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FDI & Economic Growth
 

FDI & Economic Growth

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  • Foreign direct investment (FDI) capital flows into India have increased dramatically since 1991, when India opened its economy to FDI, and inflows have accelerated since 2000.New equity capital flows take one of two forms: M&A and greenfield investment. In a merger or acquisition, one firm acquires an equity stake in an existing foreign firm. Greenfield FDI takes place as the establishment of a new overseas affiliate by a parent company. India does not provide FDI statistics that break out M&A vs. greenfield FDI. For most developing countries, however, the greenfield route is more prominent, as there are fewer existing companies available to acquire, as compared with developed countries.
  • (cumulative inflows Apr’00 to Nov’09)
  • (cumulative inflows Apr’00 to Nov’09)
  • From the Regression Analysis it can be inferred that FDI in India has had a positive relationship with GDP of India and has fuelled the GDP growth of India. From the scatter plot, we can infer that GDP rallied closely on the with the FDI flow in the initial years of economic reform, however it has mainly grown in leaps and bounds over and above FDI flow in India. Hence we can assume that FDI has somewhat fuelled the GDP growth in India. However from this analysis it can be proved to a certain degree of certainty that FDI is not one of the sole major reasons for the robust GDP figures that India enjoyed and continues to do so.
  • From the regression analysis above it can inferred that FDI has had stronger positive relation with the exports volume in India than with the GDP of India. This is quite in tune with common knowledge that FDI has led to the growth of the IT industry and also as a low cost manufacturing hub. The scatter plot gives a similar story as with (GDP v/s FDI plot). The exports have followed the FDI over many years and gradually have scored higher that FDI in India. The net inference is that FDI in India has fuelled more exports in India first and then indirectly impacted the GDP of India. FDI more related to exports than GDP.
  • India became a prosperous nation during 1700s and articulated its economic status in the major areas of food and crop production, textiles, glass etc increasing per capita income to a satisfactory level. However, the year 1757 came with the British rule and has the control in developing and formulating new business policies causing troubles for local farmers and craftsmen. The policy was more in terms of imports rather than exports and huge amount of money was forwarded to different regions specifically Britain.It's only after Indian Independence when various measures were taken and Indian become founding member of various trade blocs the commission was set up in India to plane further course of action.We should not forget the 15th century when the first European colonists had started visiting the shores of India. In the early 16th century, Portuguese rule was established on the West coast of India at Goa; however, the Portuguese did not succeed in moving deep into the country. It was the British who began with the battle of Plassey in 1757and moved forward. Then came many changes in the history and lot of development also took place, one of the example was the setting up of Indian railways. Year 1920 has made India withstand the fourth largest railway network in the world and with the history of 60 years of construction. The system by the end of year 1900 provided India with social savings of 9% of India's national income.Needless to mention that all the engineering skills, knowledge, setting up of universities etc were taking place and moving India towards the road of development. Investment in terms of various subjects was coming in and yes exports were also increasing. For instance, due to the shortage of skilled manpower raw cotton was used to send to Britain and finished goods come back. Infrastructure development was the priority in the 1900 era. These examples clearly states that even in the beginning of the 19th century globalization were taking place, however, in a less conducive manner.Current Scenario:Globalization and Foreign Direct Investment (FDI) is playing an important role in the development of developed, developing as well as underdeveloped economies. The reasons are simple like introduction of new products, new skills, easy approachable markets and modern technology to the host countries. Every country around the world is playing a important role in the encouragement of foreign and overseas investors and their investments. India is being ranked as the second most favored destination for foreign investments after China by showing a growth year after year. End of fiscal year 2008-09 Indian received FDI inflows totaling approximately USD$11.2 billion with Mauritius as the highest contributor.India is fast emerging as a global manufacturing hub. India has all the requisite skills in product, process and capital engineering, thanks to its long manufacturing history and higher education system. India's cheap, skilled manpower is attracting a number of companies, spanning diverse industries, making India a global manufacturing powerhouse. India with its vast design skills has attracted a lot of outsourcing technological orders.According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009, India ranks among the top 12 producers of manufacturing value added (MVA). In textiles, the country is ranked fourth after China, USA and Italy, while in electrical machinery and apparatus, it is ranked fifth. It holds sixth position in the basic metals category; seventh in chemicals and chemical products; 10th in leather, leather products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and motor vehicles.Foreign Direct Investment (FDI) up to 100% is permitted on the automatic route in all manufacturing activities except:-   (i) Defense Industry (where there is an equity cap of 26% and entry route restriction);    (ii) Cigars & Cigarette manufacturing (where there is an entry route restriction);    (iii) Where provisions of Press Note 1(2005 series) are attracted i.e. where the foreign investor has an existing joint venture in India in the same field(where there is an entry route restriction); (iv) Where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for Small Scale sector (where there is an entry route restriction).  Currently, the FDI is involved in some examples below:LG is looking at making India its global manufacturing hub for its mobile handsets. The company will soon be exporting mobile phones to Europe and the Commonwealth Independent States (CIS) from India. Luxury brands like Louis Vuitton and Frette are looking at India as a manufacturing base for their products.  Aircraft manufacturer, Airbus is considering India as one of the key centres for design and development of its long haul A 350 plane. Samsung plans to invest US$ 100 million over a period of four years in its manufacturing plant near Chennai and make it its global hub. Hyundai has made India the manufacturing and export hub for its small cars. The i10 is being manufactured only in India and exported to the world. India is Hyundai's largest base outside Korea. Suzuki too is making India its manufacturing hub for small cars. The Ritz is being manufactured solely in India and exported to Europe. Taiwan-based FengTay Group which is setting up a US$ 61.5 million footwear manufacturing unit in its own SEZ in Tamil Nadu plans to invest an additional US$ 41 million. Panasonic India plans to invest US$ 100 million in its new plasma TV production facility in 2011. GE Healthcare is drawing up plans to grow its India business and develop the country as a global hub for manufacturing low-cost medical devices. Volkswagen AG will make India a low-cost manufacturing hub catering to select export markets. Volkswagen will export from the second quarter of next fiscal fully-built models and completely knocked-down kits of its hatchback, Polo, to South East Asia, Middle East and Africa from its Pune plant
  • The manufacturing sector is estimated to have a US$ 180-billion investment opportunity over the next five years, according to the Investment Commission of India.
  • FICCI study further observed that India’s share remains negligible in the outward FDI stock of developed countries in the top manufacturing sectors like Chemicals, Automobiles, Food Processing, Electrical & Electronic Equipment, Metals and Machinery Equipment. India has not attracted FDI in a large manner in any of these sectors so far from the developed countries. India on the other hand India continues to import large amount of these machinery and equipments in the absence of sufficient domestic capacity to meet the demand. India has so far attracted only $283 billion of FDI in industrial machinery sector and $99.7 billion in the Computer Hardware sector.
  • Besides this, FICCI study pointed-out that the technology transfer and absorption which is one of the major benefits of FDI has not taken place adequately in various manufacturing sectors in India. While there are few Indian manufacturing firms whose technological capabilities are world class, but for many manufacturers especially in SMEs, technological capabilities are limited. A concrete and comprehensive Action plan to attract FDI in important and strategic areas like Computer Hardware, Capital Goods, Ship Building, Aerospace, Electronics, Medical Devices and Food Processing. FDI Policy should aim at incentivizing maximum value addition in the country. Incentivize technology transfer by adopting ‘Swap Technology for Market’ policy as is the case in China. Rationalizing complex regulatory procedures and reducing delays in the project approvals.
  • The emergence of India as one of the fastest growing economies in the 1990’s is due to rapid growth of service sector. India has also become an exporter of services.
  • The liberalization measures post-1990 has changed with foreign investments radically, now portfolio as well as Foreign Direct Investment are not only allowed but also actively encouraged.
  • In both banking and insurance, foreign investment is permitted subject to specific caps or entry conditions. FDI in media is permitted with varying sector caps. Retail trade is currently restricted to 51% FDI permitted in single brand retail stores and 100% FDI permitted in wholesale cash and carry. Legal services are currently not open to foreign investment.
  • Subject to these foreign equity conditions, a foreign company can set up a registered company in India and operate under the same laws, rules and regulations as any India-owned company.India extends National Treatment to foreign investors with absolutely no discrimination against foreign-invested companies registered in India or in favor of domestic ones
  • The nature of work in the service sector fuelled by FDI is restricted to a few metropolitan centers like Delhi, Mumbai, Bangalore etc performing back office jobs – IT and otherwise. Moreover, the kind of work necessary requires an extremely skilled workforce and does not form much of a value add for the common Indian man. These firms behave like isolated export points that have a very weak interrelationship with the economy of the host country, negating the advantage of the FDI. Some of them also claim that the impact of FDI on the service sector can swing its output both in the positive and the negative direction. This ambiguity in the impact on this sector makes it all the more difficult to frame appropriate precautionary regulations. This we have seen in recent recession, when people were fired from MNC’s without any notice.
  • Insurance penetration 3.1%
  • Eighty five per cent of the shares of AIG, the largest private insurance company in the whole world had to be taken over by the US Government. These crisis-ridden foreign companies are now desperately trying to gain greater access to the emerging markets of countries like India. But this move of the Government is of a concern
  • China practices the international systems which focus on recording of FDI data in balance of payments statistics in terms of three main categories as mentioned below:1) Equity flows (equity in branches, shares in subsidiaries and other capital contributions),2) Reinvested earnings (retained earnings of foreign subsidiaries and affiliates), and3) Inter-company debt transactions (inter-corporate debt transactions between associated corporate entities).to swelling of investment of neighboring countries (mainly, Taiwan and Macao) as also of Hong Kong into mainland China. According to the `round-tripping' hypothesis, Chinese firms illegally transfer funds to these countries and that in turn gets invested in mainland China as FDI inflows in order to benefit from the preferential treatment given to FDI in terms of fiscal and other incentives. Since round-tripping is essentially clandestine, accurate data are practically impossible to obtain. Nevertheless, estimates suggest that round-tripping FDI accounted for one-fourth of China's total FDI.
  • Privileged access was provided to supplies of water, electricity and transportation (paying the same price as state-owned enterprises) and to interest-free RMB loans on conditional bases.
  • FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI.
  • 98886 Cr.
  • Foreign direct investment in India is allowed through joint ventures, preferential allotments, capital markets, and financial collaborations. The advantages of foreign direct investment in India are that it has led to transfer of technology, generation of new opportunities for employment, and infrastructure development.FDI from Mauritius to India is the highest in comparison with all the other countries that invest in India. FDI from Mauritius to India is the highest due to the special treatment of tax that is given in India to the investments that come through Mauritius. 
  • While FDI have increased dramatically in both total amount and in its share in total foreign capital usage, we notice that the contractual and actual FDI amount have demonstrated somewhat different pattern in development, especially in the early 1990s. One of China’s strategies in promoting capital inflow is to attract investment from oversea Chinese. China has principal attractions like low-cost labor and an enormous domestic market of more than 1.2 billion consumers.92.4 bil$
  • Out of the 32 provinces, the following eight provinces accounted for about 80 per cent of FDI flows: Jiangsu (20%), Guangdong (15%), Shangdong (11%), Shangha (10%), Zhejiang (9%), Liaoning (5%), Fujian (5%), and Beijing (4%).This indicates that the regional differences are likely to persist and a convergence might not take place. Furthermore, these provinces also happen to be the ones enjoying higher socio-economic indicators like per capita income, industrialization, and infrastructure.
  • About six States in India account for more than 55 per cent of FDI receipts.This high regional concentration could pose long-term problems for both countries. Hence, it is vital to analyze the main determinants of regional differences in FDI.The studies reviewed indicate that four possible sets of factors influence interregional distribution of FDI in a given country. They are:(a) International orientation, (b) Infrastructure, (c) Education and social indicators, and (d) Prosperity and industrial development of the region.
  • For instance, multinational firms may increase the degree of competition in host-country markets which will force existing inefficient firms to invest more in physical or human capital.

FDI & Economic Growth FDI & Economic Growth Presentation Transcript

  • FDI & Economic Growth: An Indian Case Study
    Presented By:
    ChinmayJagga (91013)
    CejilDiclause (91014)
    DarrickArora (91015)
    Deepinder Singh (91016)
    DivanshuKapoor (91017)
    Gaurav Sharma (91018)
  • Agenda
  • Overview of FDI Inflows
  • Top Investing Countries
  • Sector-wise Distribution
  • Relationship b/w FDI and Growth indicators: GDP & Exports
  • Regression Analysis: GDP vs FDI
    Log of GDP = 4.12 + 0.466 Log of FDI
  • Regression Analysis: Exports vs FDI
    Log of Exports = 2.40 + 0.676 Log of FDI
  • FDI Benefits
  • FDI Challenges
    • Crowding out domestic investment
    • Technology transferred
  • SECTORAL ANALYSIS
  • MANUFACTURING SECTOR
  • Europeans enter into India in 15th century
    What attracted them ?
    Our prosperity in the areas of food and crop production, textiles, glass etc
    Our per capita income was at a satisfactory level.
  • Portuguese establish there control over the west coast of Goa
  • Battle of Plasseyis fought between Portuguese and British
  • Union Jack Flutters in India
    British Rule established in India
  • What Happened then?
  • Current Scenario
    • Ranked 2nd most favored destination for foreign investments after China
    • India ranks among the top 12 producers of manufacturing value added (MVA).
    • In textiles, the country is ranked 4th after China, USA and Italy.
    • In electrical machinery and apparatus, it is ranked 5th.
    According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009
  • Current Scenario
    • 6th position in the basic metals category
    • 7th in chemicals and chemical products
    • 10th in leather, leather products, refined petroleum products and nuclear fuel
    • 12th in machinery and equipment and motor vehicles.
    According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009
  • FICCI Study in Indian Manufacturing Sector: Salient Points
  • Sub-Sectors where FDI is negligible
    India’s share in outward FDI stock is negligible (Chemicals, Automobiles, Food Processing, Electrical & Electronic Equipment, Metals and Machinery Equipment)
    Sectors like Industrial Machinery, Agricultural Machinery, Ship Building, Medical & Surgical Devices and Computer Hardware
    Rather India import these items
  • FDI Inflows for Selected Sectors in India (Jan 2000 to September 2008)
  • FICCI’s Suggestions
  • FDI in Service Sector (with focus on Insurance Sector)
  • India's large service industry accounts for more than 50% of the country's GDP
    It makes up more than 25% Employment
    Service sectors like telecommunication, IT enabled services, insurance, air transport are becoming prominent
  • Reasons for growth in Services Sector
    Introduction of ‘Manmohanomics’ in 1991
    Growing presence of transnational corporations and the technological progress
    Liberalization of many service sectors activities (telecom, transport, finance etc.)
  • FDI contribution to Services Sector
    Attracted $3.12 billion FDI in the first seven months of 2009-10
    22 per cent of the total FDI inflows of $17.64 billion in the April-October for service sector
    In 2008-09, attracted the maximum FDI worth USD 6.11 billion.
  • FDI Policy in Services Sector
    100% FDI is permitted for many service sectors
    (Real estate, construction, hotels, tourism, films, IT and IT - enabled services, consultancy, renting, medical,
    education, advertising etc)
    Phased manner: to allow domestic companies to prepare for global competition (Banking, Insurance, Media, Retail Trade,
  • Restricted sectors in Services
    Atomic Energy, Lottery Business, Gambling and Betting, Business of Chit Fund, and any activity/sector that is not opened to private sector investment.
    Besides the above, FDI is not allowed in plantations.
  • Current issues with FDI in Services Sector
    Very weak linkages of service sector with the Indian economy (only few cities)
    Requires highly skilled workers
    Employee Welfare in time of crisis
  • Sub Sector Analysis: Insurance Sector
    Fifth largest life insurance market in the emerging insurance economies globally
    Insurance laws (amendment) bill 2008:
    • To increase FDI cap from 26% to 49%
    • For Life/General insurance minimum paid up capital to Rs 50 crore(from 100 crore).
  • Why increasing FDI Cap in Insurance Sector is required?
    Boost to the insurance sector
    Infuse liquidity in the financial system with increase in FDI inflow
    Increasing Insurance penetration (specially to rural areas)
    Increase in employment, tertiary sectors like IT/ITeS,
  • Boost to Health insurance (1 percent of the country’s population is presently covered under health insurance policies. )
    Insurance Law ‘08 gives provision to companies exclusively into the business of health insurance
    Micro insurance (accounts for just .1 % of total insurance premium
  • Flip Side of increasing Cap
    Many foreign companies have to be rescued by their own governments.
    For eg: AIG
    Road ahead for Insurance companies depend heavily on FDI cap.
  • FDI in Agriculture
  • FDI in Agriculture….Developments
    • To connect 66,800 habitations
    • To construct 1,46,000Km of new rural roads
    • To Upgrade and modernize 1,94,000Km of existing rural roads
    • To provide corpus of Rs. 8000 crore RIDF
  • FDI in Retail….WHY INDIA?
    • Low share of organized retailing
    • Increase in disposable income and customer aspiration
    • Increase in expenditure for luxury items
  • FDI in Retail….Benefits
    • Generate huge employment
    • Increased investment in technology
    • The huge tax revenue generated.
    • The consumer gains from the wide variety of choices and a more diversified basket.
    • The indirect benefits like better roads, online marketing, expansion of telecom sector etc. Will give a ‘big push’ to other sectors like agriculture, small and medium size enterprises.
  • FDI in Retail….Drawbacks
    • Foreign Players would displace the unorganized retailers because of their superior financial strengths.
    • The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs.
    • Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines.
    • Increase in real estate prices and marginalize domestic entrepreneurs
  • FDI in Real Estate
    • Second-most favoured destination for FDI in the world
    • Norms to allow 100% FDI Mar 2005
    • 100 acre criterion to 25 acre criterion
  • FDI in Real Estate….Why Invest??
    • India produces an estimated 2 million new graduates
    • Presence of a large number of Fortune 500
    • Real estate investments in India yield huge dividends
  • Tourism
    • Raised to $120mn
    • Major source of employment
    • Third largest earner of foreign exchange
    • Private investments through public private partnership
  • Need for FDI in Tourism
    • Foreign tourist arrivals are expected to grow to 10 million by 2010-12
    • Estimated that tourism in India could contribute Rs.8,50,000 crores to the GDP by 2020
  • Reasons for low FDI
    • Multitude of taxes
    • High Taxes
    • Highest import duty on imported liquor used in hotels
    • Service Tax on Tour Operators
    • Inland Air Travel Tax
  • Attract more FDI in Tourism Sector
    • Rationalize the taxation on the hotel industry
    • Service Tax should be computed based on the value of service provided
    • Inland Air Travel Tax should be applied at the rate of 5% of the basic ticket price
  • Comparative study
    FDI Inflow in India Vs China
  • Definition of FDI in China
  • FDI Policies in China
  • FDI Policies in India
    FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors. Known as the automatic route.
    The FDI policies in INDIA are formulated on 4 parameters:
    -Increased capital flow.
    -Improved technology.
    -Management expertise.
    -Access to international markets.
    Hence 100% inflow was allowed in sectors like Power, Renewable energy , Agriculture, mining etc.
    Also sectors like insurance and defence have a cap of 26% and the banking sector has cap of 49%.
  • FDI Inflow in India
  • Some of the Major Investing Countries
  • FDI Inflow in China
  • Neighborhood Theory- India and China
  • Regional Flow of FDI in China
  • Regional Flow of FDI in India
  • Conclusions
  • Final Recommendations