UNIVERSITY OF MUMBAI

A STUDY
ON
“PROJECT REPORT ON FDI AND IMPECT ON INDIA”

SUBMITTED BY
ANSARI SARFARAZ SHAUKAT ALI

THE AWARD OF THE DEGREE OF

BACHELOR OF MANAGEMENT STUDIES SEM-VI
EXAMINATION NO:-
ACADEMIC YEAR 2022-2023
GUIDED BY
VIJAY VANJARE

PADMASHRI ANNASAHEB JADHAV BHARATIYA

SAMAJ UNNATI MANDAL’S
B.N.N. COLLAGE, BHIWANDI
DIST.THANE 421302

(Arts, Science, Commerce & Self Finance Course)I, MR. ANSARI

DECLARARATION
I am mr. SARFARAZ SHAUKAT ALI, Exam No:____________ Student
of B.N.N College, Bhiwandi of T.Y.BMS (BACHELOR OF
MANAGEMENT STUDIES), Semester VI, hereby declare that I have
completed project on “A STUDY OF INVENTORY MANGEMENT OF
A COMPANY [EXCEL INDUSTRIES Ltd]”is a record of independent
research work carried by me during the academic year 2019-20 under the
guidance of PROF. AKSHAY BHOIR The information submitted is true
and original to the best of my knowledge.

ANSARI
SARFARAZ
SHAUKAT ALI

Estd. June 1960

 SELF-FUNDED COURSES
“A” NAAC Accredited
“BEST COLLEGE AWARD 2018-2019”

CERTIFICATE
This is to certify That ANSARI SARFARAZ SHAUKAT ALI, Seat
No.:___________of T.Y.BMS (BACHELOR OF MANAGEMENT
STUDIES), B.N.N College, Semester VI (Academic Year 2022-2023) has
successfully completed the project entitled “A STUDY OF PROJECT
REPORT ON FDI AND IMPECT ON INDIA” and submitted the project
report in partial fulfillment of the requirement for the award of the Degree of
T.Y.BMS (BACHELOR OF MANAGEMENT STUDIES) of University of
Mumbai.

PROF. VIJAY DR. KALPANA DR. ASHOK D.

VANJARE PATANKAR JAIN WAGH
( PROJECT GUIDE ) ( CO-ORDINATOR ) ( PRINCIPAL )
Examiner: -__________
Date: -__________
College Seal
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.

Table 1.1: FDI policy in permitted sectors in India 10

Table 4.1: FDI inflows year wise in India 23
Table 4.2: FDI inflows country wise in India 25
Table 4.3: FDI inflows sector wise in India 30
Table 4.4: Ranking of sector wise FDI inflows from April 2000-Dec2011 31
Table 4.6 State wise FDI inflows in India from April 2008-March 2011 41
Table 4.7: Route wise FDI inflows in India 2000-11 44
Table 4.8: FDI and GDP (fc) from 2006-11 46
Table 4.9: Calculation of Karl Pearson’s co-efficient 47
Table 4.10: FDI inflow in China and India 51
Table 4.11: Comparison of facts between India and China 52

LIST OF CHARTS:-

Chart No. Title Page No.

Chart 4.1 FDI inflows in the world 21

Chart 4.2 % of total FDI inflows in different sectors 31
Chart 4.3 Trends and patterns of FDI in service sector 34
Chart 4.4 Trends and patterns of FDI in computer sector 35
Chart 4.5 Trends and patterns of FDI in telecommunications 36
Chart 4.6 Trends and patterns of FDI in housing and real estate 38
Chart 4.7 Trends and patterns of FDI in construction activities 39
Chart 4.8: FDI trends during 2006-11 47
Chart 4.9 GDP trends during 2006-11 48
Chart 4.10 FDI confidence index from 2007-12 51
Chart 4.11 Trend of FDI in India and China 52
EXECUTIVE SUMMARY
Foreign direct investment (FDI) has played an important role in the process of globalisation
during the past two decades. The rapid expansion in FDI by multinational enterprises since the
mid-eighties may be attributed to significant changes in technologies, greater liberalisation of
trade and investment regimes, and deregulation and privatisation of markets in developing
countries like India.

The title of the empirical study is “FDI inflows and its

impact in India” during 2007 to 2011. The present study aims at providing detailed information
about FDI inflows in India during the subsequent years. The analysis is fully based on secondary
data collected through different website and journals.

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.
 1 CHAPTER-1
1.0
1.1 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.

1.2 Types of
FDI’s By direction
Outward FDI:
An outward-bound FDI is backed by the government against all types of associated risks. This
form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage
provided to the domestic industries and subsidies granted to the local firms stand in the way of
outward FDIs, which are also known as 'direct investments abroad.'

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
1.3 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

Foreign direct investment incentives may take the following forms:

 Low corporate tax and income tax rates
 Tax holidays
 Preferential tariffs
 Special economic zones
 Investment financial subsidies
 Soft loan or loan guarantees
 Free land or land subsidies
 Relocation & expatriation subsidies
 Job training & employment subsidies
 Infrastructure subsidies
 R&D support
CHAPTER-2
2.0 HISTORY OF FDI IN INDIA
India intent to open its markets to foreign investment can be traced back to the economic reforms
adopted during two prime periods- pre- independence and post independence.
Pre- independence, India was the supplier of foodstuff and raw materials to the industrialised
economies of the world and was the exporter of finished products- the economy lacked the skill
and means to convert raw materials to finished products. Post independence with the advent of
economic planning and reforms in 1951, the traditional role played changes and there was
remarkable economic growth and development. International trade grew with the establishment
of the WTO. India is now a part of the global economy. Every sector of the Indian economy is
now linked with the world outside either through direct involvement in international trade or
through direct linkages with export and import.
Development pattern during the 1950-1980 periods was characterised by strong centralised
planning, government ownership of basic and key industries, excessive regulation and control of
private enterprise, trade protectionism through tariff and non-tariff barriers and a cautious and
selective approach towards foreign capital. It was a quota, permit, licence regime which was
guided and controlled by a bureaucracy trained in colonial style. This inward thinking, import
substitution strategy of economic development and growth was widely questioned in the 1980’s.
India’s economic policy makers started realising the drawbacks of this strategy which inhibited
competitiveness and efficiency and produced a much lower growth rate that was expected.
Consequently economic reforms were introduced
initially on a moderate scale and controls on industries were substantially reduced by 1985
industrial policy. This set the trend for more innovative economic reforms and they got a boost
with the announcement of the landmark economic reforms in 1991. After nearly five decades of
insulation from world markets, state controls and slow growth, India in 1991 embarked on an
accelerated process of liberalization. The 1991 reforms ensured that the way for India to progress
will be through globalization, privatisation, and liberalisation. In this new regime, the
government is now assuming the role of a promoter, facilitator and catalyst agent instead of the
regulator and
India has a number of advantages which make it an attractive market for foreign capital namely,
political stability in democratic polity, steady and sustained economic growth and development,
significantly huge domestic market, access to skilled and technical manpower at competitive
rates, fairly well developed infrastructure. FDI has attained the status of being of global
importance because of its beneficial use as an instrument for global economic integration.
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.
1. The FIPB Route – Processing of non-automatic approval cas
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.

2.2 FOREIGN DIRECT INVESTMENT POLICY IN

INDIA FDI is prohibited in sectors like
(a) Retail Trading (except single brand product retailing)
(b) Lottery Business including Government /private lottery, online lotteries, etc.
(c) Gambling and Betting including casinos etc.
(d) Chit funds
(e) Nidhi Company
(f) Trading in Transferable Development Rights (TDRs)
(g) Real Estate Business or Construction of Farm Houses
(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and
Railway Transport (other than Mass Rapid Transport Systems).
Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business and Gambling and Betting
activities.
PERMITTED SECTORS
In the following sectors/activities, FDI up to the limit indicated against each sector/activity is
allowed, subject to applicable laws/ regulations; security and other conditionalities. In
sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to
applicable laws/ regulations; security and other conditionalities.
Wherever there is a requirement of minimum capitalization, it shall include share premium received
along with the face value of the share, only when it is received by the company upon issue of the
shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of
shares beyond the issue price of the share, cannot be taken into account while calculating
minimum capitalization requirement;
Table 1.1: FDI policies in permitted sectors in India
% of FDI
Sl.No Sector/Activity Cap/Equity Entry Route
AGRICULTURE
1 Agriculture & Animal Husbandry 100% Automatic
Floriculture, Horticulture, Apiculture
and Cultivation of Vegetables &
Mushrooms under controlled
conditions.
Development and production of Seeds
and planting material.
Animal Husbandry, Pisciculture,
Aquaculture under controlled
conditions and
services related to agro and allied
sectors Note- Besides the
above, FDI is not allowed in any other
agricultural sector/activity

2 Tea Plantation
Tea sector including tea plantations. 100% Government
Note- Besides the above, FDI is not
allowed in any other plantation
sector/activity

Other conditions: 1) Compulsory divestment of 26% equity of the company in

favour of an Indian partner/Indian public within a period of 5 years

3 Mining 100% Automatic

a) Mining and Exploration of metal and
non metal ores including diamond,
gold, silver but excluding titanium
bearing minerals and its ores; subject to
Mines and Minerals (Development &
Regulation) Act, 1957.

b) Coal and Lignite

1) Coal and Lignite mining for captive 100% Automatic
consumption by power projects, iron &
steel and cements units and other
eligible activities permitted under and
subject to provisions of Coal and Mines
(Nationalization) Act, 1973

2) Setting up coal processing plants like 100% Automatic

washeries subject to the condition that
co. shall not do coal mining and shall
not sell washed coal from its processing
unit in open market

c) Mining and mineral separation of titanium bearing minerals and ores, its value
addition and integrated activities.

Mining and mineral separation of 100% Government

titanium bearing minerals and ores, its
value addition and integrated activities.

4 Petroleum & Natural Gas

 Exploration activities of oil and natural 100% Automatic
gas fields, infrastructure related to
marketing of petroleum products and
natural gas, marketing of natural gas
and petroleum products, petroleum
product pipelines, natural gas/pipelines,
LNG Regasification infrastructure,
market study and formulation and
Petroleum refining in the private sector,
subject to the existing sectoral policy
and regulatory framework in the oil
marketing sector and the policy of the
Government on private participation in
exploration of oil and the discovered
fields of national oil companies

Petroleum refining by the Public Sector 49% Government

Undertakings (PSU), without any
disinvestment or dilution of domestic
equity in the existing PSUs.

5 Manufacturing
Manufacture of items reserved for production in Micro and Small Enterprises
(MSEs)
 FDI in MSEs will be subject to the sectoral caps, entry routes and other relevant
sectoral regulations. Any industrial undertaking which is not a Micro or Small
Scale Enterprise, but manufactures items reserved for the MSE sector would
require Government route where foreign investment is more than 24% in the
capital. Such an undertaking would also require an Industrial License under the
Industries (Development & Regulation) Act 1951, for such manufacture. The
issue of Industrial License is subject to a few general conditions and the specific
condition that the Industrial Undertaking shall undertake to export a minimum of
50% of the new or additional annual production of the MSE reserved items to be
achieved within a maximum period of three years. The export obligation would be
applicable from the date of commencement of commercial production and in
accordance with the provisions of section 11 of the Industries (Development &
Regulation) Act 1951.

6 Defence
Defence Industry subject to Industrial 26% Government
license under the Industries
(Development & Regulation) Act 1951

7 Service Sector
a) Broadcasting
Terrestrial Broadcasting FM (FM 26% (FDI, Government
Radio) subject to such terms and NRI &
conditions as specified from time to PIO
time by Ministry of Information and investments and
Broadcasting for grant of permission portfolio
for setting up of FM Radio Stations investment)

Cable Network, subject to Cable 49% (FDI, Government

Television Network Rules, 1994 and NRI &
other conditions as specified from time PIO
to time by Ministry of Information investments and
and Broadcasting portfolio
investment)
Direct–to-Home subject to such 49% (FDI, NRI & Government
guidelines/terms and conditions as PIO
specified from time to time by Ministry investments and
of Information and Broadcasting portfolio
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) Broadcasting 74% (total Automatic up to

Service is subject to such direct and indirect 49%
guidelines/terms and conditions foreign investment Government route
as specified from time to time by including portfolio beyond 49% and
Ministry of Information and and FDI up
Broadcasting. to 74%

Setting up hardware facilities such as

up-linking, HUB etc.

1) Setting up of Up-linking HUB/ 49% (FDI & Government

Teleports FII)
(2) Up-linking a Non-News & Current 100% Government
Affairs TV Channel
 (3) Up-linking a News & Current 26% (FDI & Government
Affairs TV Channel subject to the FII)
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 and investment by
current affairs NRIs/PIOs/FII)

Publication of Indian editions of foreign 26% (FDI and Government

magazines dealing with news and investment by
current affairs NRIs/PIOs/FII)

Publishing/printing of Scientific 100% Government

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 Service/ 49% FDI
Domestic Scheduled Passenger Airline (100% for NRIs)
Automatic

(2) Non-Scheduled Air Transport 74% FDI Automatic up to

Service (100% for NRIs) 49%
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 subject 74% FDI Automatic up to

to sectoral regulations and security (100% for NRIs) 49%
clearance 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 packages, 100% Government

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 infrastructure
f)
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 existing 100% Automatic

g)
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 Trading/ 100% Automatic
Wholesale Trading (including sourcing
from MSEs)

l) E-commerce activities 100% Automatic

 Test marketing of such items for which 100% Government
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 trading Government

51%
m) Financing Services
Foreign investment in other financial services , other than those indicated below,
would require prior approval of the Government:

Asset Reconstruction Companies

Asset Reconstruction Company‘ 49% of paid-up Government
(ARC) means a company registered capital of ARC
with the Reserve Bank of India under
Section 3 of the Securitisation
and Reconstruction of Financial
Assets and Enforcement of Security
Interest Act, 2002 (SARFAESI Act).

n) Banking –Private sector

Banking –Private sector 74% including Automatic up to
investment by FIIs 49%
Government route
beyond 49% and
up
to 74%

Banking- Public Sector

 Banking- Public Sector subject to 20% (FDI and Government
Banking Companies (Acquisition & Portfolio Investment)
Transfer of Undertakings) Acts
1970/80. This ceiling (20%) is also
applicable to the State Bank of India
and its associate Banks.

0) Policy for FDI in Commodity 49% (FDI & Government

Exchange FII)
[Investment by
Registered
FII
under Portfolio
Investment Scheme
(PIS) will be
limited to 23%

and
Investment under
FDI
Scheme
limited to 26%)

p) Infrastructure Company in the Securities Market

49% (FDI & Government ( For
FII) [FDI limit of 26 FDI)
Infrastructure companies in Securities per cent and an FII
Markets, namely, stock exchanges, limit of 23 per cent of
depositories and clearing corporations, the paid-up
in compliance with SEBI Regulations capital ]

q) Insurance 26% Automatic

Non-Banking Finance Companies (NBFC)
r) Foreign investment in NBFC is allowed 100% Automatic
under the automatic route in only the
following activities:
Merchant Banking
Under Writing
Portfolio Management Services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
VentureCapital
Custodian Services
Factoring
Credit Rating Agencies
Leasing & Finance
Housing Finance
Forex Broking
Credit Card Business
Money Changing Business
Micro Credit
Rural Credit

2.3 FDI promotion initiatives

(a) On the policy front, the FDI policy is already very liberal & it is being further progressively
rationalized, on the basis of an exercise initiated for integration of all prior regulations on FDI,
contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so
as to reflect the current regulatory framework. The latest consolidated FDI policy document has
been launched by Department of Industrial Policy & Promotion on 30.09.2010, which is
available at DIPP’s website (www.dipp.nic.in) for public domain.
(b) On the investment promotion front, the Department organises ‘Destination India’ and
‘Invest India’ events in association with CII and FICCI.
(c) DIPP has been undertaking concerted efforts for improving the business environment in the
country. The business reforms aimed at improving the business environment include setting up
of single windows, online registrations,
computerization of information, simplification of taxes and payments, reduction of documents
through developing single forms for various licences/permissions and reduction of inspections
etc.
(d) As a step towards promoting an online single window at the national level for business users,
the Department has undertaking e-Biz project, which is one of Mission Mode Projects (MMPs)
under the National eGovernance Plan (NeGP). The objectives of setting up of the e-Biz Portal
are to provide a number of services to business users covering the entire life cycle on their
operations. The project aims at enhancing India’s business competitiveness through a service
oriented, event- driven G2B interaction.
(e) The National Manufacturing Competitiveness Council (NMCC) has been set up to provide a
continuing forum for policy dialogue to energise and sustain the growth of manufacturing
industries.
(f) The Department has regular interaction with foreign investors. Such interactions have been
held in bilateral/regional/international meets such as Indo-ASEAN, Indo-EU, Indo-Japan, etc.
Meetings with individual investors were also held on a regular basis.
(g) The Department website (www.dipp.nic.in) has been made both comprehensive and
informative, with an online chat facility.
 CHAPTER-3
Research Design
3.0 Statement of the problem:
There are many factors that influence the economic condition. One of them is FDI. Hence there
is a need to study the impact of FDI on the change in economy.

3.1 Objectives of the research:

The study covers the following objective
1. To study the trends and patterns of flow of FDI.
2. To evaluate the impact of FDI on the economy.
3. To develop basic industrial in india.
4. To develop infrastructure.
5. To exploit natural resources.
6. To improve technology.
7. To increase employment opportunities.
8. T increase level of investment by supplementing the domestic investment.
9. To remove the shortage of foreign exchange because of defiscit balance of payment.
10. To improve managerial and entreprentrial ability.
11. To set up risky and capital intensive project.

3.2 Methodology and Data collection:

AIM: To establish the relationship between FDI and growing trends in the Indian economy.
PRIMARY SOURCE: Not Applicable in this research

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).

3.4 Scope of the study:

1) The study is aimed to understand the flow of FDI in the Indian economy.
2) Finding out the reason for the difference in FDI inflows
3) How FDI is affecting various sector of economy.

3.5 Limitations of the study:

1) It’s not only FDI that effects the growth of economy there are other factors such as FII,
monetary policy and government policies.
2) FDI data keeps on changing.
3) Time limitation.ANALYSIS AND INTERPRETATION
4) 4.0 Analysis of FDI inflows global and by group of economies Chart 4.1

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 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.
 4.1 Analysis of FDI in India year wise Table
4.1: FDI inflows year wise in India
Amount (US $ % change over
Financial Year million) previous year
(April-March)

August 1991-
March 2000 14485
2000-01 2,463.00
2001-02 4,065.00 65%
2002-03 2,705.00 -50%
2003-04 2,188.00 -19%
2004-05 3,219.00 47%
2005-06 5,540.00 72%
2006-07 12,492.00 125%
2007-08 24,575.00 97%
2008-09 27,330.00 11%
2009-10 25,834.00 -5%
2010-11 19,427.00 -25%
Total 146319

According to the statistics released by India’s Ministry of Commerce and Industry, the country
has received US $19.43 billion in FDI during the last fiscal (April ‘10- March’11), compared to
US $25.83 billion that came in the previous financial year. Although it is a significant dip (-
25%), the government is confident that the trend will be reversed. Cumulative FDI inflows
received during the post liberalization period i.e. 1991-2011 were to the tune of US $146,319
million as per the above table. From the year 2000 up to 2002, investments into India grew 65%
but declined during the subsequent two years from 2002 to 2004. 2004 to 2006, India once again
experienced a surge in investments, growing 47% in 2004-05 and 72% in 2005-06 respectively.
The year 2006-07 was an exceptional year with a 125% growth in FDI inflows. The subsequent
year was again very good, where investment inflows gained 97%, followed by an increase of
11% during 2008-09. During the year of the financial crisis, Apr’09-Mar’10, foreign direct
investments suffered a slight setback with inflows declining a little over 5% over the previous
year.

Last year (Apr’10-Mar’11) FDI into India declined further by 25% to US $19,427 million. Foreign direct
investment (FDI) in India’s services sector, which contribute over 50 per cent in the country’s
economic growth, declined by 22.5 per cent to USD 3.4 billion in 2010-11, according to the
industry ministry’s latest data. The services sector (financial and non-financial services) had
attracted FDI worth USD 4.39 billion during 2009-10. According to experts, global financial
problems, particularly in the European markets are making players cautious of undertaking
overseas investments. Mauritius, Singapore, the US, UK, Netherlands, Japan, Germany and the
UAE, among other countries, are the major investors in India. “The decline is mainly because of
global financial problems and it was a worldwide downfall. Also the setback in attracting FDI
was partly due to macroeconomic concerns such as a high current account deficit and inflation,
as well as to delays in the approval of large FDI projects.

4.2 Analysis of country wise inflows of FDI in

India Table4.2
2007- Cumulati ve
08 Inflows (April
(Apri l- 2008- 2009- 2010- 2011- '00 % to
Marc h) 09(Apr il- 10(Apr il- 11(Apr il- 12(Apr il- August '11) Total
March March March August Inflo ws
Rank Country ) ) ) )

1 Mauritius 4448 50794 49633 31855 26634 269395 41

3
2 Singapore 1231 15727 11295 7730 13350 66407 10
9
3 USA 4377 8002 9230 5353 2066 44609 7

4 UK 4690 3840 3094 3434 11311 40744 6

5 Japan 3336 1889 5670 7063 7855 31813 5

6 Netherlands 2780 3922 4283 5501 3207 28834 4

7 Cyprus 3385 5983 7728 4171 1830 23778 4

8 Germany 2075 2750 2980 908 5737 19113 3

9 France 583 2098 1437 3349 1668 11936 2

10 UAE 1039 1133 3017 1569 376 8968 1

Total FDI 9866 12302 12337

Inflows 4 5 8 88520 77864 658586

India’s 83% of cumulative FDI is contributed by ten countries while remaining 17 per cent by
rest of the world. The analysis of country wise inflows of FDI in India indicates that during
2007-2010, the total amount of Rs 526537 of FDI was received from 113 countries including
NRI investments. India’s perception abroad has been changing steadily over the years. This is
reflected in the ever growing list of countries that are showing interest to invest in India.
Mauritius emerged as the most dominant source of FDI contributing 44 % of the total investment
in the country. Singapore was the second dominant source of FDI inflows with 9% of the total
inflows. However, USA slipped to third position by contributing 7% of the total inflows. They
maintained continuous increasing trend under the period of study. UK occupied fourth position
with 5%followed by Netherlands with 4%, Japan with 4%, Cyprus with 4%, Germany with 3%,
France with 1%, UAE with 1%. It has been observed that some of the countries like Israel,
Thailand, Hong Kong, South Africa and Oman increased their share gradually during the period
under study.
It is also interesting to note that some of the new countries such as Hungary, Nepal, Virgin
Islands, and Yemen are making significant investments in India.
Mauritius:
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.
The India-Mauritius Double Taxation Avoidance Agreement (DTAA)
was signed in 1982 and has played an important role in facilitating foreign investment in India
via Mauritius. It has emerged as the largest source of foreign direct investment (FDI) in India,
accounting for 50 per cent of inflows
between August 1991 and 2008. A large number of foreign institutional investors (FIIs) who
trade on the Indian stock markets operate from Mauritius. According to the DTAA between India
and Mauritius, 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. The DTAA has, however, recently been in the news, with Indian left-wing parties
demanding a review of the treaty. They argue that businessmen are misusing the provisions of
the treaty to evade taxes.
The Mauritius stock market was opened to foreign investors following the lifting of foreign
exchange controls in 1994. No approval is required for the trading of shares by foreign investors,
unless investment is for the purpose of legal and management control of a Mauritian company
or for the holding of more than 15 per cent in a sugar company. Incentives to foreign investors
include free repatriation of revenue from the sale of shares and exemption from tax on dividends
and capital gains.
Mauritius has an active offshore financial sector, which is a major route for foreign investments
into the Asian subcontinent. Foreign direct investment transiting through the Mauritian offshore
sector to India has been considerably increasing in the recent years, according to figures released
by the Indian Ministry of Commerce and Industry. Major US corporations use the Mauritius
offshore sector to channel their investment to India.
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 $45–50 billion. A large share
of that total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6
airports, along with additional connections to existing ports. Private investment is expected to
fund 10-12 new industrial zones, upgrade 5–6 existing airports, and set up 10 logistics parks. The
Indian government expects that by 2020, the industrial corridor will contribute to employment
growth of 15 percent in the region, 28 percent growth in industrial output, and 38 percent growth
in exports.
 4.3 Analysis of sector wise inflows of FDI in
India Table
Sector 2007-08 2008-09 2009-10 2010-11 2011-12 Cumulativ % age
(April- (April- (April- ( April- (April- e to total
March) March) March) March) Dec.) Inflows Inflows
(April 2000 (In
- terms
Dec. 11) of US$)
SERVICES SECTOR 26,589 28,411 19,945 15,053 21,431 142,539 20%
(financial & non-financial) (6,615 (6,116) (4,176) (3,296) (4,575) (31,710)
COMPUTER SOFTWARE & 5,623 7,329 4,127 3,551 2,626 48,940 7%
HARDWARE (1,410) (1,677) (872) (780 (564) (10,973
TELECOMMUNICATIONS 5,103 11,727 12,270 7,542 8,969 57,035 8%
(radio paging, cellular mobile, (1,261) (2,558) (2,539) (1,665) (1,989) (12,544)
basic telephone services
HOUSING & REAL ESTATE 8,749 12,621 14,027 5,600 2,544 48,819 7%
(2,179) (2,801 (2,935) (1,227) (551) (10,933
CONSTRUCTION ACTIVITIES 6,989 8,792 13,469 4,979 7,635 46,216 6%
(including roads & highways) (1,743) (2,028) (2,852) (1,103) (1,602) (10,239

POWER 3,875 4,382 6,138 5,796 6,639 32,176 4%

(967) (985) (1,272) (1,272) (1,447) (7,094
AUTOMOBILE INDUSTRY 2,697 5,212 5,893 5,864 2,785 29,224 4%
(675) (1,152) (1,236) (1,299) (610 (6,444
METALLURGICAL 4,686 4,157 1,999 5,023 6,881 25,469 4%
INDUSTRIES (1,177) (961) (420) (1,098) (1,495) (5,750
PETROLEUM & NATURAL 5,729 1,931 1,297 2,543 920 14,581 2%
GAS (1,427) (412) (266) (556) (196) (3,333)
DRUGS & NA NA 1,006 961 14,405 42,668 4%
PHARMACEUTICALS (213) (209) (3,193) (9,155)

Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011
Table 4.4

Industrial Sector Rank

Service Sector 1
Telecommunication 2
Computer Hardware & Software 3
Housing and Real Estate 4
Construction Activities 5
Drugs and Pharmaceuticals 6
Automobile Industry 7
Metallurgical Industry 8
Power 9
Petroleum and Natural Gas 10

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.

4.5 Trends and Patterns of FDI in different sectors

Service Sector:
Chart 4.3

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.

Computer Software and Hardware:

Chart 4.4
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

Construction activities Sector includes construction development projects viz. housing,

commercial premises, resorts, educational institutions, recreational facilities, city and regional
level infrastructure, township. The amount of FDI in construction activities during Jan 2000 to
Dec. 2011 is US$ 46216 million which is 6% (with reference to table 4.3) of the total inflows
received through FIPB/SIA route, acquisition of existing shares and RBI’s automatic route. The
construction activities sector shows a steep rise in FDI inflows from 2007 onwards. Major
investment in construction activities is received from Mauritius which is accounted for maximum
of total FDI inflows during 2000-2010. In India Delhi, Mumbai, and Hyderabad receives
maximum amount of investment. The trend in this sector has declined from 2010-11 due to RBI
policy, financial debt crisis and there has been increase from 2011 because of the Government
acceded to a long-pending demand and permitted 100 percent foreign direct investment (FDI) in
construction housing and commercial premises, including hotels, resorts, hospitals, educational
institutions, recreational facilities, and city and regional level infrastructure. According to the
new norms, the existing 100-acre minimum area stipulation has been reduced to 25. As of now,
all such projects needed mandatory clearance from the Union Government. With the power to
approve being vested with the local Governments, FDI projects will now be treated on par with
any other project. Also India has several joint construction agreements with Japan and Russia to
develop infrastructure and transportation facilities in India.
4.6 Analysis of State wise inflows of FDI in India Table 4.6
Amount RBI’s - State covered 2008- 2009- 2010- Cumulati %ag
Regional 09 10 11 ve Inflows e

to
Rupee Office2 (Apr. - (Apr.- ( Apr.- (April ’00 total
s in Mar.) Mar.) March) – Infl
Crores March ows
(US$ ‘11) (in
In term
Million s
) S. of
No. US$
)
1 MUMBAI MAHARAS 57,066 39,409 27,669 201,471 35
HTRA, (12,431 (8,249) (6,097) (45,068)
DADRA & )
NAGAR
HAVELI,
DAMAN &
DIU
2 NEW DELHI, 7,943 46,197 12,184 113,689 19
DELHI PART OF (1,868) (9,695) (2,677) (25,088)
UP AND
HARYANA
3 BANGAL KARNATAK 9,143 4,852 6,133 36,657 6
ORE A (2,026) (1,029) (1,332) (8,229)
4 AHMEDA GUJARAT 12,747 3,876 3,294 31,693 6
BAD (2,826) (807) (724) (7,156)
5 CHENNAI TAMIL 7,757 3,653 6,115 30,848 5
NADU, (1,724) (774) (1,352) (6,851)
PONDICHE
RRY
6 HYDERA ANDHRA 5,406 5,710 5,753 26,562 5
BAD PRADESH (1,238) (1,203) (1,262) (5,961)
7 KOLKAT WEST 2,089 531 426 6,368 1
A BENGAL, (489) (115) (95) (1,488)
SIKKIM,
ANDAMAN
& NICOBAR
ISLANDS
8 CHANDIG CHANDIGA RH, - 1,038 1,892 4,685 1
ARH` PUNJAB, (224) (416) (1,024)
HARYANA,
HIMACHAL
PRADESH

9 PANAJI GOA 134 808 1,376 3,326 1

(29) (169) (302) (725)
10 BHOPAL MADHYA 209 255 2,093 3,009 0.5
PRADESH, (44) (54) (451) (654)
CHATTISG ARH

11 JAIPUR RAJASTHA N 1,656 149 230 2,450 0.4

(343) (31) (51) (520)
12 KOCHI KERALA, 355 606 167 1,658 0.3
LAKSHAD WEEP (82) (128) (37) (368)

13 BHUBAN ORISSA 42 702 68 1,207 0.2

ESHWAR (9) (149) (15) (261)
14 KANPUR UTTAR - 227 514 812 0.1
PRADESH, (48) (112) (177)
UTTRANCH AL

15 GUWAHA TI ASSAM, 176 51 37 316 0.1

ARUNACHA L (42) (11) (8) (72)
PRADESH,
MANIPUR,
MEGHALA YA,
MIZORAM,
NAGALAND
, TRIPURA

16 PATNA BIHAR, - - 25 27 0
JHARKHAN D (5) (6)

17 REGION NOT INDICATED3 18,300 15,056 20,543 115,943 20

(4,181) (3,148) (4,491) (26,070)
Sub. Total 123,02 123,12 88,520 580,722 100
 5 0 (19,427 (129,716)
(27,331 (25,834 )
) )
18 RBI’S-NRI SCHEMES 0 0 0 533 -
(from 2000 to 2002) (121)
GRAND TOTAL 4 123,025 123,120 88,520 581,255
(27,331) (25,834) (19,427) (129,837
)

The choice of location of projects depends on the commercial judgement of investors based on
factors such as market size and growth potential, availability of skilled man-power; availability
and reliability of infrastructure facilities; fiscal and other incentives provided by State
Governments; etc. The Central Government supplements the efforts of the State Governments by
providing fiscal incentives for investments in core and infrastructure sectors as also high priority
industries such as information technology and through specific schemes such as the Growth
Centre Schemes, Transport Subsidy Schemes, New Industrial Policy for the North-East and other
hill States, Electronic Hardware Technology Park (EHTP), Software Technology Park (STP),
Export Promotion Zones (EPZs), Special Economic Zones (SEZs), etc. Maharashtra, Delhi,
Karnataka, Gujarat, Tamil Nadu, Andhra Pradesh, West Bengal, Punjab, Goa accounted for
major portion of FDI investment approvals during the cumulative period.
The Mumbai/Maharashtra region continues to attract maximum foreign investments, which is
35% of total investments since April 2000. Delhi and its neighbouring area, which includes part
of Uttar Pradesh like Noida and Haryana like Gurgaon, was the next most important region for
foreign investments with a share of 19%. Bangalore and Ahmedabad followed in the 3rd and 4th
place accounting for up to 6% of foreign investments since April 2000. 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). The three put together have accounted for nearly 62% of the total FDI inflows
received over the last 10 years. Other Regions like Gujarat and Tamil Nadu are also beginning to
attract FDI inflows in the last 5 years and are currently not far behind Karnataka Region at US$
6,382 (INR 28,171 Crores) million and US$ 5,309 (INR 23,864 Crores) million respectively In
the last financial year (Apr.’10 to Mar’11), Maharashtra and Delhi though still occupying the
first and second position respectively, saw decline in investments, particularly the Delhi area
which saw a decline of over 72%. The third most important region for foreign investments
 during the last year was Chennai (US $1,352) followed closely by Bangalore (US
$1,332) in the fourth place. The regions which saw increased investment inflows during the last
financial year were Tamil Nadu, Karnataka, Chandigarh, Goa and noticeably Madhya
Pradesh/Chhattisgarh.
More software companies are in Mumbai and Bangalore where the Indian
industry originally developed, but they are also developing quickly in Delhi and its surroundings
as well as in Andhra Pradesh and Tamil Nadu. As to the main poles of competitiveness, they are
mainly concentrated in the South on the axis of Chennai and Bangalore, and around Delhi and
Mumbai. Gujarat, in particular, has grabbed the attention of foreign investors due to the presence
of strong road and rail network, availability of skilled manpower (presence of academic and
research institutions like IIM, NIFT, NID, CEPT etc), proactive governance model and investor
friendly regulations go in favour of this state. Some of the leading Indian and Multinational
companies including Reliance, Adani, Essar, Aditya Birla, ABG shipyard, Tata, Zydus Cadila,
Welspun, Torrent, Amul, Bombardier (Canada), Matsushita (Japan), McCain Foods (Canada),
Alstom (France), Shell (Netherlands) General Motors (USA), Linde ( Germany) have set up
their operations in the state.

4.7 Financial Year and Route Wise FDI Inflows Data

Table 4.7
Sl.No Financ ial Foreign Direct Investment In INDIA (FDI) Invest ment
Year by FII's
(April- fund (net)
March
) Equity Re- Othe r FDI
inves ted capit al+ Flo ws
earni ngs into
+ Indi a

FIPB Equity capital Tota l %age

route/RBI's of unincorp FDI grow th
Automatic orated bodies# Flo ws over
Route/Acq previ ous
uisition Route year( in
US$
 terms
)

Financi al Year (2000-

2011)

1 2000- 2339 61 1350 279 4029 1847

01
2 2001- 3904 191 1645 390 6130 (+) 52% 1505
02
3 2002- 2574 190 1833 438 5035 (-) 18% 377
03
4 2003- 2197 32 1460 633 4322 (-) 14% 10918
04
5 2004- 3250 528 1904 369 6051 (+) 40% 8686
05
6 2005- 5540 435 2760 226 8961 (+) 48% 9926
06
7 2006- 15585 896 5828 517 2282 (+) 146 3225
07 6 %

8 2007- 24573 2291 7679 292 3483 (+) 53% 20328

08 5
9 2008- 27329 702 9030 777 3783 (+) ) 9% (-) 15017
09 8
10 2009- 25609 1504 8669 194 3776 (-) 0.2% 29048
10 (P) (+) 5 3
(+
+)

11 2010- 19430 657 6703 234 2702 (-) 28% 29422

11 (P) 4
(+)

Cumulative 132330 7523 4886 610 1948 100265

Total (from 1 0 14
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

FDI is considered to be the lifeblood and an important vehicle of for economic development as
far as the developing nations are concerned. The important effect of FDI is its contribution to
the growth of the economy.
FDI has an important impact on country’s trade balance, increasing labour standards and skills,
transfer of technology and innovative ideas, skills and the general business climate. FDI also
provides opportunity for technological transfer and up gradation, access to global managerial
skills and practices, optimal utilization of human capabilities and natural resources, making
industry internationally competitive, opening up export markets, access to international quality
goods and services and augmenting employment opportunities.
Here we are trying to show the effect of FDI on economic growth with the help of
Karl Pearson co relation.

Karl Pearson co relation

The Correlation between two variables X and Y, which are measured using Pearson’s
Coefficient, give the values between +1 and -1. When measured in population the Pearson’s
Coefficient is designated the value of Greek letter rho (ρ). But, when studying a sample, it is
designated the letter r. It is therefore sometimes called Pearson’s r. Pearson’s coefficient reflects
the linear relationship between two variables. As mentioned above if the correlation coefficient
is +1 then there is a perfect positive linear relationship between variables, and if it is -1 then
there is a perfect negative linear relationship between the variables. And 0 denotes that there is
no relationship between the two variables.
The degrees -1, +1 and 0 are theoretical results and are not generally found in normal
circumstances. That means the results cannot be more than -1, +1. These are the upper and the
lower limits.
Pearson’s Coefficient computational formula
Here the two variables are FDI(x) and GDPfc (y)
GDP GDP at Factor cost means, money value of everything produced in India, without
fc: -

counting Government's role in it i.e. indirect tax and subsidies.

Table 4.8
FDI and GDP(fc)
Year FDI (Rs Crores) (x) GDP fc (Rs Crores)(y)
2006-07 56,390 3952241
2007-08 98,642 4581422
2008-09 1,23,025 5282086
2009-10 1,23,120 6133230

2010-11 88,520 7306990

Table 4.9 Calculation of Karl Pearson’s co-efficient

X Y XY X^2 Y^2

56,390 3952241 2,22,86,68,69,990 3,17,98,32,100 1,56,20,20,89,22,08

98,642 4581422 4,51,92,06,28,924 9,73,02,44,164 2,09,89,42,75,42,08

1,23,025 5282086 6,49,82,86,30,150 15,13,51,50,625 2,79,00,43,25,11,39

T 1,23,120 6133230 7,55,12,32,77,600 15,15,85,34,400 3,76,16,51,02,32,90

o

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.

4.9 Comparison of FDI between India and China

China has been receiving substantial FDI compared to India. Although prior to 1980s India
received higher FDI than China but because of the liberalization policy adopted by China in
1978, turned the tables in favour of China. Since late eighties and throughout nineties China has
been in forefront of the developing world in terms of FDI inflows and hence economic
development.

Foreign Direct Investment (FDI) Confidence Index

The Foreign Direct Investment Confidence Index is a regular survey of global executives
conducted by A.T. Kearney. The Index provides a unique look at the present and future prospects
for international investment flows. Companies participating in the survey account for more than
$2 trillion in annual global revenue
FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover
from the global recession and continued economic uncertainty in Europe and the United States.
The Asia Pacific region remains the top destination for investors, attracting about one-fifth of
global FDI in 2010. Supported by strong growth and political stability, China tops the Index once
again. India moves up a spot to second place. Southeast Asia performs particularly well on the
back of soaring inflows, with its five major economies ranking in the top 20.

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 Chart
4.10 4.10

FDI

inflow in China and

India Table 4.10
Year China India
2002 49.31 5.62
2003 47.07 4.32
 2004 54.93 5.77
2005 117.20 7.60
2006 124.08 20.33
2007 160.05 25.48
2008 175.14 43.40
2009 114.21 35.59
2010 185.08 24.15
All fig. in US billion $

Chart 4.11
India vs. China Economy
Making an in depth study and analysis of India vs. China economy seems to be a very hard task.
Both India and China rank among the front runners of global economy and are among the
world's most diverse nations. Both the countries were among the most ancient civilizations and
their economies are influenced by a number of social, political, economic and other factors.
However, if we try to properly understand the various economic and market trends and features
of the two countries, we can make a comparison between Indian and Chinese economy.

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
facts india China
GDP Around $1.3123 Around 4909.28 bilion

GDP growth 8.90% 9.60%

Per capital GSP $1124 $7518

Inflation 7.48 % 5.1%

Labour Force 467 million 813.5 million
Unemployment 9.4 % 4.20 %
Fiscal Deficit 5.5% 21.5%
Foreign Direct Investment $12.40 $9.7 billion
Gold Reserves 15% 11%
Foreign Exchange Reserves $2.41 billion $2.65 trillion
World Prosperity Index 88th Position 58th Position
Mobile Users 842 million 687.71 million
Internet Users 123.16 million 81 million.
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:

 Metallurgical industries (76%)

 Chemicals (other than fertilizers) (7%)
 Trading (3%)
 Industrial machinery (3%) and
 Computer software & hardware (2%)

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.

Liberalization of the market

In spite of being a Socialist country, China started towards the liberalization of its market
economy much before India. This strengthened the economy to a great extent. On the other hand,
India was a little slow in embracing globalization and open market economies. While India's
liberalization policies started in the 1990s, China welcomed foreign direct investment and private
investment in the mid- 1980s. This made a significant change in its economy and the GDP
increased considerably.

Difference in infrastructure and other aspects of economic growth

Compared to India, China has a much well developed infrastructure. Some of the important
factors that have created a stark difference between the economies of the two countries are
manpower and labour development, water management, health care facilities and services,
communication, civic amenities and so on. All these aspects are well developed in China which
has put a positive impact in its economy to make it one of the best in the world. Although India
has become much developed than before, it is still plagued by problems such as poverty,
unemployment, lack of civic amenities and so on. In fact unlike India, China is still investing in
huge amounts towards manpower development and strengthening of infrastructure.

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.

Company Management Capabilities

It is said that Indians have great managerial skills. India also leaves China behind as far as
management abilities are concerned. As compared to China India has better managed companies.
One of the major reasons for this is that management reform training in China began 30 years
ago and sadly the subject has still not picked up as a matter of interest by the citizens of the
country. Another important factor behind China not doing well in the business forefront is that
most of the countries came to China and manufactured their goods. It was not Chinas exports
that drove the economy instead it were the export products of outsiders. Even in the case of
mergers and acquisitions China still has not managed to do too well. On the other hand Indian
companies are rapidly expanding mergers and acquisitions. Some of the recent examples include;
Tata Steel's $13.6 Billion Acquisition of Corus, Tata Tea's purchase of a controlling stake in
Britain's Tetley for US$407 million, Indian Pharmaceutical giant Ranbaxy's acquisition of
Romania's Terapia etc.
 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.

2. Indian economy is largely agriculture based. There is plenty of scope in food processing,
agriculture services and agriculture machinery. FDI in this sector should be encouraged.

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.

5. Government should ensure the equitable distribution of FDI inflows among states. The
central government must give more freedom to states, so that they can attract FDI inflows at
their own level. The government should also provide additional incentives to foreign
investors to invest in states where the level of FDI inflows is quite low.
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.

9. FDI can be instrumental in developing rural economy. There is abundant opportunity in

Greenfield Projects. But the issue of land acquisition and steps taken to protect local interests
by the various state governments are not encouraging.

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