Regulation & Promotion of Foreign Trade•Globalization•Significance of foreigninvestments•Foreign Trade Act
Foreign InvestmentsRatio of world FDI inflows to global gross domestic capital formation was 14% in 1999 compared to 2 % 20 years ago.Grown from $21.5 billion in 1973 to $1271 billion in 2000
Significance of Foreign DirectInvestments• Shifts burden of risk to foreign investors• Repayments are linked to profitability unlike debt financing• Strongly associated with higher GDP since 1970• TYPES OF FOREIGN INVESTMENTS – FDI – Portfolio Investment - FII
Factors affecting ForeignInvestments• Stable, predictable, macroeconomic policy• Effective and honest govt.• Large and growing market• Freedom of activity in the market• Minimal government regulations• Property rights and protection• Reliable infrastructure• Availability of high quality factors of production• Strong local currency• Ability to remit profits, dividends and interests• Favorable tax climate• Freedom to operate between markets
As indicated earlier ,foreign investment and foreign technology agreements were regulated in India. Prior approval from the Government was required for each such project involving foreign exchange and /or technology .This caused undue delays and also affected business decision-making. Therefore NIP has made suitable policy changes to enable almost free flow of foreign technology.
• The 1990s have seen a marked increase in private capital flows to India, a trend that represents a clear break from the two decades before that . Fresh foreign investment was invited in a range of industries.• In the 1970s there was hardly any new foreign investment in India: indeed, some firms left the country.• Inflows of private capital remained meager in 1980s.
• To put these figures in perspective , note that the total stock of private of foreign equity capital in Indian Industry was about $ 2 billion in 1990.• India was not unique as a recipient of increased inflows in the 1990s.• The question then is not, why have inflows to India grown so much , but why they remain low compared to other emerging markets ?
Foreign equity holding up to 51 per cent by international trading companies is also now allowed. The new policy also provides for automatic approval to foreign technology agreements in case of priority industries(34 industries) within certain guidelines. No permission will be required for hiring foreign technicians and testing indigenously developed technology abroad.
Changes in the FDI policy(1992-2003) 100 per cent FDI with automatic approval has been allowed in many industries. Important among these are metallurgical industries , business to business E- Commerce , oil refining , certain activities of telecom industries (with some conditions) , drugs and pharmaceuticals , hotels and tourism , courier service , mass rapid transport system etc.
Certain sectors have allowed 74 per cent FDI with automatic approval.These includes , airports ( FDI up to 74 per cent would get cleared via automatic route ,while FIPB permission would be required for 100 per cent foreign investment ) etc. Apart from these certain industries are eligible for automatic approval up to 51 per cent foreign equity.
Certain sectors have been allowed 49 per cent foreign equity. For example , the banking sector is being opened up to 49 per cent foreign equity , subject to clearance from the Reserve Bank. Similarly , in basic and cellular services , the sectoral cap is 49 per cent . For the first time in India , foreign investments (up to 26 per cent ) have been permitted in defence production ( subject to certain conditions and approvals).
The foreign Investment Promotion Board (FIPB) and the Foreign Investment Promotion Council (FIPC) have been constituted respectively to make rules and regulations relating to the foreign investment more transparent. Foreign Institutional Investors have been allowed to make equity investment in unlisted companies and the limit of investments of 5 per cent of total equities in a single company has been raised to 10 per cent.
The guidelines on Euro issues and External Commercial Borrowing have been liberalised to ease the access of Indian Companies to international capital markets. Host country economic determinants Resources seeking Markets seeking Efficiency seeking
Is foreign capital a pain or is it apanacea to India’s problems?• To a large extent , the answer depends on the nature of foreign direct investment (FDI) and its motivations.• Some FDI is motivated by high rates of return in a vibrant economy, and aims to benefit from better international organization of production and location.
Regulation and promotion of foreigntrade• Imports and exports (Control) act, 1947• Replaced by Foreign Trade (Development and Regulation) Act, 1992 – FTDRAObjectives of FTDRA• Development and regulation• Prohibition and restriction• Director general of foreign trade – DGFT• Importer-Exporter Code no.• Issue and suspension/cancellation of license• Search, inspection and seizure• Penalty for contravention
EXIM Policy• Announced under FTDRA post 1991• 2002-2007 coincided with 10th 5 yr plan• Mission – to increase India’s share in global exports to 1% from .67%• SEZ• Agricultural exports• Towns of export excellence• Special focus on cottage sector/handicrafts• Reduction in transaction time and costs• Assistance to states for infrastructure developments for exports
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