Professional Documents
Culture Documents
A Project Report On FDI and Its Impact in India
A Project Report On FDI and Its Impact in India
A Project Report On FDI and Its Impact in India
I, Kumari Priya studying in Sharda University do hereby declare that this project relating to the
study of ratio analysis and the title “FDI INFLOWS AND ITS IMPACT IN INDIA” has
been prepared by me after undergoing the study
I, further declare that this project work is the outcome of my efforts and not a replica of any other
report/work submitted to any University/ Boards.
With the deepest gratitude I wish to thank every person who has supported me helping to prepare
the project.
I would also like to acknowledge and express my gratitude to the following people who had written
the articles and research the topic which it had totally gave me a strong feeling and idea to do the
project.
For generously sharing their wisdom, love, and destiny. My friends are always supported with
their love and bearing my improper behaviour while prepare the file. They had always made me
to think in logical idea and their also helped me in journey to prepare a project.
Thanks to Sharda University where it has been always making to have a practical test and
encouraging the creativity of the students.my sincere to our beloved teacher Rakesh Sharma who
had always been to clarify my doubts in the project.
And finally to my family who made their efforts to come across to make my education in
university. Their always made my day by providing me with every facility to come to my destiny
in the future times.
CONTENTS:-
Chapter-1 Page No.
1.0 Introduction 1
1.1 Types of FDI 1
1.2 Methods of FDI 3
Chapter-2
2.0 History of FDI in India 5
2.1 Investment routes for FDI in India 8
2.2 FDI policy in India 9
2.3 FDI promotional initiatives 17
Chapter-3
3.0 Statement of the problem 19
3.1 Objectives of the research 19
3.2 Methodology of data collection 19
3.3 Hypothesis 20
3.4 Scope of the study 20
3.5 Limitations of the study 20
Chapter-4
4.0 FDI inflows in the world 21
4.1 FDI inflows analysis in India year wise 23
4.2 FDI inflows analysis country wise in India 25
4.3 FDI inflows sector wise in India 30
4.5 Trends and patterns of FDI in different sectors 34
4.6 State wise FDI inflows analysis in India 41
4.7 Route wise FDI inflows analysis in India 44
4.8 FDI and economic development 46
4.9 Comparison of FDI between India and China 49
Chapter-5
5.0 Findings and conclusions 56
Chapter-6
6.0 Recommendations and suggestions 58
Bibliography 60
LIST OF TABLES:-
Table No. Title Page No.
LIST OF CHARTS:-
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 developing countries like India.
The project aims at providing information of present FDI policy, year wise FDI
inflows, sector wise FDI inflows, countries contribution to maximum of FDI
inflows, state wise FDI inflows, trends and patterns of FDI inflows in different
sector, FDI comparison between India and China and so on.
From the study it has been found out that total FDI
inflows are estimated at US$19.43 billion during April 2010 to March 2011 and
cumulative FDI inflows from 1991-2011 was $146319 million. The services sector,
computer hardware & software, telecommunications, real estate, construction
received maximum FDI inflows in India and Mauritius is the main source followed
by Singapore, the US, the UK, the Netherlands and Japan for FDI inflows in India.
From the hypothesis it has been found out that there is a positive relationship
between FDI and economy growth of India.
And thus different suggestion and recommendation are given to improve the present
condition of FDI in India.
CHAPTER-1
1.0 INTRODUCITON TO FDI
Foreign Direct Investment (FDI) broadly encompasses any long-term investments
by an entity that is not a resident of the host country. Typically, the investment is
over a long duration of time and the idea is to make an initial investment and then
subsequently keep investing to leverage the host country’s advantages which could
be in the form of access to better (and cheaper) resources, access to a consumer
market or access to talent specific to the host country - which results in the
enhancement of efficiency. This long-term relationship benefits both the investor as
well as the host country. The investor benefits in getting higher returns for his
investment than he would have gotten for the same investment in his country and the
host country can benefit by the increased know how or technology transfer to its
workers, increased pressure on its domestic industry to compete with the foreign
entity thus making the industry improve as a whole or by having a demonstration
effect on other entities thinking about investing in the host country.
Inward FDIs:
Different economic factors encourage inward FDIs. These include interest loans, tax
breaks, subsidies, and the removal of restrictions and limitations. Factors detrimental
to the growth of FDIs include necessities of differential performance and limitations
related with ownership patterns.
Horizontal FDI- Investment in the same industry abroad as a firm operates in at
home.
Vertical FDI
Backward Vertical FDI: Where an industry abroad provides inputs for a firm's
domestic production process.
Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's
domestic production.
BY TARGET
Greenfield investment: - Direct investment in new facilities or the expansion of
existing facilities. Greenfield investments are the primary target of a host nation’s
promotional efforts because they create new production capacity and jobs, transfer
technology and know-how, and can lead to linkages to the global marketplace. The
Organization for International Investment cites the benefits of Greenfield investment
(or in sourcing) for regional and national economies to include increased
employment (often at higher wages than domestic firms); investments in research
and development; and additional capital investments. Disadvantage of Greenfield
investments include the loss of market share for competing domestic firms. Another
criticism of Greenfield investment is that profits are perceived to bypass local
economies, and instead flow back entirely to the multinational's home economy.
Critics contrast this to local industries whose profits are seen to flow back entirely
into the domestic economy.
Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firm takes place; the primary
type of FDI. Cross-border mergers occur when the assets and operation of firms from
different countries are combined to establish a new legal entity. Cross-border
acquisitions occur when the control of assets and operations is transferred from a
local to a foreign company, with the local company becoming an affiliate of the
foreign company. Nevertheless, mergers and acquisitions are a significant form of
FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United
States. Mergers are the most common way for multinationals to do FDI.
BY MOTIVE
FDI can also be categorized based on the motive behind the investment from the
perspective of the investing firm:
•Resource-Seeking
Investments which seek to acquire factors of production those are more efficient than
those obtainable in the home economy of the firm. In some cases, these resources
may not be available in the home economy at all. For example seeking natural
resources in the Middle East and Africa, or cheap labour in Southeast Asia and
Eastern Europe.
•Market-Seeking
Investments which aim at either penetrating new markets or maintaining existing
ones.FDI of this kind may also be employed as defensive strategy; it is argued that
businesses are more likely to be pushed towards this type of investment out of fear
of losing a market rather than discovering a new one. This type of FDI can be
characterized by the foreign Mergers and Acquisitions in the 1980’s Accounting,
Advertising and Law firms.
•Efficiency-Seeking
Investments which firms hope will increase their efficiency by exploiting the
benefits of economies of scale and scope, and also those of common ownership. It
is suggested that this type of FDI comes after either resource or market seeking
investments have been realized, with the expectation that it further increases the
profitability of the firm
1.2 Methods of Foreign Direct Investments
The foreign direct investor may acquire 10% or more of the 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
Pre-Independence Reforms:
Under the British colonial rule, the Indian economy suffered a major set-back. An
economy with rich natural resources was left plundered and exploited to the hilt
under the English regime. India is originally an agrarian economy. India’s cottage
industries and trade were abused and exploited as means to pave the way for
European manufactured goods. Under the British rule the economy stagnated and on
the eve of independence India was left with a poor economy and the textile industry
as the only life support of the industrial economy.
Post-Independence Reforms:
India’s struggle post independence has been an excruciating financial battle with a
slow economic growth and development which were largely due to the political
climate and impact of the economic reforms. The country began it transformation
from a native agrarian to industrial to commercial and open economy in the post
independence era. India in the post independence era followed what can be best
called as a ‘trial and error’ path. During the post independence era, the Indian
Economy geared up in favour of central planning and resource allocation. The
government tailored policies that focussed a great deal on achieving overall
economic self-reliance in each state and at the same time exploit its natural resource.
In order to augment trade and investments, the government sought to play the role
of custodian and trustee by intervening in the practice of crucial sectors such as
aviation, telecommunication, banking, energy mainly electricity, petrol and gas.
The policy of central planning adopted by the government sought to ensure that the
government laid down marked goals to be achieved by the economy thereby
establishing a regime of checks and balances. The government also encouraged self
sufficiency with the intent to encourage the domestic industries and enterprises,
thereby reducing the dependence on foreign trade. Although, initially these policies
were extremely successful as the economy did have a steady economic growth and
development, they weren’t sustained. In the early, 1970’s, India had achieved self
sufficiency in food production. During the 1970’s, the government still continued to
retain and wield a significant spectre of control over key
In the Early 1980’s-Macro-Economic Policies were conservative. Government
control of industries continued. There was marginal economic growth &
development courtesy of the development projects funded by foreign loans. The
financial crisis of 1991 compelled drafting and implementation of economic
reforms. The government approached the World Bank and the IMF for funding. In
keeping with their policies there was expectation of devaluation of the rupee. This
lead to a lack of confidence in the investors and foreign exchange reserves declined.
There was a withdrawal of loans by Non Resident Indians.
Economic reforms of 1991:
India has been having a robust economic growth since 1991 when the government
of India decided to reverse its socially inspired policy of a retaining a larger public
sector with comprehensive controls on the private sector and eventually treaded on
the path of liberalization, privatisation and globalisation.
During early 1991, the government realised that the sole path to India enjoying any
status on the global map was by only reducing the intensity of government control
and progressively retreating from any sort of intervention in the economy – thereby
promoting free market and a capitalist regime which will ensure the entry of foreign
players in the market leading to progressive encouragement of competition and
efficiency in the private sector. In this process, the government reduced its control
and stake in nationalized and state owned industries and enterprises, while
simultaneously lowered and deescalated the import tariffs. All of the reforms
addressed macroeconomic policies and affected balance of payments. There was
fiscal consolidation of the central and state governments which lead to the country
viewing its finances as a whole. There were limited tax reforms which favoured
industrial growth. There was a removal of controls on industrial investments and
imports, reduction in import tariffs. All of this created a favourable environment for
foreign capital investment. As a result of economic reforms of 1991, trade increased
by leaps and bounds. India has become an attractive destination for foreign direct
and portfolio investment.
2.1 Government Approvals for Foreign Companies Doing Business in India
Government Approvals for Foreign Companies Doing Business in India or
Investment Routes for Investing in India, Entry Strategies for Foreign Investors
India's foreign trade policy has been formulated with a view to invite and encourage
FDI in India. The Reserve Bank of India has prescribed the administrative and
compliance aspects of FDI. A foreign company planning to set up business
operations in India has the following options:
1. Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks
(subject to compliance of norms) to all proposals and permits foreign equity up to
24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries
and the sectoral caps applicable. The lists are comprehensive and cover most
industries of interest to foreign companies. Investments in high-priority industries or
for trading companies primarily engaged in exporting are given almost automatic
approval by the RBI.
2. The FIPB Route – Processing of non-automatic approval cases:
FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is
4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and
rejections are few. It is not necessary for foreign investors to have a local partner,
even when the foreign investor wishes to hold less than the entire equity of the
company. The portion of the equity not proposed to be held by the foreign investor
can be offered to the public.
6 Defence
Defence Industry subject to 26% Government
Industrial license under the
Industries (Development &
Regulation) Act 1951
7 Service Sector
a) Broadcasting
Terrestrial Broadcasting 26% (FDI, NRI Government
FM (FM Radio) subject to & PIO
such terms and conditions as investments
specified from time to time by and portfolio
Ministry of Information and investment)
Broadcasting for grant of
permission for setting up of
FM Radio Stations
Cable Network, subject to 49% (FDI, NRI Government
Cable Television Network & PIO
Rules, 1994 and other investments
conditions as specified from and portfolio
time to time by Ministry of investment)
Information and Broadcasting
Direct–to-Home subject to 49% (FDI, NRI Government
such guidelines/terms and & PIO
conditions as specified from investments
time to time by Ministry of and portfolio
Information and Broadcasting investment)
Within this
limit, FDI
component not
to exceed
20%
Headend-In-The-Sky (HITS) Broadcasting Service refers to the
multichannel downlinking and distribution of television
programme in C-Band or Ku Band wherein all the pay channels
are downlinked at a central facility (Hub/teleport) and again
uplinked to a satellite after encryption of channel. At the cable
headend these encrypted pay channels are downlinked using a
single satellite antenna, transmodulated and sent to the
subscribers by using a land based transmission system
comprising of infrastructure of cable/optical fibres network.
FDI limit in (HITS) 74% (total Automatic up
Broadcasting Service is direct and to 49%
subject to such indirect foreign Government
guidelines/terms and investment route beyond
conditions as specified from including 49% and up
time to time by Ministry of portfolio and to 74%
Information and FDI
Broadcasting.
Setting up hardware
facilities such as up-linking,
HUB etc.
1) Setting up of Up-linking 49% (FDI & Government
HUB/ Teleports FII)
(2) Up-linking a Non-News & 100% Government
Current Affairs TV Channel
(3) Up-linking a News & 26% (FDI & Government
Current Affairs TV Channel FII)
subject to the condition that
the portfolio investment from
FII/ NRI shall not be
―persons acting in concert‖
with FDI investors, as defined
in the SEBI(Substantial
Acquisition of Shares and
Takeovers) Regulations, 1997
b) Print Media
Publishing of Newspaper and 26% (FDI and Government
periodicals dealing with news investment by
and current affairs NRIs/PIOs/FII)
Publication of Indian editions 26% (FDI and Government
of foreign magazines dealing investment by
with news and current affairs NRIs/PIOs/FII)
Publishing/printing of 100% Government
Scientific and Technical
Magazines/specialty journals/
periodicals, subject to
compliance with the legal
framework as applicable and
guidelines issued in this
regard from time to time by
Ministry of Information and
Broadcasting.
Publication of facsimile 100% Government
edition of foreign newspapers
c) Civil Aviation
Airports
(a) Greenfield projects 100% Automatic
(b) Existing projects 100% Automatic up
to 74%
Government
route beyond
74%
d) Air Transport Services
1) Scheduled Air Transport 49% FDI
Service/ Domestic Scheduled (100% for
Passenger Airline NRIs) Automatic
(2) Non-Scheduled Air 74% FDI Automatic up
Transport Service (100% for to 49%
NRIs) Government
route beyond
49% and up
to 74%
(3) Helicopter 100% Automatic
services/seaplane services
requiring DGCA approval
e) Other services under Civil Aviation sector
(1) Ground Handling Services 74% FDI Automatic up
subject to sectoral regulations (100% for to 49%
and security clearance NRIs) Government
route beyond
49% and up
to 74%
(2) Maintenance and Repair 100% Automatic
organizations; flying training
institutes; and technical
training institutions
Courier services for carrying 100% Government
packages, parcels and other
items which do not come
within the ambit of the Indian
Post Office Act, 1898 and
excluding the activity relating
to the distribution of letters.
Construction Development: Townships, Housing, Built-up
f) infrastructure
Townships, housing, built-up 100% Automatic
infrastructure and
construction-development
projects (which would
include, but not be restricted
to, housing, commercial
premises, hotels, resorts,
hospitals, educational
institutions, recreational
facilities, city and regional
level infrastructure)
Industrial Parks – new and 100% Automatic
g) existing
h) Satellites – Establishment and operation
Satellites – Establishment and 74% Government
operation, subject to the
sectoral guidelines of
Department of Space/ISRO
i) Private Security Agencies 49% Government
j) Telecom Services 74% Automatic up
to 49%
Government
route beyond
49% and up
to 74%
k) Trading
Cash & Carry Wholesale 100% Automatic
Trading/ Wholesale Trading
(including sourcing from
MSEs)
l) E-commerce activities 100% Automatic
Test marketing of such items 100% Government
for which a company has
approval for manufacture,
provided such test marketing
facility will be for a period of
two years, and investment in
setting up manufacturing
facility commences
simultaneously with test
marketing.
Single Brand product Government
trading 51%
m) Financing Services
Foreign investment in other financial services , other than those
indicated below, would require prior approval of the
Government:
SECONDARY SOURCE:
The present study is of analytical nature and makes use of secondary data. The
relevant secondary data has been collected from reports of the Ministry of
Commerce and Industry, Government of India, Centre for Monitoring Indian
Economy, Reserve Bank of India, World Investment Report. It is a time series data
and the relevant data has been collected for the period 2007-2011.
3.3 Hypothesis:
The study has been taken up for the period 2007-2011 with the following hypothesis
Ho: FDI doesn’t affect the economic growth of the country (India).
H1: FDI affect the economic growth of the country (India).
Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5
trillion, surpassing the previous record set in the year 2000. It was due to continuous
rise in FDI in all of three groups of economies -- in developed countries, developing
economies and in South-East Europe and the Commonwealth of Independent States
(CIS) -- largely reflecting the high-growth propensities of transnational corporations
(TNCs) and strong economic performance in many parts of the world. Increased
corporate profits and an abundance of cash boosted the value of the cross-border
mergers and acquisitions (M&A’s) that constitute a large portion of FDI flows,
although the value of M&A’s in the latter half of 2007 declined.
The financial and credit crisis that began in the latter half of 2007 has not affected
the overall volume of FDI inflows. Even with a slowdown of the United States
economy, the depreciation of the US dollar may have helped to maintain high levels
of FDI flows into the country, in particular from countries with appreciating
currencies, such as Europe and developing Asia. While sub-prime loan problems
have impinged on the lending capabilities of banks, new capital injections from
various funds, including sovereign wealth funds, have helped alleviate some of the
problems.
FDI flows to developed countries in 2007 grew for the fourth consecutive year,
reaching US$1 trillion. The European Union (EU) as a whole continued to be the
largest host region, attracting almost 40% of total FDI inflows in 2007. FDI inflows
to developing countries and economies in transition (the latter comprising South-
East Europe and CIS) rose by 16% and 41% respectively, and reached new record
levels. In Africa, FDI inflows in 2007 remained relatively strong. The unprecedented
level of inflows (US$36 billion) was supported by a continuing boom in global
commodity markets. FDI inflows to Latin America and the Caribbean, meanwhile,
rose by 50% to a record level of US$126 billion. FDI inflows to South, East and
South-East Asia, and Oceania maintained their upward trend in 2007, reaching a new
high of US$224 billion, an increase of 12% over 2006. In West Asia, overall FDI
inflows declined by 12%. FDI to South-East Europe and the CIS, or transition
economies, expanded significantly, by 41%, to a new record of US$98 billion.
Despite some unfavourable economic projections for 2008 and potential tightening
of rules for foreign investment in natural resources and related industries, high
demand for natural resources around the world -- and, as a result, the opening up of
new potentially profitable opportunities in the primary sector - are likely to boost
FDI in the extractive industries. And later during 2008 due to subprime crisis in US
led to decline in FDI of the world.
However global FDI inflows in 2010
reached an estimated $1,244 billion from the above figure– a small increase from
2009’s level of $1,185 billion. How- ever, there was an uneven pattern between
regions and also between sub regions. FDI inflows to developed countries and
transition economies contracted further in 2010. In contrast, those to developing
economies recovered strongly, and together with transition economies – for the first
time – surpassed the 50 per cent mark of global FDI flows. FDI flows to developing
economies raised by 12% (to $574 billion) in 2010, due to their relatively fast
economic recovery, the strength of domestic demand. The value of cross-border
M&A’s into developing economies doubled due to attractive valuations of company
assets, strong earnings growth and robust economic fundamentals (such as market
growth). As more international production moves to developing and transition
economies, TNCs are increasingly investing in those countries to maintain cost-
effectiveness and to remain competitive in the global production networks. This is
now mirrored by a shift in international consumption, in the wake of which market-
seeking FDI is also gaining ground. This changing pattern of FDI inflows is
confirmed also in the global ranking of the largest FDI recipients: In 2010, half of
the top 20 host economies were from developing and transition economies,
compared to seven in 2009.In addition, three developing economies ranked among
the five largest FDI recipients in the world. While the United States and China
maintained their top position, some European countries moved down in the ranking.
Indonesia entered the top 20 for the first time.
Singapore:
Singapore has become a rapidly growing source of investment funds to India in the
past few years. In fact, the data above shows that investment from Singapore has
grown to very high levels. Singapore has become India’s second largest source of
FDI inflow for the period April 2011 till August 2011, with a cumulative amount of
Rs. 66407 crore. Its share has gone up from less than 1% of total FDI inflow in 2003-
04, to 13% in 2007-08. For the past two years, it has overtaken even large developed
economies like US, UK and Japan which are normally viewed as the most important
places to look for funds. FDI increased from Rs. 172 crore 2003-04 to Rs. 822 crore
in 2004-05, a jump of 378%! A major reason for this, as was seen with Indo-
Singaporean trade, probably was the anticipation for CECA’s signing that boosted
investment.30 Another major boost arrived in 2007-08, when FDI increased by
370%. Since 2004-05, Singapore has been consistently in the top few ranks since
2004-05, a situation not seen prior to this. Although FDI inflow from most countries
has grown in the past few years, the pace of growth in Singapore’s investment has
made others look surprised.
U.S.A:
The United States is the third largest source of FDI in India (7 % of the total), valued
at 44609 crore in cumulative inflows between April 2000 and August 2011.
According to the Indian government, the top sectors attracting FDI from the United
States to India during 1991–2011 are fuel (36 percent), telecommunications (11
percent), electrical equipment (10 percent), food processing (9 percent), and services
(8 percent). According to the available M&A data, the two top sectors attracting FDI
inflows from the United States are computer systems design and programming and
manufacturing. Since 2002, many of the major U.S. software and computer brands,
such as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel
have established R&D operations in India, primarily in Hyderabad or Bangalore.
The majority of U.S. electronics companies that have announced Greenfield projects
in India are concentrated in the semiconductor sector. By far the largest such project
is AMD’s chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest
share (36 percent) was found in the manufacturing sector, most prominently in the
machinery, chemicals, and transportation equipment manufacturing segments. Other
important categories of employment are professional, scientific, and technical
services; and wholesale trade, with 29 percent and 18 percent of U.S. affiliate
employment, respectively.
European Union:
Within the European Union, the largest country investors were the United Kingdom
and the Netherlands, with 40744 crore and 28834 crore, respectively, of cumulative
FDI inflows between April 2000 to August 2011. The United Kingdom, the
Netherlands, Germany and France together accounted for almost 15% of all FDI
flows from the EU to India. FDI from the EU to India is primarily concentrated in
the power/energy, telecommunications, and transportation sectors. The top sectors
attracting FDI from the European Union are similar to FDI from the United States.
Manufacturing; information services; and professional, scientific, and technical
services have attracted the largest shares of FDI inflows from the EU to India since
2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are
examples of EU companies investing in India by means of mergers and acquisitions.
European companies accounted for 31 percent of the total number and 43 percent of
the total value for all reported Greenfield FDI projects. The number of EU
Greenfield projects was distributed among four major clusters: ICT (17 percent),
heavy industry (16 percent), business and financial services (15 percent), and
transport (11 percent). However, the heavy industry cluster accounted for the
majority (68 percent) of the total value of these projects.
Japan:
Japan was the fifth largest source of cumulative FDI inflows in India between April
and August 2011, i.e. the cumulative flow is 31813 crore and it is 5% of total inflow.
FDI inflows to India from most other principal source countries have steadily
increased since 2000, but inflows from Japan to India have decreased during this
time period. There does not appear to be a single factor that explains the recent
decline in FDI inflows from Japan to India. India is, however, one of the largest
recipients of Japanese Official Development Assistance (ODA), through which
Japan has assisted India in building infrastructure, including electricity generation,
transportation, and water supply. It is possible that this Japanese government
assistance may crowd out some private sector Japanese investment. The top sectors
attracting FDI inflows from Japan to India are transportation (54 percent), electrical
equipment (7 percent), telecommunications, and services (3 percent). The available
M&A data corresponds with the overall FDI trends in sectors attracting inflows from
Japan to India. Companies dealing in the transportation industry, specifically
automobiles, and the auto component/peripheral industries dominate M&A activity
from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd.,
and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an
estimated 148 Greenfield FDI projects valued at least at $3.7 billion between 2002
and 2006. In April 2007, Japanese and Indian officials announced a major new
collaboration between the two countries to build a new Delhi-Mumbai industrial
corridor, to be funded through a public-private partnership and private-sector FDI,
primarily from Japanese companies. The project was begun in January 2008 with
initial investment of $2 billion from the two countries. The corridor will cross 6
states and extend for 1,483 km, in an area inhabited by 180 million people. At
completion in 2015, the corridor is expected to include total FDI of $45–50 billion.
A large share of that total is destined for infrastructure, including a 4,000 MW power
plant, 3 ports, and 6 airports, along with additional connections to existing ports.
Private investment is expected to fund 10-12 new industrial zones, upgrade 5–6
existing airports, and set up 10 logistics parks. The Indian government expects that
by 2020, the industrial corridor will contribute to employment growth of 15 percent
in the region, 28 percent growth in industrial output, and 38 percent growth in
exports.
Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011
Table 4.4
Chart 4.2
Pie chart representing % of total FDI inflows in different sectors
The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has
taken place in the service sector including the telecommunication, information
technology, travel and many others. The service sector is followed by the computer
hardware and software in terms of FDI. High volumes of FDI take place in
telecommunication, real estate, construction, power, automobiles, etc.
The rapid development of the telecommunication sector was due to the FDI inflows
in form of international players entering the market and transfer of advanced
technologies. The telecom industry is one of the fastest growing industries in India.
With a growth rate of 45%, Indian telecom industry has the highest growth rate in
the world. During the year 2009 government had raised the FDI limit in telecom
sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI.
The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as
compared to previous fiscal.
FDI inflows to real estate sector in India have developed the sector. The increased
flow of foreign direct investment in the real estate sector in India has helped in the
growth, development, and expansion of the sector. FDI Inflows to Construction
Activities has led to a phenomenal growth in the economic life of the country. India
has become one of the most prime destinations in terms of construction activities as
well as real estate investment.
The FDI in Automobile Industry has experienced huge growth in the past few years.
The increase in the demand for cars and other vehicles is powered by the increase in
the levels of disposable income in India. The options have increased with quality
products from foreign car manufacturers.
The introduction of tailor made finance schemes, easy repayment
schemes has also helped the growth of the automobile sector. The basic advantages
provided by India in the automobile sector include, advanced technology, cost-
effectiveness, and efficient work force. Besides, India has a well-developed and
competent Auto Ancillary Industry along with automobile testing and R&D centres.
The automobile sector in India ranks third in manufacturing three wheelers and
second in manufacturing of two wheelers. Opportunities of FDI in the Automobile
Sector in India exist in establishing Engineering Centres, Two Wheeler Segment,
Exports, Establishing Research and Development Centres, Heavy truck Segment,
Passenger Car Segment.
The increased FDI Inflows to Metallurgical Industries in India has helped to bring
in the latest technology to the industries. Further, the increased FDI Inflows to
Metallurgical Industries in India has led to the development, expansion, and growth
of the industries. All this has helped in improving the quality of the products of the
metallurgical industries in India.
The increased FDI Inflows to Chemicals industry in India has helped in the growth
and development of the sector. The increased flow of foreign direct investment in
the chemicals industry in India has helped in the development, expansion, and
growth of the industry. This in its turn has led to the improvement of the quality of
the products from the industry. Based upon the data given by department of
Industrial Policy and Promotion, in India there are sixty two (62) sectors in which
FDI inflows are seen but it is found that top ten sectors attract almost seventy percent
(70%) of FDI inflows. The cumulative FDI inflows from the above results reveals
that service sector in India attracts the maximum FDI inflows amounting to Rs.
106992 Crores, followed by Computer Software and Hardware amounting to Rs.
44611 Crores. These two sectors collectively attract more than thirty percent (30%)
of the total FDI inflows in India.
The housing and real estate sector and the construction industry are among the new
sectors attracting huge FDI inflows that come under top ten sectors attracting
maximum FDI inflows. Thus the sector wise inflows of FDI in India shows a varying
trend but acts as a catalyst for growth, quality maintenance and development of
Indian Industries to a greater and larger extend. The technology transfer is also seen
as one of the major change apart from increase in operational efficiency, managerial
efficiency, employment opportunities and infrastructure development.
India stands out for the size and dynamism of its services sector. The importance of
the services sector can be gauged by looking at its contributions to different aspects
of the economy. The share of services in India’s GDP at factor cost (at current prices)
increased rapidly: from 30.5 per cent in 1950-51 to 55.2 per cent in 2009-10. The
overall growth rate (compound annual growth rate) of the Indian economy from 5.7
per cent in the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a
large measure due to the acceleration of the growth rate (CAGR) in the services
sector from 7.5 per cent in the 1990s to 10.3 per cent in 2004- 05 to 2009-10. The
services sector growth was significantly faster than the 6.6 per cent for the combined
agriculture and industry sectors annual output growth during the same period. In
2009-10, services growth was 10.1 per cent and in 2010-11 it was 9.6 per cent.
India’s services GDP growth has been continuously above overall GDP growth,
pulling up the latter since 1997- 98, It has also been more stable. An international
comparison of the services sector shows that India compares well even with the
developed countries in the top 12 countries with highest overall GDP.
The two broad services categories, namely
trade, hotels, transport, and communication; and financing, insurance, real estate,
and business services have performed well with growth of 11 per cent and 10.6 per
cent, respectively in 2010-11(with reference to table 4.3). Only community, social
and personal services have registered a low growth of 5.7 per cent due to base effect
of fiscal stimulus in the previous two years, thus contributing to the slight
deceleration in growth of the sector. Among the subsectors of services sectors,
financial services attract of total FDI inflows followed by banking services,
insurance and non- financial services respectively. Outsourcing, banking, financial,
information technology oriented services make intensive use of human capital. The
trend in this sectors first declines till 2011 and increases in 2012 due to strong RBI
policy and increase in consultancy services and devaluation of rupees against dollar.
Over the past few years the computer software industry has been one of the fastest
growing sectors in Indian economy. FDI Inflows to Computer Software and
Hardware Industry in India have been significant. 100 percent FDI is permitted
under automatic route to the E-Commerce activities in India. Software Technology
Parks (STP) have been a major initiative in India to drive in Foreign Direct
Investment in the computer software industry. These Software Technology Parks
provide highly developed infrastructure and facilities that attract foreign investors.
Regulatory measures by the Indian government have also played a positive role in
this regard. Measures like increased freedom of recruiting and laying-off employees,
tax benefits and easing of export producers have contributed to the growth of FDI in
this sector.
FDI is permitted under automatic route in the
computer hardware industry in India. The huge market for computer hardware in
India, coupled with the availability of skilled workforce in this sector has boosted
the inflow of FDI. High growth prospects, in terms of increased consumption in the
India as well as increasing demand for exports are expected to lead to more Foreign
Direct Investments in this sector. Computer Software and Hardware sector received
US$ 564 million which constitute 11% of the total FDI inflows during the period
Jan2000-Dec2011 (with reference to table 4.3). The maximum of FDI in this sector
was received from Mauritius which was followed by USA and so on. Among Indian
locations Mumbai received of investment followed by Bangalore, and Chennai.
However the trend in this sector is declining from 2008 due to economy crisis,
recession and due to greater oppurtunity in countries like China and Korea in respect
of labour and technology.
Telecommunication:
Chart 4.5
Telecom is one of the fastest growing industries in India, and everyone, including
foreign players and investors, are eager to be a part of this growth. The last few years
have witnessed many activities on the foreign direct investment front with world's
leading telecom operators picking up large stakes in domestic operators.
The telecom services industry registered a growth of 20.7 percent clocking revenues
of 1, 57,542 crore in 2008-09 compared to Rs 130561 Crore in the previous year.
During the year 2005, government had raised the FDI limit in telecom sector from
49 percent to 74 percent, which has contributed to the robust growth of FDI in the
sector. In February 2009, the Government has further revised the methodology of
calculation of indirect foreign investment, according to which FDI of less than 50%
in investing company is not counted in the licensee company if the investing
company is ‘owned’ and ‘controlled’ by resident Indian citizens. This change of
methodology of calculation of indirect foreign investment from earlier proportionate
basis to ‘owned’ and ‘controlled’ basis has brought down composite FDI in some of
the licensee companies and have given more room to bring in further investment.
However, actual foreign investment requirement of a licensee company depends on
its business case. FDI in Indian Telecommunications Industry is one of the most
crucial parts that have caused such a hike in the telecom market so far. Inflow of FDI
into India’s telecom sector during April 2000 to Dec. 2010 was about US $ 57035
million which constitute 8% of total FDI inflows and is second after FDI in services
(with reference to table 4.3). The trend in telecom sector due to above reasons
remains almost stable in 2008-10 but declines in 2011 due to 2G scam and again
increases in 2012.
Housing and Real Estate:
Chart 4.6
The housing and real estate sector in India witnessed foreign direct investment (FDI)
of US $ 5600 million in April-September 2010-11, according to the Department of
Industrial Policy and Promotion (DIPP). Housing and real estate sector including
Cineplex, multiplex, integrated townships and commercial complexes etc, attracted
a cumulative foreign direct investment (FDI) worth US $ 48819 million from April
2000 to Dec 2010 (with reference to table 4.3).
Foreign investors have so far contributed significant capital to India’s real estate
market. Aggregate FDI inflows into the real estate sector are recorded at
approximately 7% of the total inflows. The relaxed FDI rules implemented by India
last year has invited more foreign investors and real estate sector in India is
seemingly the most lucrative ground at present. Private equity players are
considering big investments, banks are giving loans to builders, and financial
institutions are floating real estate funds. Indian property market is immensely
promising and most sought after for a wide variety of reasons. However the trend in
this sector is declining from year 2010-12 due to current FDI regulations for the
sector stipulate certain conditions, such as minimum area of 50000 square metres to
be developed, minimum capitalisation requirements, lock-in period of 3 years, due
to economic debt crisis in Europe and America and also due to higher interest rate
on loans that have been put in place from the perspective of preventing growth in
the sector. Such conditions, however, pose challenges for FDI inflows into various
projects, where given the nature of projects, it may not be possible to comply with
such conditions.
Construction Activities:
Chart 4.7
Financi
al Year
(2000-
2011)
1 2000- 2339 61 1350 279 4029 1847
01
2 2001- 3904 191 1645 390 6130 (+) 1505
02 52%
3 2002- 2574 190 1833 438 5035 (-) 377
03 18%
4 2003- 2197 32 1460 633 4322 (-) 10918
04 14%
5 2004- 3250 528 1904 369 6051 (+) 8686
05 40%
6 2005- 5540 435 2760 226 8961 (+) 9926
06 48%
7 2006- 15585 896 5828 517 2282 (+) 3225
07 6 146
%
8 2007- 24573 2291 7679 292 3483 (+) 20328
08 5 53%
9 2008- 27329 702 9030 777 3783 (+) (-)
09 8 )9% 15017
10 2009- 25609 1504 8669 194 3776 (-) 29048
10 (P) 5 3 0.2%
(+)(++
)
11 2010- 19430 657 6703 234 2702 (-) 29422
11 (P) 4 28%
(+)
Cumul 132330 7523 4886 610 1948 10026
ative 1 0 14 5
Total
(from
April
2000 to
March
2011)
Above table represents the inflows data for the 11-year period 2000-01 to 2010-11.
The data presented in the table are comparable since India adopted the international
norms for presenting FDI statistics, alluded to in the earlier section, from 2000-01.
The change in the reporting practice which introduced new items, especially
reinvested earnings of the already established enterprises, contributed significantly
to the upward revision of total inflows. As compared to the earlier methodology, the
new approach resulted in increasing FDI inflows by 44 per cent for the period 2000-
01 to 2004-05 and nearly 31 per cent for the period 2005-06 to 2009-10. As can be
seen from the Table, the dramatic rise in the inflows after 2005-06 was also a result
of rapid increases in equity inflows (comprising of inflows on account of (i)
government approvals, (ii) acquisitions and (iii) through the automatic route). The
FDI Equity inflows during the five years 2005-06 to 2009-10 were almost seven
times those of the previous years. The increase in inflows since 2005 resulted from
a number of policy initiatives taken by the government to attract FDI. In March 2005,
the government announced a revised FDI policy, an important element of which was
the decision to allow FDI up to 100 per cent foreign equity under the automatic route
in townships, housing, built-up infrastructure and construction-development
projects. The year 2005 also witnessed the enactment of the Special Economic Zones
Act, which opened further avenues for the involvement of foreign firms in the Indian
economy.
4.8 FDI and Economic Development
X Y XY X^2 Y^2
sum x * sum
y/N 13347166251393 2224527708565.50
sum x^2/N 39967191968
sum y^2/N 123814641021493
Numerator 502026452899
Denominator 351038547077197000000000 592485060636.30
After putting all the value in the equation, we get the value of Karl Pearson co
relation(r) is found to be +.85. It means that there is high degree positive correlation
between the FDI and GDP at factor cost. Hence H1 hypothesis is accepted.
Chart 4.8
Chart 4.9
With the help of both the data and the chart we can see the trend line of GDP and
FDI are increasing rapidly which tells us about the positive relationship between
GDP and FDI and it is also resembles with Karl Pearson co relation.
Conclusion
Foreign direct investment has continued to play a significant role in the India’s
economy. From the above calculation, the analysis shows that there is a positive
relationship between the FDI and economic growth, which the relationship is found
to be significant. These findings have important policy implication where the
government has to concern the importance of the FDI contributed to economic
growth. Economy development of a country can be achieve by encourage more
foreign direct investment, which it can help to create more employment in the
country. In addition, advance technology in production will trained more skilled
labour; therefore it will enhance the productivity and fulfil the satisfaction and
demand from the consumers. But, there is negative effect on domestic producer,
because they losing the market power, since the foreign investor become monopoly
in the market. This indirectly will make the domestic producer facing the difficulties
to survive in the market in the long term as foreign companies can achieve economy
of scale with advance technology.
CHINA
China has held the top position since 2002, when it took the spot from the United
States. Rising incomes, urban migration, and increased demand for consumer goods
in the world's most populous consumer market are surely contributing to continued
increased foreign investment. Inflows rose 6 percent to $185 billion in 2010, $10
billion above the previous peak in 2008.
With this growing emphasis on domestic consumption comes a shift toward services,
FDI flows into China's services sector grew faster than any other industry. China has
also shown strong leadership and the ability to move up the value chain in the
technology sector. It has improved R&D capabilities and better educated its
workforce while also successfully creating vast technology clusters that are
important nodes in the global technology supply chains.
INDIA
India moves up one spot to 2nd place this year, passing the United States, as
investors return to India after a few years of soft inflows. In 2008, India attracted
$43 billion in overseas investment. The following year FDI dipped to $36 billion,
and then to $25 billion in 2010. A significant portion of this decline was due to weak
inflows into service spaces such as computer software and hardware, financial
services, banking, and construction, industries where the global economic crisis led
firms to scale back their overseas operations.
Persistent local challenges, including the slow pace of reform and poor governance,
may also be at play. Senior government officials have acknowledged that the country
needs to improve its business climate, particularly as other emerging markets craft
investor-friendly policies
Chart 4.10
FDI
Going by the basic facts, the economy of China is more developed than that of India.
While India is the 11th largest economy in terms of the exchange rates, China
occupies the second position surpassing Japan. Compared to the estimated $1.3123
trillion GDP of India, China has an average GDP of around $4909.28 billion. In case
of per capital GDP, India lags far behind China with just $1124 compared to $7,518
of the latter. To make a basic comparison of India and China Economy, we need to
have an idea of the economic facts of the countries.
Table 4.11
If we make the analysis of the India vs. China economy, we can see that there are a
number of factors that has made China a better economy than India. First things first,
India was under the colonial rule of the British for around 190 years. This drained
the country's resources to a great extent and led to huge economic loss. On the other
hand, there was no such instance of colonization in China. As such, from the very
beginning, the country enjoyed a planned economic model which made it stronger.
Top sectors that attracted FDI equity inflows (from April 2000 to January 2011),
from China, are:
Agriculture
Agriculture is another factor of economic comparison between India and China. It
forms a major economic sector in both the countries. However, the agricultural
sector of China is more developed than that of India. Unlike India, where farmers
still use the traditional and old methods of cultivation, the agricultural techniques
used in China are very much developed. This leads to better quality and high yield
of crops which can be exported.
IT/BPO
One of the sectors where Indi enjoys an upper hand over China is the IT/BPO
industry. India's earnings from the BPO sector alone in 2010 are $49.7 billion while
China earned $35.76 billion. Seven Indian cites are ranked as the world's top ten
BPO's while only one city from China features on the list.
Company Development
Tax incentives are one area where China is lagging behind India. The Chinese capital
market lags behind the Indian capital market in terms of predictability and
transparency. The Indian capital or stock market is both transparent and predictable.
India has Asia's oldest stock exchange which is the BSE or the Bombay Stock
Exchange. Whereas China is home to two stock exchanges, namely the Shenzhen
and Shanghai stock exchange. As far as capitalization is concerned the Shanghai
Stock Exchange is larger than the BSE since the SSE has US$1.7 trillion with 849
listed companies and the BSE has US$1 trillion with 4,833 listed companies. But
more than the size what makes both these stock exchanges different is that the BSE
is run on the principles of international guidelines and is more stable due to the
quality of the listed companies. In addition to this the Chinese government is the
major stake holder of most of its State-owned organizations hence the listed firms
have to run according to the rules and regulations lay down by the government.
Hence India is ahead of China in matters of financial transparency.
CHAPTER-5
5.0 Findings and Conclusion
1. Global foreign direct investment (FDI) inflows grew in 2007 to an estimated
US$1.5 trillion, surpassing the previous record set in the year 2000. It was due
to continuous rise in FDI in all of three groups of economies - in developed
countries, developing economies and in South-East Europe.
2. However there was declining of global FDI in 2008 due to financial crisis in
US but in 2010 FDI was $1,244 billion, where developing economies
contributed to more than 50% of the share in global FDI.
3. From 2004 onwards FDI in India increases tremendously and in 2006-2007
there was a growth of 125% in FDI inflow. The subsequent year was again
very good, where investment inflows gained 97%, but due to global financial
crisis FDI declined from 2008 onwards. In 2010-11 the decline was 25% due
to decline in FDI in service sector because of debt crisis in Europe and US.
4. Mauritius, Singapore, the US, UK, Netherlands, Japan, Cyprus, Germany,
France and the UAE, among other countries, are the major investors in India.
Where India’s 83% of cumulative FDI is contributed by ten countries while
remaining 17 per cent by rest of the world.
5. After 1991-2011, Mauritius have always topped the position for FDI inflows
in India with FDI on 2011-12 standing at 26634 US $ million, consisting of
41% of total FDI inflows. The inordinately high investment from Mauritius is
due to routing of international funds through the country given significant tax
advantages; double taxation is avoided due to a tax treaty between India and
Mauritius, and Mauritius is a capital gains tax haven, effectively creating a
zero-taxation FDI channel. This is the main reason why most of the countries
invest in India through Mauritius.
6. Singapore however was very behind among the major investor in India but
during the year 2010-11 it came to second position because of CECA
agreement between India & Singapore.
7. Service Sector contribute maximum of FDI inflow in India of about 20% of
total inflow which is followed by tele communications, computer hardware &
software, housing and construction activities.
8. The increase in service sector is because of increase in BPO services,
consultancy services and also devaluation of rupee against dollar resulting to
more inflows of funds to software industries.
9. There has been decline in computer hardware & software sector due to global
financial crisis and due to greater opportunity in countries like China and
Korea.
10. In tele communication sector there has been increase in FDI inflows due to
change in FDI limit from 49% to 74%.
11. Due to various government policies as to maintain minimum capitalization
requirement, 3 yrs lock in period minimum area requirement had led to decline
in housing and real estate sector.
12. However in construction activities due to relaxation of government policies
and also due to improvement in infrastructure through agreement between
India and Japan there has been increase in FDI inflows.
13. Top three states which got the maximum FDI inflow are Maharashtra, New
Delhi and Karnataka. The top 3 Indian Regions attracting the highest FDI
(April 2000 to January 2010) have been Mumbai Region (representing with
US$ 38,074 million (INR 169,691 Crores) followed by Delhi Region with
US$ 21,460 million (INR 97,125 Crores) and Karnataka Region with US$
6,750 million (INR 29,850 Crores).
14. The three states together have accounted for nearly 62% of the total FDI
inflows received over the last 10 years, because of better infrastructure, more
number of mergers and acquisition of companies in these regions, more
number of software companies.
15. More of FDI inflows are through automatic route because of government
policies and enactment of SEZ Act which attracted a lot of foreign companies
to India.
16. Because of China adopting policies regarding FDI in various sectors starting
from 1978 it is at present a top destination of FDI investment in the world.
Because of improved R&D, skilled manpower, technological advancement
China is far more ahead than India.
17. FDI in China was 185.08 US billion $ which was very higher than that of
India which was only 24.15 billion US $. With metallurgical industries being
a top sector attracting FDI followed by chemicals, trading, industrial
machinery and computer software and hardware.
CHAPTER-6
6.0 Suggestion and Recommendations
Thus, it is found that FDI as a strategic component of investment needed by India
for its sustained economic growth and development. FDI is necessary for creation of
jobs, expansion of existing manufacturing industries and development of the new
one. Indeed, it is also needed in the healthcare, education, R&D, infrastructure,
retailing and in long- term financial projects. So, the study recommends the
following suggestions:
1. This study states that policy makers should focus more on attracting diverse types
of FDI. Like the policy makers should design policies where foreign investment
can be utilized as means of enhancing domestic production, savings, and exports;
as medium of technological learning and technology diffusion and also in
providing access to the external market.
3. India has a huge pool of working population. However, due to poor quality
primary education and higher there is still an acute shortage of talent. This factor
has negative repercussion on domestic and foreign business. FDI in Education
Sector is less than 1%. Given 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. The issues of commercialization of education,
regional gap and structural gap have to be addressed on priority.
4. It can also be suggested that the government should invest more for improvement
of infrastructure sectors, R&D activities, human capital, education sector,
technological advancement to attract more of FDI.
6. 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.
7. Though service sector is one of the major sources of mobilizing FDI to India,
plenty of scope exists. Still we find the financial inclusion is missing. Large part
of population still doesn’t have bank accounts, insurance of any kind,
underinsurance etc. These problems could be addressed by making service sector
more competitive. Removal of sectoral cap in insurance is still awaited.
8. FDI should be guided so as to establish deeper linkages with the economy, which
would stabilize the economy (e.g. improves the financial position, facilitates
exports, stabilize the exchange rates, supplement domestic savings and foreign
reserves, stimulates R&D activities and decrease interest rates and inflation etc.)
and providing to investors a sound and reliable macroeconomic environment.
10. It is also suggested that the government while pursuing prudent policies must
also exercise strict control over inefficient bureaucracy and the rampant
corruption, so that investor’s confidence can be maintained for attracting more
FDI inflows to India.(According to JP Morgan risk index of India)
Bibliography:
The necessary data were collected through following websites-
www.rbi.org.in
www.worldbank.org.in
www.dipp.nic.in
http://indiahighcom-mauritius.org
www.docs.google.com
www.imf.org
www.uscc.gov