FDI

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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.
  • 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.
  • 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

    1. 1. FDI & Economic Growth: An Indian Case Study<br />Presented By:<br />ChinmayJagga (91013)<br />CejilDiclause (91014)<br />DarrickArora (91015)<br />Deepinder Singh (91016)<br />DivanshuKapoor (91017)<br />Gaurav Sharma (91018)<br />
    2. 2. Overview of FDI Inflows<br />
    3. 3. Top Investing Countries<br />
    4. 4. Sector-wise Distribution<br />
    5. 5. Relationship b/w FDI and Growth indicators: GDP & Exports<br />
    6. 6. Regression Analysis: GDP vs FDI<br />Log of GDP = 4.12 + 0.466 Log of FDI<br />
    7. 7. Regression Analysis: Exports vs FDI<br />Log of Exports = 2.40 + 0.676 Log of FDI<br />
    8. 8. FDI Benefits<br />
    9. 9. FDI Challenges<br /><ul><li>Crowding out domestic investment
    10. 10. Technology transferred</li></li></ul><li>SECTORAL ANALYSIS<br />
    11. 11. Current Scenario<br /><ul><li>Ranked 2nd most favored destination for foreign investments after China
    12. 12. India ranks among the top 12 producers of manufacturing value added (MVA).
    13. 13. In textiles, the country is ranked 4th after China, USA and Italy.
    14. 14. In electrical machinery and apparatus, it is ranked 5th. </li></ul>According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009<br />
    15. 15. Current Scenario<br /><ul><li>6th position in the basic metals category
    16. 16. 7th in chemicals and chemical products
    17. 17. 10th in leather, leather products, refined petroleum products and nuclear fuel
    18. 18. 12th in machinery and equipment and motor vehicles.</li></ul>According to a United Nations Industrial Development Organization (UNIDO) analysis based on 2007 figures mentioned in the International Yearbook of Industrial Statistics 2009<br />
    19. 19.
    20. 20. FICCI Study in Indian Manufacturing Sector: Salient Points <br />
    21. 21. Sub-Sectors where FDI is negligible<br />India’s share in outward FDI stock is negligible (Chemicals, Automobiles, Food Processing, Electrical & Electronic Equipment, Metals and Machinery Equipment)<br />Sectors like Industrial Machinery, Agricultural Machinery, Ship Building, Medical & Surgical Devices and Computer Hardware <br />Rather India import these items<br />
    22. 22. FDI Inflows for Selected Sectors in India (Jan 2000 to September 2008) <br />
    23. 23. FICCI’s Suggestions<br />
    24. 24. FDI in Service Sector (with focus on Insurance Sector)<br />
    25. 25. India's large service industry accounts for more than 50% of the country's GDP<br />It makes up more than 25% Employment<br />Service sectors like telecommunication, IT enabled services, insurance, air transport are becoming prominent<br />
    26. 26. Reasons for growth in Services Sector <br />Introduction of ‘Manmohanomics’ in 1991<br />Growing presence of transnational corporations and the technological progress<br />Liberalization of many service sectors activities (telecom, transport, finance etc.)<br />
    27. 27. FDI contribution to Services Sector<br />Attracted $3.12 billion FDI in the first seven months of 2009-10<br />22 per cent of the total FDI inflows of $17.64 billion in the April-October for service sector<br />In 2008-09, attracted the maximum FDI worth USD 6.11 billion.<br />
    28. 28. FDI Policy in Services Sector<br />100% FDI is permitted for many service sectors <br /> (Real estate, construction, hotels, tourism, films, IT and IT - enabled services, consultancy, renting, medical,<br /> education, advertising etc)<br />Phased manner: to allow domestic companies to prepare for global competition (Banking, Insurance, Media, Retail Trade, <br />
    29. 29. Restricted sectors in Services<br />Atomic Energy, Lottery Business, Gambling and Betting, Business of Chit Fund, and any activity/sector that is not opened to private sector investment. <br />Besides the above, FDI is not allowed in plantations. <br />
    30. 30. Current issues with FDI in Services Sector <br />Very weak linkages of service sector with the Indian economy (only few cities)<br />Requires highly skilled workers<br />Employee Welfare in time of crisis<br />
    31. 31. Sub Sector Analysis: Insurance Sector<br />Fifth largest life insurance market in the emerging insurance economies globally<br />Insurance laws (amendment) bill 2008: <br /><ul><li>To increase FDI cap from 26% to 49%
    32. 32. For Life/General insurance minimum paid up capital to Rs 50 crore(from 100 crore). </li></li></ul><li>Why increasing FDI Cap in Insurance Sector is required?<br />Boost to the insurance sector <br />Infuse liquidity in the financial system with increase in FDI inflow<br />Increasing Insurance penetration (specially to rural areas)<br />Increase in employment, tertiary sectors like IT/ITeS, <br />
    33. 33. Boost to Health insurance (1 percent of the country’s population is presently covered under health insurance policies. )<br />Insurance Law ‘08 gives provision to companies exclusively into the business of health insurance<br />Micro insurance (accounts for just .1 % of total insurance premium<br />
    34. 34. Flip Side of increasing Cap <br />Many foreign companies have to be rescued by their own governments.<br />For eg: AIG<br />Road ahead for Insurance companies depend heavily on FDI cap.<br />
    35. 35. FDI in Agriculture<br />
    36. 36. FDI in Agriculture….Developments<br /><ul><li> To connect 66,800 habitations
    37. 37. To construct 1,46,000Km of new rural roads
    38. 38. To Upgrade and modernize 1,94,000Km of existing rural roads
    39. 39. To provide corpus of Rs. 8000 crore RIDF </li></li></ul><li>FDI in Retail….WHY INDIA?<br /><ul><li>Low share of organized retailing
    40. 40. Increase in disposable income and customer aspiration
    41. 41. Increase in expenditure for luxury items </li></li></ul><li>FDI in Retail….Benefits<br /><ul><li>Generate huge employment
    42. 42. Increased investment in technology
    43. 43. The huge tax revenue generated.
    44. 44. The consumer gains from the wide variety of choices and a more diversified basket.
    45. 45. 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.</li></li></ul><li>FDI in Retail….Drawbacks<br /><ul><li>Foreign Players would displace the unorganized retailers because of their superior financial strengths.
    46. 46. The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs.
    47. 47. Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines.
    48. 48. Increase in real estate prices and marginalize domestic entrepreneurs</li></li></ul><li>FDI in Real Estate<br /><ul><li>Second-most favoured destination for FDI in the world
    49. 49. Norms to allow 100% FDI Mar 2005
    50. 50. 100 acre criterion to 25 acre criterion</li></li></ul><li>FDI in Real Estate….Why Invest??<br /><ul><li>India produces an estimated 2 million new graduates
    51. 51. Presence of a large number of Fortune 500
    52. 52. Real estate investments in India yield huge dividends</li></li></ul><li>Tourism<br /><ul><li>Raised to $120mn
    53. 53. Major source of employment
    54. 54. Third largest earner of foreign exchange
    55. 55. Private investments through public private partnership</li></li></ul><li>Need for FDI in Tourism<br /><ul><li> Foreign tourist arrivals are expected to grow to 10 million by 2010-12
    56. 56. Estimated that tourism in India could contribute Rs.8,50,000 crores to the GDP by 2020</li></li></ul><li>Reasons for low FDI<br /><ul><li> Multitude of taxes
    57. 57. High Taxes
    58. 58. Highest import duty on imported liquor used in hotels
    59. 59. Service Tax on Tour Operators
    60. 60. Inland Air Travel Tax</li></li></ul><li>Attract more FDI in Tourism Sector<br /><ul><li>Rationalize the taxation on the hotel industry
    61. 61. Service Tax should be computed based on the value of service provided
    62. 62. Inland Air Travel Tax should be applied at the rate of 5% of the basic ticket price</li></li></ul><li>Comparative study<br />FDI Inflow in India Vs China<br />
    63. 63. Definition of FDI in China<br />
    64. 64. FDI Policies in China<br />
    65. 65. FDI Policies in India<br />FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors. Known as the automatic route.<br />The FDI policies in INDIA are formulated on 4 parameters:<br /> -Increased capital flow.<br /> -Improved technology.<br /> -Management expertise.<br /> -Access to international markets.<br /> Hence 100% inflow was allowed in sectors like Power, Renewable energy , Agriculture, mining etc.<br />Also sectors like insurance and defence have a cap of 26% and the banking sector has cap of 49%.<br />
    66. 66. Neighborhood Theory- India and China<br />
    67. 67. Conclusions<br />
    68. 68. Final Recommendations<br />

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