'erceive C)ina an% In%ia a t1o %i**erent !ar.et *or 'otentia& inve t!ent+ In%ia i i%enti*ie% a t)e u'co!ing $u ine I, ervice 'rovi%er an% t)ere are !ore inve t!ent in ector an% activitie o*t1are- $u ine *a te t gro1ing con u!er !ar.et an% t)e 1or&%0 &ea%ing !anu*acturer an% i inve t!ent centre *or ector an% activitie uc) a !ac)inery N in%u tria& goo% an% auto!o$i&e + Curr%nt Cha##%n'%s and I$1ro3%$%nt Ar%as A e:'&aine% a$ove- In%ia i %e*inite&y a &ucrative '&ace *or FDI- $ut t)ere are certain&y o!e c)a&&enge an% area *or i!'rove!ent ti&& 're ent+ Unti&- t)e e area are )one% to 'er*ection- In%ia 1i&& not $eco!e t)e nu!$er one '&ace *or FDI+ So!e o* t)e .ey area are &i te% $e&o122D
22 22

'roce

an%

uc) a I, N ee! a an

ervice an% re earc) N %eve&o'!ent+ C)ina i recogni;e% a t)e !anu*acturing o* c)e!ica& -

FDI Con*i%ence In%e:- ,)e G&o$a& Bu ine Po&icy Counci&- Octo$er ?==4- Jo&u!e 5- A+ ,+ Cearney Co!'eting *or G&o$a& FDID O''ortunitie an% C)a&&enge *or t)e In%ian Econo!y- Sa%)ana Sriva tavaO an% Ra)u& Sen 22 GMRC Country Re'ortD In%ia "Country Ana&y i an% Foreca t# 6 2= May ?==9- Gor&% Mar.et Re earc) Centre

Pa'% *4 o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE a# Political riskD A!ong t t)e to' ite! i t)e 'o&itica& in ta$i&ity o* t)e country+ On one )an% t)e *act t)at In%ia i t)e 1or&%0 &arge t %e!ocracy %oe a%% a en e o* 'ri%e an% ecurity- $ut t)e )ar% rea&ity i t)at t)ere i in ur!ounta$&e in ta$i&ity 're ent+ Hu t t)e *act t)at t)e 'a t t1o govern!ent )ave $een $a e% on coa&ition $et1een a *e1 'artie i rea on enoug) to $e .e'tica&+ Moreover- eac) ne1 govern!ent )a certain 'o&icie 1)ic) are %i**erent *ro! t)e ru&ing govern!ent an% i* t)ere i *re/uent c)ange in govern!ent- t)i 1i&& &ea% to c)ange in 'o&icy an% increa e% uncertainty+ Hu t ta.e t)e e:a!'&e o* t)e &a t e&ection in ?==4- 1)ere $y a u%%en c)ange o* event t)e In%ian Nationa& Congre 1a a$&e to co!e into 'o1er $y *or!ing a coa&ition govern!ent- $y o&iciting t)e va t !ajority o* t)e 'oor 'eo'&e o* t)e countryur'ri ing t)e incu!$ent govern!ent 1)ic) 1a re&ying )eavi&y on a *a t gro1ing econo!y- increa e% 'rivati;ation an% a t)riving !i%%&e c&a + $# BureaucracyD Anot)er very i!'ortant *actor t)at a**ect In%ia0 co!'etitivene t)e 1or&% tan%ing i t)e Bureaucracy+ Particu&ar&y in t)e FDI 'roce Govern!ent )a a&rea%y inve te% a &ot o* ti!e an% e**ort $ut t)ere i on

t)e In%ian ti&& a &ot o* e+g+

roo! *or i!'rove!ent in t)e i%enti*ication- a''rova& an% i!'&e!entation 'roce

creating !ore centre *or a i tance- !ore u er *rien%&y 'roce e - e**ective u e o* tec)no&ogy- $eing a c&ear a 'o i$&e &eaving no roo! *or inter'retation- a i ting in i%enti*ying ne1 area *or inve t!ent etc+ c# Security riskD Anot)er i!'ortant *actor t)at nee% to $e )an%&e% 1it) care an% 1or.e% u'on i t)e ever 're ent ecurity ri .+ ,)i ri . inc&u%e t)e geo'o&itica& ri . 1it) Pa.i tan an% t)e ongoing %i 'ute over t)e Ca )!ir i ue- 1)ic) on nu!erou occa ion )a $roug)t t)e e t1o countrie ar!e% 1it) nuc&ear 1ea'on to t)e $rin. o* 1ar+ ,)e ot)er ecurity ri . 1ou&% inc&u%e inci%ence o* %o!e tic terrori !- not on&y in t)e Ca )!ir va&&ey $ut a& o in A a!- Mani'ur an% Naga&an%- 1)ere nu!erou e'arati t grou' o'erate+ %# Cost advantageD One o* t)e attraction o* In%ia i t)e &o1er co t a%vantage a co!'are% to !o t 1e tern econo!ie + ,)e In%ian Govern!ent 1ou&% )ave to 1or.

Pa'% ** o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE on creating an at!o ')ere 1)ere t)i a%vantage can $e !aintaine% e& e it !ig)t re u&t in In%ia not ee! a attractive+ One o* t)e .ey %river 1ou&% $e to try an% contro& in*&ation $ecau e i* t)ere i increa e% &eve& o* in*&ation t)en t)ere 1ou&% $e increa e% co t an% re%uce% return + Ot)er *actor 1)ic) 1ou&% act in i!i&ar re 'ect 1ou&% $e increa e% ta: incentive an% re%uce% tari** + e# Intellectual Property (IP) Rights & PiracyD Git) t)e increa e% in tance o* Piracy aroun% t)e 1or&% an% t)e e:tre!e i!'ortance '&ace% $y Inve tor on !aintaining t)eir IP rig)t - t)i i %e*inite&y an area 1)ic) nee% i!'rove!ent in In%ia+ In%ia )a $egun in ti&&ing inte&&ectua& 'ro'erty ru&e an% regu&ation into t)e country $ut t)ere i ti&& a &ong roa% a)ea%+ ,)e !ain area *or i!'rove!ent in t)i re 'ect i t)e en*orce!ent- 1)ic) i t)e !o t crucia& 'art $ut t)e 1ea.e t at 're ent in t)e country+ ,)e en*orce!ent o* IP rig)t inc&u%e% t)e increa e% crac.%o1n in t)e !ar.et on 'irate% an% .noc.(%o1ne% goo%+ *# Privatization and deregulationD Increa e% 'rivati;ation o* variou %e*inite&y en)ance t)e attractivene ta.en te' to 'rivati;e area te'+ g# In rastructureD It %e*inite&y i an a%%e% $onu to t)e inve tor i* t)ere i a%e/uate in*ra tructure 're ent in t)e country+ In In%ia t)ere i u$ tantia& &ac. o* ro$u t in*ra tructure aroun% t)e country- e+g+ 'ro'er roa% - )ig)1ay - a%e/uate u''&y o* c&ean 1ater- uninterru'ti$&e u''&y o* e&ectricity etc+ But t)ere i a *&i' i%e to t)i &ac. o* In*ra tructure+ Puoting t)e 'ri!e !ini ter Dr+ Man!o)an Sing) on a recent 'eec) at t)e NQSE2?!"hen I talk to business people# they tell $e# %"ell# India&s in rastructure is a proble$&' I do agree (ith the$ that in rastructure is our biggest proble$ and also the biggest opportunity' In the ne)t *+ years (e $ust invest at least ,*-+ billion to
2?

ector 1ou&%

o* In%ia a an FDI %e tination+ In%ia )a a&rea%y uc) a $an.ing an% in urance 1)ic) i a *ir t

uc) a e&ectricity- te&eco!!unication etc+ an% increa e

t)e *oreign )o&%ing ca'acity in ector

PMR

'eec) at t)e NQSE- Se'te!$er ??- ?==4- Ne1 Qor.- )tt'DEE'!in%ia+nic+inEvi it +)t!

Pa'% *) o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE $odernize and to e)pand India&s in rastructure# and (e have $ajor invest$ents needed in energy sector# in po(er sector# in oil e)ploration# in roads progra$$e# in $odernizing our rail(ay syste$# ood syste$# airports' .his is (here# I eel# (e need a ne( e)peri$entation (ith public/private sector participation because the public sector $ay have a role# but by itsel it cannot $eet all the re0uire$ents' 1s I see an e)panding and very pro itable role o oreign direct invest$ent in $eeting the challenge o $odernizing India&s in rastructure'2 So t)e &ac. o* in*ra tructure can %e*inite&y $e een a a $&e ing in %i gui e an% $e a u$ tantia& ource o* FDI- $ut nevert)e&e inve t!ent + Conc#us on Cee'ing in !in% t)e )u!$&e $eginning o* In%ia an% t)e tage at 1)ic) it i rig)t no1 goe to )o1 )o1 !uc) 'otentia& i 're ent in t)i country an% i* t)e In%ian govern!ent 1or. on t)e area *or i!'rove!ent !entione% a$ove an% continue to u''ort an% a i t t)e encourage!ent o* FDI into In%ia- t)ere i no to''ing In%ia into $eco!ing t)e nu!$er one %e tination *or FDI in t)e 1or&%- *ar $eyon% C)ina+ i* t)i FDI %oe not !ateria&i;e- t)e Govern!ent 1i&& )ave to inve t t)eir o1n *un% into it an% try an% attract ot)er

Pa'% *, o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE A11%nd 5 Ta6#% * Co$1arat 3% Gro(th Rat%s o& D%3%#o1 n' Econo$ %s A3%ra'% Annua# Rat%s *2/47++ Industr a# GDP Product on *2/47 *2+47 *2/47 *2+47*2++ *2+4 *2++ *2+4 29+? 2?+A @+@ 2=+2 2?+@ 5+? 3+A 5+4 2?+2 4+9 3+? A+3 2=+< 5+9 3+3 5+4 2=+< A+A 5+4 A+9 @+3 9+2 9+3 9+5 @+= 5+? 4+4 A+< 3+AS A+2 5+3S 4+A 4+A 5+A <+9 9+4 A+2 4+3 9+@S <+9 9+< 4+4 9+? <+3 4+? 5+<S <+9 <+<S S ( 235=(23@=

Countr8

Sout) Corea ,ai1an Singa'ore Hong Cong ,)ai&an% In%one ia Pa.i tan Ma&ay ia In%ia Bang&a%e ) Sri Lan.a Mayan!ar

SourceD .he 3cono$ist May 4- 2332- Survey 'age 5

Pa'% *- o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE

Ta6#% ) No$ na# tar && rat%s, *2+.9 : o& 3a#u% Country Hungary Qugo &avia Argentina Morocco P)i&i''ine Me:ico ,)ai&an% ,ur.ey Pa.i tan C)ina Bang&a%e ) In%ia Inter!e%iate Goods 24+? 2@+= ?2+? ?2+A ?2+@ ?9+9 ?5+@ ?3+4 59+= 5@+3 35+3 24A+4 Ca'ita& Goods 29+= ?=+5 ?9+= 2@+2 ?4+9 ?<+9 ?4+@ 94+3 5<+@ A?+9 @=+9 2=5+< Con u!er Goods ??+A ?=+= ?2+3 4<+= <3+= <?+? @+9 99+< 2?5+< 2<=+5 22A+2 24=+3 Manu*acture% Goods ?=+3 23+= ??+3 ?5+< ?@+= ?4+5 <<+A <5+2 @3+@ 32+? 2==+@ 2<5+5

SourceD Gor&% Ban.- Cite% *ro! ;P&ain ta&e o* t)e &icence raj8- Croo. C, Economist; 5/4/91, Vol. 319 Issue 7705, India urvey

Pa'% *. o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE Table 3 FDI ca#cu#at ons
1990-91 E!uit" #ein$este% c&'it&l ( )t*e+ ,&'it&l (( -ot&l ./I (01/ ml 2/P (,+o+es ./I &s 3 o4 2/P In$estments ./I &s 3 o4 2/I .. 1991-92 1992-93 129 315 1993-94 586 1994-95 1,314 1995-96 2,144 1996-97 2,821 1997-98 3,557 1998-99 2,462 1999-00 2,155 2000-01 2001-02 2002-03 (P 2,700 1,498 462 4,660 2,469,564 0.85 575,033 3.65 2003-04 (P 2,387 1,800 488 4,675 2,772,194 0.76

97 129 315 586 1,314 2,144 2,821 3,557 568,674 653,117 748,367 859,220 1,012,770 1,188,012 1,368,209 1,522,547 0.08 0.09 0.19 0.31 0.58 0.81 0.93 1.05 149,536 147,285 176,722 198,412 263,356 319,527 334,999 374,480 0.29 0.39 0.80 1.33 2.25 3.02 3.79 4.27

2,462 2,155 1,740,985 1,936,831 0.64 0.50 393,021 490,669 2.82 1.98

2,400 4,095 1,350 1,646 279 390 4,029 6,131 2,089,499 2,282,143 0.87 1.21 508,833 527,917 3.56 5.23

( (( 8ote 1 : ; 45 I8# 1 c+o+e ; 10 million

/&t& 4o+ 2002-03 &+e estim&te% &s &$e+&5e o4 '+e$ious t6o "e&+s /&t& 'e+t&in to inte+ com'&n" %e7t t+&ns&ctions o4 ./I entities /&t& on ./I *&$e 7een +e$ise% since 2000-01 6it* e9'&n%e% co$e+&5e to &''+o&c* inte+n&tion&l 7est '+&ctices.

SourceD Ca&cu&ate% *ro! Han%$oo. o* Stati tic on t)e In%ian Econo!y- Re erve $an. o* In%ia- Aug <2- ?==4

Pa'% */ o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE

R%&%r%nc%s 2+ Fro! cri i to recovery- In%ia0 e:'erience 1it) econo!ic re*or! o* 233=0 - C+G Sa)a%evan- )tt'DEEganga+ii!&+ac+inEF%evanEeco&i$( aj!+'%* ?+ Inve t!ent 'o&icy in In%ia 6 'er*or!ance an% 'erce'tion - ?==?- Dr Sanji$ Po)it an% M + S)a&ini Su$ra!ania!- CU,S Centre *or Co!'etition- Inve t!ent N Econo!ic Regu&ation <+ Re erve $an. o* In%ia 1e$ ite 4+ P&ain ta&e o* t)e &icence raj- Croo. C, Economist; 5/4/91, Vol. 319 Issue 7705, India urvey 9+ .he 3cono$ist May 4- 2332- Jo&+ <23 I ue 55=9- India urvey A+ )tt'DEE111+in%iaone to'+co! 5+ Foreign Direct Inve t!ent in In%ia- PL Beena- Lavee ) B)an%ari- Su!on B)au!i.- Su$ir Go.arn an% Anja&i ,an%on- DRC 1or.ing 'a'er - Lon%on Bu ine Sc)oo&- 111+i'anet+net @+ CIA Gor&% Fact$oo. ?==9)tt'DEE111+cia+govEciaE'u$&ication E*act$oo.Ein%e:+)t!& 3+ Gor&% Deve&o'!ent In%icator %ata$a e- Gor&% Ban.- A'ri& ?==9)tt'DEE111+1or&%$an.+orgE%ataE/uic.re*erenceE/uic.re*+)t!& 2=+ FDI Con*i%ence In%e:- ,)e G&o$a& Bu ine Jo&u!e 5- A+ ,+ Cearney Po&icy Counci&- Octo$er ?==4-

22+ UNC,AD- FDI Data$a e On(Line)tt'DEE tat +uncta%+orgE*%iEengERe'ortFo&%er ER*vie1EE:'&orer'+a 'KCSLre*ererM 2?+ Manua& on Inve ting in In%ia(Foreign Direct Inve t!ent( Po&icy an% Proce%ure Mini try o* Co!!erce an% In%u try- De'art!ent o* In%u tria& Po&icy an% Pro!otion- )tt'DEE%i''+nic+inE 2<+ Con*e%eration o* In%ian In%u try)tt'DEE111+ciion&ine+orgE ervice E54E%e*au&t+a 'KPageMFDI>?=in>?=In%ia+)t! 24+ Bu%get ?==4- )tt'DEE111+e/uity!a ter+co!E$u%get=4=9E ector E$an.ing+a ' 29+ ,)e Econo!ic ,i!e On&ine)tt'DEEecono!icti!e +in%iati!e +co!Eartic&e )o1E22=33?<+c!

Pa'% *0 o& *+

ECONOMICS AND MANAGEMENT IN DEVELOPING COUNTRIES FDI IN INDIA: PAST, PRESENT AND FUTURE 2A+ Co!'eting *or G&o$a& FDID O''ortunitie an% C)a&&enge *or t)e In%ian Econo!y- Sa%)ana Sriva tavaO an% Ra)u& SenOO 25+ GMRC Country Re'ortD In%ia "Country Ana&y i an% Foreca t# 6 2= May ?==9Gor&% Mar.et Re earc) Centre 2@+ PMR 'eec) at t)e NQSE- Se'te!$er ??- ?==4- Ne1 Qor.)tt'DEE'!in%ia+nic+inEvi it +)t! 23+ FDI Fact*i&e ?==9 ")tt'DEE111+*%i!aga;ine+co!#

Pa'% *+ o& *+