Int

BM & HRM 2020 - 22 | Session 13

FDI in India: Facts and

Figures
APALAK KHATUA, Email: apalak@xlri.ac.in
 Evolution of FDI Policy in India
• New Industrial Policy announced on July 24, 1991, was a
major departure in the Indian Economy
– Abolition of industrial licensing system, commonly known as License
Raj, except where it is required for strategic or environmental grounds
• Controversial FERA (1973) to less stringent FEMA (1999)
• Automatic clearance of FDI proposals fulfilling the conditions
laid down
• Foreign ownership up to 100% is permitted in most sectors
– 49% cap in a few sectors like insurance, pension, petroleum refining by
PSUs, infrastructure companies in the securities market
– Prohibited sectors are lottery business, chit funds, manufacturing of
tobacco or tobacco substitutes, gambling and betting sectors
• Export obligation were withdrawn in 2000
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 FDI Policy Framework

Three primary institutions in India that handle FDI-related issues:

1. Foreign Investment Promotion Board (FIPB)
– nodal single-window agency for all matters relating to FDI as well as
promoting investment in the country
2. Secretariat for Industrial Assistance (SIA)
– entrepreneurial assistance, investor facilitation, receiving and
processing all applications, conveying government decisions,
assisting entrepreneurs and investors in setting up projects and
monitoring the implementation
3. Foreign Investment Implementation Authority (FIIA)
– facilitates quick translation of FDI approvals into implementation,
helps to obtain necessary approvals, sort out operational problems
and meet with various government agencies
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment Policy

• The Indian government has provided many incentives for attracting

FDI, such as establishing Special Economic Zones (SEZs) where
companies are entitled to certain benefits, exemption from duty on
import, income tax exemptions, value added tax (VAT) rebate on
export, opening up of many sectors for FDI, etc.

• Indian Finance Minister in his 2017-18 budget speech noted:

– Our Government has already undertaken substantive reforms in
FDI policy in the last two years. More than 90 per cent of the total
FDI inflows are now through the automatic route ... Further
liberalisation of FDI policy is under consideration and necessary
announcements will be made in due course

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment Policy
• FDI is permitted in virtually every sector, except those of
strategic concern such as atomic energy or railway operations
• FDI can come into India in two ways.
• Automatic route
– FDI in sectors/activities to the extent permitted under the
automatic route does not require any prior approval from the
Government of India
– The investors are only required to communicate with RBI within
30 days after receipt of inward remittances or issue of shares to
foreign investors
• Prior Government Approval route
– Few sectors require prior government approval
– Proposals are considered in a time-bound and transparent manner
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Economic Reforms & Route-wise FDI inflows
(in US$ million)

Introduction of
FEMA

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Why China attracts more FDI than India?

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Same story with other Asian economies

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Is it India's failure to attract FDIs?

• India yet to build the critical mass of FDI as it is a late

starter
– 1991 as compared to China’s 1979

• The figures of FDI inflows in India and China are not

comparable
– Indian figures of inflows did not follow the IMF’s
manual that was followed internationally during this
period

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Revised Indian FDI data

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 FDI inflows by component

Source: World Investment Reports

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment in India
A. Direct investment B. Portfolio investment Total (A+B)
Year
Rs. crore US $ million Rs. crore US $ million Rs. crore US $ million
1990-91 174 97 11 6 185 103
1991-92 316 129 10 4 326 133
1992-93 965 315 748 244 1713 559
1993-94 1838 586 11188 3567 13026 4153
1994-95 4126 1314 12007 3824 16133 5138
1995-96 7172 2144 9192 2748 16364 4892
1996-97 10015 2821 11758 3312 21773 6133
1997-98 13220 3557 6794 1828 20014 5385
1998-99 10358 2462 -257 -61 10101 2401
1999-00 9338 2155 13112 3026 22450 5181
2000-01 18406 4029 12609 2760 31015 6789
2001-02 29235 6130 9639 2021 38874 8151
2002-03 24367 5035 4738 979 29105 6014
2003-04 19860 4322 52279 11377 72139 15699
2004-05 27188 6051 41854 9315 69042 15366
2005-06 39674 8961 55307 12492 94981 21453
2006-07 103367 22826 31713 7003 135080 29829
2007-08 140180 34835 109741 27271 249921 62106
2008-09 173741 37838 -63618 -13855 110123 23983
2009-10 179059 37763 153516 32376 332575 70139
2010-11 138462 30380 143435 31471 281897 61851

Note : 1) Data for 2009-10 and 2010-11 are provisional.

2) Data from 1995-96 onwards include acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999. Data on such
acquisitions are included as part of FDI since January 1996.
3) Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are
not comparable with FDI data for earlier years.
4) Negative (-) sign indicates outflow.
5) Direct Investment data for 2006-07 include swap of shares of 3.1 billion.
Also see Notes on Tables. Source: Reserve Bank of India
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Financial Year-wise FDI inflows

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Financial Year-wise FDI inflows

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
China and India: A Comparative Perspective

After controlling
China’s ‘Round-
Tripping’ and
adjusting India’s
FDI calculation
according to IFC
guideline

Can you recall the A.T. Kearney FDI Confidence Index?

Source: Kumar (2005), EPW
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Sector-wise FDI Inflows in India

August 1991 – Dec 1999

Jan 2000 – March 2009

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Sector-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Sector-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise Distribution of FDI in India
(Jan 2000 – March 2009)

• FDI equity flows are concentrated in a few states

• Of the total approved FDI flow, Maharashtra accounted for the
largest proportion with 46 per cent, followed by Gujarat with
15 per cent, and Delhi with 7.7 per cent.
• Other significant states are AP, Karnataka and TN.
• Among these states, only a few cities attract FDIs.
– These included Ahmedabad, Bangalore, Kolkata, Chennai, Coimbatore,
Goa, Hyderabad, Jamnagar, Kancheepuram, Mumbai, Pune and
Raigarh.
• Only seven states accounted for over 97 per cent of the total
amount of export-oriented FDI and 83 per cent of total FDI
approvals during 1991-2001.
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
RBI’s Region-wise Break-up of FDI inflows
(Jan 2000 – March 2009)

Software hub
Strong industrial base

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Country-wise FDI Inflows in India

August 1991 – Dec 1999

Followed by Japan (2.9), Cyprus (2.5),

Germany (2.4), France (1.4), U.A.E.(1.0)

Jan 2000 – March 2009

Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Country-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Country-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement
• Armenia • Jordan • Mozambique • Sweden
• Australia • Hungary • Myanmar • Swiss Confederation
• Austria • Iceland • Namibia • Syrian Arab
• Bangladesh • Indonesia • Nepal Republic
• Belarus • Ireland • Netherlands • Tajikistan
• Belgium • Israel • New Zealand • Tanzania
• Botswana • Italy • Norway • Thailand
• Brazil • Japan • Oman • Trinidad and Tobago
• Bulgaria • Kazakstan • Philippines • Turkey
• Canada • Kenya • Poland • Turkmenistan
• China • Korea • Portuguese Republic • UAE
• Cyprus • Kuwait • Qatar • UAR (Egypt)
• Czech Republic • Kyrgyz Republic • Romania • UGANDA
• Denmark • Libya • Russia • UK
• Egypt • Lithuania • Saudi Arabia • Ukraine
• Estonia • Luxembourg • Serbia • United Mexican
• Ethiopia • Malaysia • Singapore States
• Finland • Malta • Slovenia • USA
• France • Mauritius • South Africa • Uzbekistan
• Georgia • Mongolia • Spain • Vietnam
• Germany • Montenegro • Sri Lanka • Zambia
• Greece • Morocco • Sudan
Source: http://law.incometaxindia.gov.in/DIT/intDtaa.aspx#

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• Indian government has provided many incentives for attracting

FDI

• For instance, DTAA is mainly aimed at promoting trade and

investment by eliminating double taxation and making tax
regulations more consistent
• India adopted this policy quite early and signed the first such
agreement in 1969 with Egypt

• Currently, India is party to 90+ DTAAs with various countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• While the stated goals of DTAAs are promoting trade and

investment, among others
• DTAAs have come under criticism for facilitating treaty shopping
and round-tripping – especially due to the disproportionately huge
FDI inflows from jurisdictions like Mauritius, Singapore and
Cyprus, which are regarded as tax havens
• Along with their role in tax avoidance, there are concerns that
these jurisdictions are also being used for tax evasion and black
money
• This has been highlighted in various reports including by
government agencies and news outlets

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Why Mauritius?

• India-Mauritius DTAA was signed in 1982

• According to the DTAA, capital gains arising from the sale of shares
are taxable in the country of residence of the shareholder and not in the
country of residence of the company whose shares have been sold:
– Therefore, a Company resident in Mauritius selling shares of an
Indian company will not pay tax in India.
– Since there is no capital gains tax in Mauritius, the gain will escape
tax altogether
• After several years of negotiations, India in 2016 finally succeeded in
amending the treaties with Mauritius, Singapore and Cyprus.
• India’s finance ministry said the amendment of the treaty would “help
curb tax evasion and tax avoidance” and “double non-taxation” as well
as round-tripping

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 What are the Determinants of FDI inflows in a
country like India?

• India’s strengths as an investment destination depends

on
– Large and growing domestic market with increasing
purchasing power parity
– World-class scientific, technical and managerial institutes
– Cost-effective and highly skilled manpower
– An abundance of natural resources
– A large English-speaking population
– Institutional transitions in terms of openness to international
trade, economic reforms etc.
– An independent judiciary
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Outbound FDI from India
• There is a growing realization that the future growth of Indian
companies will be influenced by the share that they can garner in
the world market, not only by producing in the country and
exporting, but also by acquiring overseas assets

• RBI allows Indian firms to invest in entities abroad up to 200%

(it is not constant) of their net worth in a year
– But money raised abroad does not come under this law

• The actual acquisition values are higher as a significant amount

of fund has been raised abroad.
– For instance, a significant portion of the capital was raised in Singapore for
The Tata Steel/Corus deal

Source: https://www.bis.org/review/r070122c.pdf

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 To sum up…

• Global outlook about India as FDI destination is positive

• However, FDI still plays a relatively small role in domestic
capital formation
• Broadly, MNEs are more export oriented than domestic firms
• Only a few states of India receive FDIs and mostly FDIs are
concentrated in a few sectors
• Regulating FDI inflows to maximize their impact on domestic
sector might not be a bad idea for India à Governments should
ensure efficient, competitive and regulatory regime to provide
level playing fields to both domestic and foreign firms

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A