Indias experience with fdi role of a game changer

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Kindly read this book all the management student/other students or anyone because it helps you in increasing your knowledge about FDI in India.

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Indias experience with fdi role of a game changer

  1. 1. India’s Experience with fdi: Role of a Game Changer The Associated Chambers of Commerce and Industry of India ASSOCHAM Corporate Office: 1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498 Email: assocham@nic.in | Website: www.assocham.org January 2012
  2. 2. Contents I. India’s FDI Overall View.....................................................................4 II. Assessment of Global FDI...............................................................10 III. India’s Sectoral Analysis.................................................................12 IV. Relevance of FDI in India.................................................................24 V. Potential FDI Sectors.......................................................................27 VI. ASSOCHAM’s Suggestions.............................................................40
  3. 3. India’s Experience with FDI: Role of a Game Changer 1 Executive Summary • The study examines the Role of FDI in India – ASSOCHAM has attempted to estimate possible foreign investment flows if Pension Funds and Civil Aviation are opened up for FDI • Impact of FDI on Indian economy is assessed by analyzing the performance of three sectors where FDI has been permitted. These sectors were:  Telecommunications  Automobiles  IT/ITES • Some of the benefits of liberalization of Telecom Sector were:  Increase Penetration  Growth in Subscriber Base  Reduction of Call Rates • Some of the benefits of liberalization of Automobiles Sector were:  Increase in Production, Domestic Sales and Exports  Development of a healthy Auto Component’s Industry  Greater Choice for the Consumer • Some of the benefits of liberalization of IT/ITES Sector were:  High Growth Rates  India becoming one of the leading exporter’s of software services • The study further tries to assess the impact of opening up of FDI in other sectors. Two sectors that have been considered for this purpose are:  FDI in Pension Funds  FDI in Civil Aviation
  4. 4. India’s Experience with FDI: Role of a Game Changer 2 • The study of FDI in Pension Funds observed:  The 12th Draft approach paper of the Planning Commission suggests the total infrastructure investment requirement would be US $ 1 trillion.  Pension Fund investments into infrastructure seem to be a befitting alternative given the match of interests for both the sectors.  1 percent of the total pension funds held by pension fund companies would increase India’s Pension fund assets to GDP ratio from the current level of 5 percent to close to 17 percent.  2.1 percent allocation of total pension fund assets to India would increase its reserves to US $ 342 billion the level of pension assets estimated in Brazil in 2010.  CAGR of 16.5 percent would give an equity allocation of US$ 344.95 billion at the end of 2017.  If 30 percent of the equity allocation goes into Infrastructure Sector it would mean an investment of US $ 103.49 billion which shall be one tenth of the infrastructure investment. • The study of FDI in Civil Aviation observed:  Huge amounts of additional investments required to realize the vision of the Civil Aviation industry as suggested in Working Groups report.  Airport Infrastructure would require an investment of about Rs.67,500 crore during the 12th Plan of which around Rs 50,000 crore is likely to be contributed by the private sector.  Airlines in India are expected to add around 370 aircrafts worth Rs.150,000 crore.  Decade 2000-2010 witnessed a profitless growth. The Airline Industry in India suffers from huge debt burden – close to US $ 20 billion (Estimated 2011-12).
  5. 5. India’s Experience with FDI: Role of a Game Changer 3  Allowing foreign airlines to pick up stake in three major Indian Airlines (Kingfisher, Jet Airways and Spice Jet) would result in capital infusion to the tunes of :  Promoters off loading 26% of their Equity Stake can raise approximately upto Rs. 1341 crore.  Figure goes approximately upto Rs.2530 crore in case 49 per cent FDI is allowed.  Equity valuation at 26% of all issued shares (promoter and non- promoter) approximately comes out to be Rs.2835 crore.  Estimates at 49% goes approximately upto Rs.5341 crore.  The amount raised can be used to address working capital requirements of the airlines.
  6. 6. India’s Experience with FDI: Role of a Game Changer 4 I. India’s FDI Overall View The early nineties was a period when the Indian economy faced a severe Balance of Payment crisis. Exports began to experience serious difficulties. The crippling external debts were putting pressure on the economy. In view of all these developments there was a serious threat of the economy defaulting in respect of external payments liability. It was in the light of such adverse situations that the policy makers decided to adopt a more liberal and global approach thereby, opening its door to FDI inflows in order to restore the confidence of foreign investors.FDI provides a situation wherein both the host and the home nations derive some benefit. The home countries want to take the advantage of the vast markets opened by industrial growth. Whereas the host countries get to acquire resources ranging from financial, capital, entrepreneurship, technological know-how and managerial skills which assist it in supplementing its domestic savings and foreign exchange. The contribution or impact of FDI has been well acknowledged in various discussion papers and studies amongst these in one of the recent study done on India’s FDI inflows trends and concepts1 it is mentioned that, “The Economic Survey 2008-09 reiterated that: FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. And the National Manufacturing Competitiveness Council specified that: Foreign investments mean both foreign portfolio investments and foreign direct investments (FDI). FDI brings better technology and management, access to marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. This efficiency contribution of FDI is much more important”. The evolution of Indian FDI can broadly be divided into three phases classified on the premises of the initiatives taken to induce foreign investments into the Indian economy: (a) The first phase, between 1969 and 1991, was marked by the coming into force of the Monopolies and Restrictive Trade Practices Commission (MRTP) in 1969, which imposed restrictions on the size of operations, pricing of products and services of foreign companies. The Foreign Exchange Regulation Act (FERA), enacted in 1973, limited the extent of foreign equity to 40%, though this limit could be raised to 74% 1 K.S. Chalapati Rao & Biswajit Dhar “INDIA’S FDI INFLOWS Trends & Concepts” by Institute for Studies in Industrial Development Working Paper No: 2011/01
  7. 7. India’s Experience with FDI: Role of a Game Changer 5 for technology-intensive, export-intensive, and core-sector industries. A selective licensing regime was instituted for technology transfer and royalty payments and applicants were subjected to export obligations. (b) The second phase, between 1991 and 2000, witnessed the liberalisation of the FDI policy, as part of the Government’s economic reforms program. In 1991 as per the ‘Statement on Industrial Policy’, FDI was allowed on the automatic route, up to 51%, in 35 high priority industries. Foreign technical collaboration was also placed under the automatic route, subject to specified limits. In 1996, the automatic approval route for FDI was expanded, from 35 to 111 industries, under four distinct categories (Part A–up to 50%, Part B–up to 51%, Part C–up to 74%, and Part D-up to 100%). A Foreign Investment Promotion Board (FIPB) was constituted to consider cases under the government route. (c) The third phase, between 2000 till date, has reflected the increasing globalisation of the Indian economy. In the year 2000, a paradigm shift occurred, wherein, except for a negative list, all the remaining activities were placed under the automatic route. Caps were gradually raised in a number of sectors/activities. Some of the initiatives that were taken during this period were that the insurance and defence sectors were opened up to a cap of 26%, the cap for telecom services was increased from 49% to 74% , FDI was allowed up to 51% in single brand retail. The year 2010 saw the continuation of the rationalisation process and all existing regulations on FDI were consolidated into a single document for ease of reference. The evolution of the FDI policy, towards more rationalisation and liberalisation, has narrowed down the instruments regulating FDI policy broadly to three2 : (i) Equity caps: restricting foreign ownership of equity capital (ii) Entry route: requiring prior Government oversight, including screening and approval (iii) Conditionalities: comprising of operational restrictions/licencing conditions, such as nationality criteria, minimum-capitalisation and lock-in period etc. 2 http://dipp.nic.in/English/Discuss_paper/DiscussionPaper_relevance_23June2011.pdf
  8. 8. India’s Experience with FDI: Role of a Game Changer 6 A. FDI INFLOWS Trends: 1991-2011 The data on FDI inflows into the country shows that foreign investors have shown a keen interest in the Indian economy ever since it has been liberalized. An increasing trend of flows can be observed since 1991 with the peak of FDI flows being reached in 2008-09. (Chart 1) Therefore the trend gives support to the fact that as and when the government has taken initiatives to open up and liberalize the economy further, the investors have welcomed the initiative and reciprocated by infusing investments into India. There are various reasons which work in favour of India and increase the level of interest shown in by foreign organization’s some of them being its demographics’ with a young population there is a huge consumer base that is to be tapped, the growing middle class, increased urbanization and awareness, rising disposable incomes. Chart 1: Trends of FDI Inflows Source: DIPP B. FDI Inflow by Components: There has been a change in the method of estimation of FDI inflows since 2000-01, prior to this only equity inflows was taken as the FDI inflow figure however post 2000-01 the RBI has started following the international practice and taken into account other components of FDI inflows namely re-invested earnings and other capital. A look at the contribution of various components of FDI reveals that the share of re-invested earnings was rising from 2000 onwards uptil 2005-06 after which it has constantly been declining. The share of equity inflows has risen sharply since 2000-01 when it stood at 59.6 per cent to 74.3 per cent in 2010-11. (Chart 2)
  9. 9. India’s Experience with FDI: Role of a Game Changer 7 Chart 2: Share of FDI Components Source: DIPP C. Ways of receiving Foreign Direct Investment by an Indian company3 i. Automatic Route FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on ‘Entry Routes for Investment’ issued by the Government of India from time to time, are attracted. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors. As can be seen that since 2005-06 there has been a significant difference in the amount of FDI inflows through the two routes a possible explanation for which could be that with the investment climate in India improving and healthy competition among states to 3 http://www.rbi.org.in/scripts/FAQView.aspx?Id=26
  10. 10. India’s Experience with FDI: Role of a Game Changer 8 attract FDI, the government eased foreign investment regulations leading to a spurt in FDI coming through the RBI route, which is a positive sign. As per the data available there is an increase in share of inflows through the RBI’s automatic route, a decrease in the shares of inflows through the SIA/FIPB. (Chart 3) Chart 3: Trend of Equity inflow through FIPB and Automatic Route Source: RBI D. Sectoral FDI Flow: Changing Dynamics of Investment: • Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for which could be the global situation that prevailed during that time frame. • Although services sector remain the sector attracting the highest FDI inflows since 2006-07 its share has been constantly declining. • The FDI flows into computer hardware and software has been downward ever since 2005-06. It has drastically gone down from 24.8 per cent in 2005-06 to 4.0% in 2010-11. • Housing & Real Estate have shown an upward trend in terms of their share in FDI inflows. • Investments in chemicals and metallurgical industries have been erratic as no clear trend could be observed for the time period 2005-06 to 2010-11.
  11. 11. India’s Experience with FDI: Role of a Game Changer 9 Table Sectors Attracting Highest FDI Equity Inflows (US $ Million) Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Services Sector 543 (9.8) 4664 (37.3) 6615 (26.9) 6138 (22.5) 4353 (16.8) 3403 (17.5) Computer Software & Hardware 1375 (24.8) 2614 (20.9) 1410 (5.7) 1677 (6.1) 919 (3.6) 784 (4.0) Telecommunications 624 (11.3) 478 (3.8) 1261 (5.1) 2558 (9.4) 2554 (9.9) 1665 (5.8) Housing & Real Estate 171 (3.1) 467 (3.7) 2179 (8.9) 2801 (10.2) 2844 (11.0) 1127 (5.8) Construction Activites 151 (2.7) 985 (7.9) 1743 (7.1) 2028 (7.4) 2862 (11.1) 1125 (5.8) Automobile Industry 143 (2.6) 276 (2.2) 675 (2.7) 1152 (4.2) 1208 (4.7) 1331 (6.9) Power 87 (1.6) 157 (1.3) 967 (3.9) 985 (3.6) 1437 (5.6) 1252 (6.4) Metallurgical Industries 147 (2.7) 173 (1.4) 1177 (4.8) 961 (3.5) 407 (1.6) 1105 (5.7) Petroleum & Natural Gas 14 (0.3) 89 (0.7) 1427 (5.8) 412 (1.5) 272 (1.1) 578 (3.0) Chemicals 390 (7.0) 205 (1.6) 229 (0.9) 749 (2.7) 362 (1.4) 398 (2.0) Total Fdi 5540 12492 24575 27330 25834 19427 Source: DIPP
  12. 12. India’s Experience with FDI: Role of a Game Changer 10 II. Assessment of Global FDI4 UNCTAD’s recent world investment report 2011 has some interesting insights into the FDI pattern during 2010. Certain key highlights of the report are: 4 http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-en.pdf Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010, but were still 15 per cent below their pre-crisis average. For the first time, developing and transition economies together attracted more than half of global FDI flows. Outward FDI from those economies also reached record highs, with most of their investment directed towards other countries in the South. In contrast, FDI inflows to developed countries continued to decline. Emerging economies are the new FDI powerhouses Developing economies increased further in importance in 2010, both as recipients of FDI and as outward investors. As international production and, recently, international consumption shift to developing and transition economies, TNCs are increasingly investing in both efficiency- and market-seeking projects in those countries. For the first time, they absorbed more than half of global FDI inflows in 2010. FDI outflows from developing and transition economies also increased strongly, by 21 per cent. Services FDI subdued Sectoral patterns. FDI in services, which accounted for the bulk of the decline in FDI flows due to the crisis, continued on its downward path in 2010. All the main service industries (business services, finance, transport and communications and utilities) fell, although at different speeds. FDI flows in the financial industry experienced one of the sharpest declines. FDI policies interact increasingly with industrial policies, nationally and internationally The challenge is to manage this interaction so that the two policies work together for development. Striking a balance between building stronger domestic productive capacity on the one hand and avoiding investment and trade protectionism on the other is key, as is enhancing international coordination and cooperation.
  13. 13. India’s Experience with FDI: Role of a Game Changer 11 FDI trends in various EME’s (Emerging Market Economies) in US $ Millions Source: UNCTAD • As can be seen from the figures China is way ahead of other emerging economies in terms of FDI flows. • Mexico has been witnessing a steady flow of foreign funds through the years. • India alongwith Russia has witnessed increase in FDI flows in recent years. • South Africa is the one that has been lagging behind other EME’s in terms of foreign investments.
  14. 14. India’s Experience with FDI: Role of a Game Changer 12 III. India’s Sectoral Analysis A. Telecommunications The growth in certain key industries is indicative of the economic development taking place in an economy. Increased efficiency and reach provided by the telecom sector has been instrumental in improving the operations of various sectors such as IT, banking, or Media & Advertisement industry. The liberalization process that took place and the subsequent policy initiatives has paved the way for influx of private players. (Fig 1) The regulatory body overseeing the functioning of the sector is The Telecom Regulatory Authority of India (TRAI) and its main objective is to ensure a level playing field that encourages greater but fair competition so as to provide the consumers a better ambit of services at an affordable price. The Indian government has relaxed the limits on FDI into the sector considerably. (Table 1), which has lead to an increase of foreign capital into the sector. (Table 2) FDI helps in attracting large amount of funds, advanced technology and market competition which results in better services for the customer. Figure 1: Evolution of Telecom in India
  15. 15. India’s Experience with FDI: Role of a Game Changer 13 Table 1: Investment caps and other conditions for specified services are given below:5 Telecom services 74% Automatic upto 49% Government route beyond (a) ISP with gateways (b) ISP’s not providing gateways i.e. without gate-ways (both for satellite and marine cables) (c) Radio paging (d) End-to-End bandwidth 74% Automatic upto 49% Government route beyond 49% and up to 74% (a) Infrastructure provider providing dark fibre, right of way, duct space, tower (IP Category I) (b)Electronic Mail (c) Voice Mail Note: Investment in all the above activities is subject to the conditions that such companies will divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. 100% Automatic upto 49% Government route beyond 49% Table 2: Telecom Sector FDI Equity Inflows (US $ Million) Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (upto Sep. 2011) Telecom 624 478 1261 2558 2554 1665 1901 Source: DIPP Sector Performance: India with its favourable demographics and growing economy provides telecom players from world over an exciting and profitable opportunity. (Table 3) Rising demand for a wide range of telecom equipment, particularly in the area of mobile telecommunication which comprises of products like cell phones, chipsets, DSL and cable 5 http://dipp.gov.in/Fdi_Circular/FDI_Circular_012011_31March2011.pdf
  16. 16. India’s Experience with FDI: Role of a Game Changer 14 modems and networking devices,, has provided excellent opportunities to domestic and foreign investors in the manufacturing sector. The mobile phone has been transformed from being a luxury to being an essential device required by almost everyone. Such a change has been possible due to various reasons either at the policy level or at the operators or manufacturers end. Low priced handsets and tariffs alongwith increased connectivity has helped in the progress of various other sectors as well. Table 3: Sector’s Performance There is a huge difference in terms of the PSU and private sector networks, thereby suggesting that it is the private players which actually are responsible for the significant growth of telecom in the economy.
  17. 17. India’s Experience with FDI: Role of a Game Changer 15
  18. 18. India’s Experience with FDI: Role of a Game Changer 16 Outcomes of the FDI policy: Some of the benefits Industry Consumers • Provided private players to tap the existing potential in the sector. • Assisted the industry in upgrading its technology quotient by being exposed to international standards. • Opening up international markets for the telecom equipment manufacturers • Provided the sector with the much needed financial assistance to set up the infrastructure required to distribute the benefits of the telecom revolution. • More Choices in terms of service provider • Prices of products and services have come down substantially • A lot more products to choose from in terms of handsets • Greater connectivity assists customers from all walks of life, be it the trader, farmer, entrepreneurs • Increased usage of internet has meant new models of imparting education can be adopted in the form of e-learning B. Automobiles Although the delicensing of the passenger car sector was initiated in 1993 the quantitative restrictions still prevailed. Therefore most of the foreign firms had to enter into joint ventures during the 1990’s. (Fig 2) However since 2002 when the equity caps for foreign
  19. 19. India’s Experience with FDI: Role of a Game Changer 17 investors had been lifted the automobile industry has witnessed a healthy growth in the inflow of foreign funds. As reported in the data the FDI flow in 2005-06 was approximately 143million US$ which in 2010-11 became 1331million US$. (Table 4) Fig 2: Evolution of Automobile FDI Policy Table 4: Automobiles Sector FDI Equity Inflows (US $ Million) Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Automobile Industry 143 276 675 1152 1208 1331 Source: DIPP Sector Performance: India is considered to be one of the fastest growing auto markets in the world owing to its huge market size, expanding middle class, availability of finance options and a high percentage of young aspirational population. Apart from these from the viewpoint of a manufacturer India provides auto companies with low cost production facility, a growing talent pool of technical personnel, and a growing and competent auto components market. A look at some of the key parameters of the industry shows that the sector has been growing continuously thereby benefitting both the manufacturers as well as the consumers. A look at the production, sales and exports figures suggest that all the three indicators have shown an upward trend alongwith the rise in FDI flows into the sector. The growth of the automobile sector has assisted India in developing a healthy auto component industry, with its turnover and investments rising almost every year since 2005-06. (Table 5) An indicator of increase in the competitiveness of the Indian auto components market can be judged by the fact that a major share of the exports of these products is to Tier 1 OEM’s.
  20. 20. India’s Experience with FDI: Role of a Game Changer 18 Table 5: Sector’s Performance
  21. 21. India’s Experience with FDI: Role of a Game Changer 19
  22. 22. India’s Experience with FDI: Role of a Game Changer 20
  23. 23. India’s Experience with FDI: Role of a Game Changer 21 Outcomes of the FDI policy: Some of the benefits Industry Consumers • Has increased the competitiveness of domestic players. • The growth in the sector assisted the development of the auto component industry which not only produces products of global standard’s but has also resulted in increased employment. • The productivity levels within the sector have improved as a result of following globally recognized models of manufacturing. • The technological capability of Indian firms has also seen improvements over the years. • FDI bought the required capital into the sector which assisted players in scaling up their supply thereby assisting their overall efficiency and growth. • Consumer choices have increased by many folds both in terms of product range within a price range as well as across price range. • The Indian consumer today has access to global brands • The quality of products in terms of customer experience as well as other parameters such as safety, accessories have improved tremendously. • Over the years there have been new product categories that have been created keeping in mind the change in customer preferences. The recent surge in demand for luxury and high end automobiles has been noticed by various international brands which have now started looking at India as a future growth driver. C. IT/ITES 100% FDI is permitted in the Electronic hardware sector and the Software development sectorundertheautomaticapprovalroute.IndustrialLicensinghasbeenvirtuallyabolished in the Electronics and Information Technology sector except for manufacturing electronic aerospace and defence equipment. In order to promote domestic investment, foreign direct investment, transfer of technology / process know-how, technical collaboration, joint venture etc in India and export IT software products and services from India to the global market, both Government of India and State Governments in India have been offering a series of policy packages including tax breaks, import duty concessions etc. The rapid growth in the sector is a consequence of highly skilled human resource, low wage structure, quality of work and the various policy initiatives as discussed earlier. The
  24. 24. India’s Experience with FDI: Role of a Game Changer 22 recent fall in FDI flow to the sector could be due to the turmoil prevailing in most of the developed nations which are a big market for the Indian IT industry. (Table 6) Table 6: Computer Software & Hardware Sector FDI Equity Inflows (US $ Million) Sector 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Computer Software & Hardware 1375 2614 1410 1677 919 784 Source: DIPP Sector Performance: The Information Technology (IT) sector in India is one of the sunshine sectors of the Indian economy and amongst the fastest growing in the country. The demand for IT services has been fuelled by subsequent growth in allied sectors such as telecom, banking, insurance, retail, healthcare and automobiles. Abundant investment opportunities exist in the following thrust areas in India. Hence IT sector is attracting considerable interest not only as a vast market but also as potential production base by international companies. The trend over the last few years indicates a healthy rate of growth both in terms of production and exports. (Table 7). Table 7: Sector’s Performance
  25. 25. India’s Experience with FDI: Role of a Game Changer 23
  26. 26. India’s Experience with FDI: Role of a Game Changer 24 IV. Relevance of FDI in India The 12th Plan’s draft approach paper of the Planning Commission mentions that “Thus the average investment rate needed during the Twelfth Plan period is estimated to be 38.5 per cent of GDP for the 9.0 per cent growth scenario with 4.5–5.0 average inflation. It would have to rise as much as 41.4 per cent of GDP for the 9.5 per cent growth scenario with 5.0–5.5 rate of inflation” and in terms of investment in infrastructure the same document suggests that “The total investment in infrastructure would have to be over Rs.45 lakh crore or $ 1 trillion during the 12th Plan period. Financing this level of investment will require larger outlays from the public sector, but this has to be coupled with a more than proportional rise in private investment”. It is seen that every nation world over is the race of attracting more FDI inflows to accelerate the pace of economic progress India’s case is no different as in order to achieve and sustain a healthy rate of growth India would require huge investments which cannot be financed locally therefore the government needs to look at alternate avenues of building up investments, FDI in this context is a very useful mechanism. Recent reports have also suggested that greater FDI inflows must be encouraged to meet capital requirements.6 Aside from using FDIs as investment channel and a method to reduce operating costs, many companies and organizations are now looking at FDI as a way to internationalize. FDI should be looked upon as a means of industrialisation and development. The Benefits of FDI Inflows can be broadly identified as:7 • Bridging the financial gap between the quantum of funds needed to sustain a level of growth and the domestic availability of funds • Technology transfer coupled with knowledge diffusion that leads to improvement in productivity. It can, thus, fasten the rate of technological progress through a ‘contagion’ effect that permeates domestic firms • The transfer of better organisational and management practices through the linkages between the investing foreign company and local companies. 6 http://www.financialexpress.com/news/more-fdi-must-for-fund-requirements/754904/0 7 http://dipp.gov.in/oecd_backpaper/FDI%20AND%20INFRASTRUCTURE.pdf
  27. 27. India’s Experience with FDI: Role of a Game Changer 25 Some of these benefits have been seen in the cases of automobile and the telecom industry as discussed in the study earlier. Moreover it can be seen that a promotion and growth in one industry simultaneously fuels the growth in its interconnected sectors as well. It is well accepted that India’s rising growth would require a simultaneous expansion of its infrastructure facilities to support it. The Government of India has been frequently taking initiatives to liberalize and incentivize its foreign direct investment policies to attract investments however the recent decision to suspend FDI in retail as well as hold all other FDI decisions could dampen the international investor’s confidence, as the initial announcement and then the rollback of the initiative might be interpreted as a sign of political instability in taking key policy decisions. In today’s global scenario when investors might be looking at alternate avenues, to invest their money there are only a few nations across the world that provide opportunities to foreigncompanies,withahighlypotentialmarketanda lowcostmanufacturingopportunity and India is one of them. FDI in retail would have been an opportunity to attract inflow of funds which would have resulted in major benefits for the Indian economy: 1. Agriculture: Organized retailing would have led to a complete overhauling of the existing agricultural supply chain. It would have led to bypassing of various intermediaries thereby reducing costs. Investments made by them would have helped in creating back end infrastructure like warehousing and distribution centres, transport and cold storage facilities. It would have created both direct as well as indirect employment at various levels. All these would have resulted in enhanced farmer’s realizations, improved quality of products and reduction in consumer price. 2. Growth in allied industries: The inflow of funds into retailing would have simultaneously led to the growth of allied industries as happened in the case of automobiles, which led to the growth of auto components sector. Likewise FDI in retail would assist growth in supplier industries such as food-processing and textiles moreover, growing demand for retail space, construction of real estate would have also taken place. 3. Increase in Employment: As mentioned in the previous point the growth in a number of allied industries would also result in the growth of employment opportunities across sectors. Both direct and indirect labour would be required to support the industrial and operational machinery that would have been formed as a result of opening up of the sector.
  28. 28. India’s Experience with FDI: Role of a Game Changer 26 4. ImprovementofGovernmentRevenues:Anothersignificantadvantageoforganized retailing is its contribution to government revenues. Organized retailers, by virtue of their being corporate entities need to file tax returns periodically whereas in the unorganized sectors there have been leakages in the collection of central and state taxes. Source: PIB’s Website Recent Development Farmers have reiterated their support for Cabinet’s decision to allow FDI in Multi-Brand Retail. In a meeting with the Minister of Commerce, Industry and Textiles Shri Anand Sharma, Secretary General of Consortium of Indian Farmers Associations (CIFA), Shri P. Chengal Reddy conveyed the desire of various farmers’ body to implement the decision as soon as possible. “FDI in retail will free farmers from the middleman and will get the remunerative price for the produce to the farmer” said Shri Reddy after the meeting. Shri Reddy also informed about the CIFA’s efforts to engage state governments on the issue of FDI in retail. “Many states are reconsidering their opinion as we have explained to them various details because of which FDI will help the small farmers in the long run as it builds competitiveness” informed Shri Reddy.
  29. 29. India’s Experience with FDI: Role of a Game Changer 27 V. Potential FDI Sectors A. FDI in Pension Funds As per the 12th Draft Approach paper of the Planning Commission The total investment in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion during the 12th Plan period. The year wise requirement of infrastructure investments is given in the table below: Table: Projected Investment in Infrastructure during the Twelfth Five Year Plan (Rs crore at 2006-07 prices) Year Base Year (2011-12) 2012-13 2013-14 2014-15 2015-16 2016-17 Total 12th Plan GDP at market prices (Rs crore) 63,14,265 68,82,549 75,01,978 81,77,156 89,13,100 97,15,280 4,11,90,064 Rate of growth of GDP (%) 9.00 9.00 9.00 9.00 9.00 9.00 9.00 Infrastruc- ture invest- ment as % of GDP 8.37 9.00 9.50 9.90 10.30 10.70 9.95 Infrastruc- ture invest- ment (Rs crore) 5,28,316 6,19,429 7,12,688 8,09,538 9,18,049 10,39,535 40,99,240 Infrastruc- ture invest- ment (US$ billion) @ Rs 40/$ 132.08 154.86 178.17 202.38 229.51 259.88 1,024.81 Source: Mid-Term Appraisal of the Eleventh Five Year Plan Such high level of investments cannot be financed by traditional sources of public finance alone. Moreover, with increased globalization, provisions will have to be made to counter any global risks that might be prevailing as is the case with Euro zone crises currently. In the light of such events therefore the Central Government might have to pursue an even more cautious approach while incurring expenditures. This could lead to a significant
  30. 30. India’s Experience with FDI: Role of a Game Changer 28 infrastructure gap and therefore there is need to recognize the importance of private sector’s role in developing the infrastructure requirements of the nation. The share of private sector investments in infrastructure has been marginally on a rise. Please refer to the figure below: Figure: Share in Total Investment Source: Mid-Term Appraisal of the Eleventh Five Year Plan However amidst a slowing economy and a fall in corporate performance there might be a situation wherein even the private sector might have monetary constraints to fund huge infrastructure projects. To fill this Infrastructure Gap • Pension Fund investments into infrastructure seem to be a befitting alternative given the match of interests for both the sectors. • FDI in pension funds would further increase the volume of assets that can be invested into infrastructure and help in realizing the infrastructure needs of the country. Characteristics of infrastructure projects that assist in attracting investments from pension funds:  Long term income streams  Stability
  31. 31. India’s Experience with FDI: Role of a Game Changer 29  Predictable cash flows  Low default rates  Diversification of projects  The project stands to benefit the society at large Given the large infrastructure financing requirements, all potential resources must be tapped into by channeling available domestic and international funds into project finance. However, long-term investors, such as pension and insurance funds, have had a limited presence in the Indian market due to regulatory restrictions. The contribution of Pension and Insurance companies to infrastructure financing has been relatively small as indicated by their percentage share as sources of debt during the Eleventh Five Year Plan. Please refer to table below: Table: Likely Sources of Debt Financing for Infrastructure (Rs crore 2006-07 price) 2007-08 2008-09 2009-10 2010-11 2011-12 Total Eleventh Plan Pension/Insurance Companies 9077 9984 10983 12081 13289 55414 External Com- mercial Borrowing (ECB) 19593 21768 24184 26868 29851 122263 Estimated Require- ment of Debt 131718 155704 187333 229571 283709 988035 % Share of Pen- sion/Insurance in Estimated Require- ment of Fund 6.9 6.4 5.9 5.3 4.7 5.6 % Share of ECB’s in Estimated Require- ment of Fund 14.9 14.0 12.9 11.7 10.5 12.4 Source: Eleventh Five Year Plan Therefore it is imperative that financial sector reforms continue in order to offer products and services to meet financing and risk management of the needs infrastructure projects.
  32. 32. India’s Experience with FDI: Role of a Game Changer 30 Size of Pension Funds Market As per an OECD report8 “According to the OECD calculations, the funded pensions market (both occupational and work related) has a size of US$ 24.6tr worldwide. Of this, US$ 16.2tr is held by pension funds”. According to another report9 The OECD (Organization for Economic Cooperation and Development) countries account for more than 90 percent of the world’s private pension assets and the US account for nearly half of the total assets of private pension assets. Pension fund assets in BRIC countries are relatively low in relation to their GDP (17 percent in Brazil, 2 percent in Russia, 5 percent in India, and one percent in China). The total pension assets in 13 markets at the end of 201010 are given in the table below: Table: Pension Fund Assets Country Plan % GDP Australia 1261 103 Brazil 342 17 Canada 1140 73 France 133 5 Germany 471 14 Hong Kong 87 38 Ireland 100 49 Japan 3471 64 Netherlands 1032 134 South Africa 256 72 Switzerland 661 126 UK 2279 101 US 15265 104 Total 26496 76 Source: Global Pension Asset Study 2011 Towers Watson 8 Georg Inderst “Pension Fund Investment in” published by OECD, Working Papers on Insurance and Private Pensions No. 32 9 Global Pension Funds : Overview FT Knowledge Management Company Limited Vol 1I No. 32I October 25, 2010 10 Global Pension Asset Study 2011 Towers Watson
  33. 33. India’s Experience with FDI: Role of a Game Changer 31 As per the Global Pension Asset Study 2011 the trend observed in the allocation of pension assets at a world level are: Table: Asset Allocation in 2010 Asset Allocation Percentage Allocated Equity 47 Bonds 33 Other 19 Cash 1 Source: Global Pension Asset Study 2011 Towers Watson Pension Fund Assets in India Table: Current Status Rs. Crores USD Billion India’s GDP at (constant price 2004-05) in 2010-11 4877842 97556 Exchange Rate taken as 1 US$ = 50 Indian Rupees Pension Fund Assets 48.78 As stated earlier pension fund asset in India is 5 per cent of the GDP Fund Allocation Equity 22.93 Assuming that allocation is done as per the world trend indicated in the earlier table Bonds 16.10 Other 9.27 Cash 0.49 ASSOCHAM’s Calculations Allowing FDI in Pension funds would give access to global pension fund companies to the vast untapped Indian market and assuming that opening up of FDI in Pension Funds shall help India in attracting slightly more than 1 percent of the total pension funds held by pension fund companies (size of pension fund holdings assumed to be US $ 16.2 trillion as given in an OECD report). 11 Global Pension Funds : Overview FT Knowledge Management Company Limited Vol 1I No. 32I October 25, 2010
  34. 34. India’s Experience with FDI: Role of a Game Changer 32  India would be able to raise the share of Pension fund assets to GDP from the current level of 5 percent to close to 17 percent which would be similar to that of another emerging economy Brazil’s level in 2010. Moreover a 2.1 percent allocation of total pension fund assets to India would increase its reserves to US $ 342 billion the level of pension assets that were there in Brazil in 2010. • If Pension Funds reach 17 per cent of India’s GDP then this would result in assets worth US$ 165.85 Billion • Moreover if India is able to reach the levels witnessed in Brazil in 2010 then going by the world trends the Equity allocation of these alone could be as high as US$ 160 Billion • A CAGR of 16.5 percent as witnessed by Brazil would result in total pension assets of US$ 733.93 Billion, of which equity would be US$ 344.95 Billion. Of this even if 30 per cent goes into Infrastructure Sector then it would mean an investment of US $ 103.49 billion which is close to one tenth of the infrastructure investment requirement of the 12th Plan. Table: Potential Scenario Asset Alloca- tion Percent- age Allo- cated Pension Fund As- sets at 5 per cent of GDP (current status) Pension Fund Assets at 17 per cent of GDP Pension Fund As- sets at Brazil’s Current Level Pension Fund As- sets at the end of 2017 (starting at US $ 342 billion in 2012) if CAGR is 16.5 percent* Total Avail- able Assets (USD Billion) 48.78 165.85 342.00 733.93 Equity 47 22.93 77.95 160.74 344.95 Bonds 33 16.10 54.73 112.86 242.20 Other 19 9.27 31.51 64.98 139.45 Cash 1 0.49 1.66 3.42 7.34 ASSOCHAM’s Calculations *CAGR is taken as 16.5 per cent as this has been the rate achieved by Brazil in the period 31/12/2000 to 31/12/2010 as per Global Pension Asset Study 2011 Towers Watson
  35. 35. India’s Experience with FDI: Role of a Game Changer 33 Other Benefits • A vast majority of India’s population is not covered by any formal old age income scheme and is dependent on their earnings and transfer from family members. • The unorganized sector has no access to formal channels of old age economic support. • As indicated in remarks made on the pension system in India12 :  Only about 12 per cent of the working population in India is covered by some form of retirement benefit scheme.  The total pension liability on account of the Central Government employees has increased at a compound annual growth rate of more than 21% during the 1990s, the comparable rate for the State Government was 27% per annum.  The implications of demographic dynamics for pension planning in India becomes more evident when one takes into account the fact that average life expectancy at age 60, which is currently 17 years, is likely to rise to more than 20 years in the next three decades and that the population over 60 years of age will approach 200 million in 2030. Therefore large scale reforms are required to ease the pressure on the treasury, to provide for a social security net for growing numbers of senior citizens as well as a growing workforce. 12 Pension Reform in India – A Social Security Need ( D. Swarup, Chairman, PFRDA)
  36. 36. India’s Experience with FDI: Role of a Game Changer 34 B. FDI in Civil Aviation I. Importance The aviation industry is critical for any nation to gain from participation in the global economy. Civil Aviation in its role of a key infrastructure sector facilitates: • Growth of other industries • Trade - by offering a reliable and faster mode of transport services to move products and personnel across long distances • Tourism • Generates both direct and indirect employment opportunities The vision for the Indian civil aviation industry for the 12th Plan period is: “To propel India among the top five civil aviation markets in the world by providing access to safe, secure and affordable air services to everyone through an appropriate regulatory framework and by developing world class infrastructure facilities” II. Potential A growing middle class supplemented with rise in disposable incomes, change in lifestyles, a globalized economy all act as drivers that project a huge potential for the industry. Another way of looking at the potential of the sector is by comparing the domestic tariff of another emerging economy China. Domestic traffic in China is believed to be five times the size of India’s despite having a population just 10% larger. Forecast of air traffic carried out for 12th plan13 period suggests: • Domestic passenger throughout would grow at an average annual rate of around 12%. • Domestic passenger throughout is expected to touch around 209 million by FY-17 from 106 million in FY-11. • International passenger throughout is estimated to grow at an average annual rate of 8% during the 12th Plan period • International Passengers to reach 60 million passengers by FY-17 from 38 million in FY-11. 13 Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)
  37. 37. India’s Experience with FDI: Role of a Game Changer 35 III. Investment Required Huge amounts of additional investments will have to be made into the sector to develop more airports, increase the existing capacities as well as improve and create additional support infrastructure if India intends to harness the existing potential efficiently. Broad Investment requirements: Expense On Amount (Rs. Crores) Airport 67,500 Fleet Expansion 147,600 Total 2,15,100 Estimates given in the Report of Working Group on Civil Aviation suggest the investments requirement would be: a) Airport Infrastructure Estimates received from AAI and the industry indicate that the Indian airports would require an investment of about Rs 67,500 crores during the 12th Plan of which around Rs 50,000 crores is likely to be contributed by the private sector. Please refer to the Table below: Table: Expected investments in airports during 12th Plan Investor Investment Category INR (Crores) AAI Airport projects 17500 Private By Airport Operator 40,000 Investments By Others (Concessionaires, Third Party, etc.) 10,000 Subtotal 50,000 TOTAL 67,500 Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17) b) Airlines Airlines in India are expected to add around 370 aircrafts worth Rs 150,000 crores to their fleet by FY-17. Fleet expansion at this scale would require airlines to explore multiple
  38. 38. India’s Experience with FDI: Role of a Game Changer 36 funding options including capital markets, long-term borrowings and leasing etc. Please refer to table below: Table: Expected fleet expansion by Indian carriers Airline Number of aircrafts expected to be added by 2017 Estimate value of aircrafts to be added (Rs. crores) Air India 40 18,000 Go Air 22 8,100 Jet Airways 79 32,000 JetLite 20 7,600 Kingfisher 78 29,700 Spicejet 68 26,100 Indigo 69 26,100 TOTAL 376 147,600 Source: Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17) Realization of the civil aviation industry’s vision would require huge amounts of funds to be invested. However, looking at the existing financial status of the industry the achievement of set objective seems to be ambitious14 . • The decade 2000-2010 witnessed a profitless growth phase of the air lines industry. • During the three year period between 1 Apr 2007 and 31 Mar 2010, Indian carriers incurred an accumulated operational loss in excess of Rs 26,000 crores. • As per certain estimates the Airline Industry in India suffers from huge debt burden – close to US $ 20 billion (estimated for 2011-12). • Half of this debt is aircraft related and the rest for working capital loans, payments to airport operators and fuel companies. • High costs of operation and competitive pricing mechanism followed has adversely dented the financials of the airline sector. 14 Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan (2012-17)
  39. 39. India’s Experience with FDI: Role of a Game Changer 37 IV. Foreign Airlines Equity Participation Raising huge amounts of investments would require the government to adopt more progressive and positive fiscal regime as well as develop a collaborative approach with the industry. Civil Aviation industry would require not only large but continuous flow of funds if the next phase of growth needs to take place. For this to happen the government must relook at its FDI policy which disallows foreign airlines from purchasing equity of domestic airlines. Direct investment by foreign airlines would: • Provide managerial and technical expertise needed to improve productivity. • Raise much-needed capital for the private-sector players • Improve operating standards and services An estimation of the amount of capital that can be raised by three prominent Indian Private Airlines shows: (foreign non- airline investor’s equity has not been considered in estimation). • The promoters by off loading 26 % of their Equity Stake can raise upto Rs. 1341.45 crores. • This figure goes up to Rs. 2528.3 crores in case 49 per cent FDI is allowed. • Combined equity valuation (promoter and non-promoter) at 26 % comes out to be Rs. 2834.27crores. • The valuation at 49 % goes upto Rs. 5341.52 crores. The capital raised from equity sale can be used to address the working capital requirements of the airlines. Estimates: Table: Estimates of capital that can be raised Condition Amount of Capital Raised (Rs. Crores) At 26 per cent At 49 per cent (a) Promoters off load their stakes 1341.54 2528.29 (b) total available equity(promoter and non-promoter) is diluted 2834.27 5341.51 ASSOCHAM’s Calculation
  40. 40. India’s Experience with FDI: Role of a Game Changer 38 A. Investment flow through FDI Promoter’s share is diluted Airline No of shares % Share Total Value (Rs Crores) Amount of Capital Raised (Rs. Crores) if FDI 26% FDI 49% Kingfisher 263085543 56.08 4268.56 1109.82 2091.59 Jet Airways 10183 0.06 .57 .15 .28 Spice Jet 156528305 38.61 890.65 231.57 436.42 Total 1341.54 2528.29 ASSOCHAM’s Calculation Overall (promoter and non-promoter’s) share is diluted Airline No of shares Total Value (Rs Crores) Amount of Capital Raised (Rs. Crores) if FDI 26% FDI 49% Kingfisher 469107140 7611.26 1978.92 3729.51 Jet Airways 17275436 983.17 255.62 481.75 Spice Jet 405378065 2306.6 599.72 1130.23 Total 2834.27 5341.51 ASSOCHAM’s Calculation B. Individual Airlines Kingfisher Category No of shares % Share Total Value (Rs Crores) Amount of Capital Raised (Rs. Crores) if FDI 26% FDI 49% Promoter 263,085,543 56.08 4268.56 1109.82 2091.59 Non Promoter 206,021,597 43.92 3343.11 869.20 1638.12 Total 469,107,140 100 7611.26 1978.92 3729.51 ASSOCHAM’s Calculation Note: Rs 162.27 that is the average of highest share price and lowest share price in the last four years has been used to calculate the valuation.
  41. 41. India’s Experience with FDI: Role of a Game Changer 39 Jet Airways Category No of shares % Share Total Value (Rs Crores) Amount of Capital Raised (Rs. Crores) if FDI 26% FDI 49% Promoter 10,183 0.06 .57 .15 .28 Non Promoter 17,265,253 99.94 982.60 255.47 481.47 Total 17,275,436 100 983.17 255.62 481.75 ASSOCHAM’s Calculation Note: Rs 569.13 that is the average of highest share price and lowest share price in the last four years has been used to calculate the valuation. Spice Jet Category No of shares % share Total Value (Rs Crores) Amount of Capital Raised (Rs. Crores) if FDI 26% FDI 49% Promoter 156,528,305 39.68 890.65 231.57 436.42 Non Promoter 248,849,760 60.32 1415.96 368.15 693.82 Total 405,378,065 100 2306.60 599.72 1130.23 ASSOCHAM’s Calculation Note: Rs 56.9 that is the average of highest share price and lowest share price in the last four years has been used to calculate the valuation.
  42. 42. India’s Experience with FDI: Role of a Game Changer 40 VI. ASSOCHAM’s Suggestions FDI since 1991 has proved to be game changer for wide segments of Indian industry. FDI has change quality, productivity, and production in areas where it has been allowed. FDI has led to the creation of new activities such as IT-BPO, which was initiated by select foreign companies. India needs huge investment in the 12th Plan period, it is calling for investments to the tune of $1 trillion in the infrastructure sector alone. We need among many other infrastructure facilities infrastructure in retail as well as those for food & perishable products. Opening of FDI in retail would have led to the creation of such farm infrastructure. This apart mining and manufacturing sectors also require huge investments and FDI can supplement domestic efforts significantly. There is also an urgent need for India to augment the investment absorption capacity. Moreover it has to be understood that India is competing for foreign investments with other emerging economies and so far a comparative analysis suggest that India has not been a large recipient of FDI. It is in this context that ASSOCHAM studied the role of FDI in Indian economy and particularly in select sectors. While ASSOCHAM feels that FDI liberalization should be pursued we also recommend some immediate ground level reforms for increasing the ease of doing business in India. Therefore we would like to propose a few suggestions to the policymakers for their consideration: • Bureaucratic delays and various governmental approvals and clearances involving different ministries need to be fastened so as to increase the absorption rate of FDI into the country. • Restrictions on sector caps and entry route to sectors other than those of national importance need to be liberalized further and constant reviewing of policies must be done. • Government must ensure consistency of policy so as to improve the business and investor confidence.
  43. 43. India’s Experience with FDI: Role of a Game Changer 41 • It is in the interest of the industry at large if a mechanism could be developed which facilitates a consultation between Centre and State governments before a policy rollout so that once the decision is taken its implementation does not get affected. • Government must recognise that good regulations and efficient processes are key catalysts for FDI. Accessible and reliable information and efficient and predictable actions by public institutions help create a business environment conducive to investment. • Time bound, non-discretionary, simplified and less number of procedures and approvals would also help in uplifting the international investor’s confidence and help foster more investment into India. HHH
  44. 44. About ASSOCHAM ASSOCHAM acknowledged as Knowledge Chamber of India has emerged as a forceful, pro-active, effective and forward looking institution playing its role as a catalyst between the Government and Industry. ASSOCHAM established in 1920 and has been successful in influencing the Government in shaping India’s economic, trade, fiscal and social policies which will be of benefit to the trade and industry. ASSOCHAM renders its services to over 3,50,000 members which includes multinational companies, India’s top corporates, medium and small scale units and Associations representing all the sectors of Industry. ASSOCHAM is also known as a Chamber of Chambers representing the interest of more than 350 Chambers & Trade Associations from all over India encompassing all sectors. ASSOCHAM has over 100 National Committees covering the entire gamut of economic activities in India. It has been especially acknowledged as a significant voice of Indian industry in the field of Corporate Social Responsibility, Environment & Safety, Corporate Governance, Information Technology, Agriculture, Nanotechnology, Biotechnology, Pharmaceuticals, Telecom, Banking & Finance, Company Law, Corporate Finance, Economic and International Affairs, Tourism, Civil Aviation, Infrastructure, Energy & Power, Education, Legal Reforms, Real Estate, Rural Development etc. The Chamber has its international offices in China, Sharjah, Moscow, UK and USA. ASSOCHAM has also signed MoU partnership with Business Chambers in more than 45 countries. The Associated Chambers of Commerce and Industry of India ASSOCHAM Corporate Office 1, Community Centre, Zamrudpur, Kailash Colony, New Delhi-110048 Tel: 011 46550555 (Hunting Line) | Fax: 011 46536481/82, 46536498 Email: assocham@nic.in | Website: www.assocham.org
  45. 45. NOTES
  46. 46. NOTES

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