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  • 1. 1. By,Nagaraj Avarekar 2. Meaning of FDI FDI is direct investment into production in a country by acompany located in another country, either by buying a company in thetarget country or by expanding operations of an existing business inthat country. 3. FDI offers an exclusive opportunity to enter into theinternational or global business, new markets and marketingchannels, elusive access to new technology and expertise,expansion of company with new or more products orservices, and cheaper production facilities. 4. - India received FDI worth US $1.47 billion in july 2012 with cumulative inflow for April 2012-13 Stood at $5.9billion.The sector which attracted huge FDI inflows during the April 2012- 13 are service $1.65 million pharmaticals $428 million, construction $421 million, metallurgical industries (US$ 334 million), power (US$ 237 million) and automobile (US$ 234 million) Retailing is the single largest component of the services sector in terms of contribution of GDP. New Delhi And Mumbai are two major cities where FDI inflows is heavily concentrated. Mauritian has been the largest direct investor. At least 10% shares of company need to quality as FDI. 5. Improved consumer welfare through reduced cost, wider choice Contribution to export growth Employment generation Finance resource for expansive Competitive advantages and innovation Inflow of equipment and technology 6. & Provide access to global markets for Indian producer. improved quality. Effect on culture Effect on notional environment Loss of control Conflict of laws Crowing of local industry 7. 8. Indian retailers have made steady progress in the pastdecade, their efforts fall short in matching global norms in asector estimated to be worth more than $450 billion.Consequently organised retail has barely more than 4 percent market share. Some stakeholders speculate that millions of jobswould be lost due to FDI in retail. Actually, it will be theother way around. With the entry of modern retailers, themarket will expand, creating millions of additional jobs inretail and other tertiary sectors market share in India. Improvement in supply chain and warehousing Cost reduction Growth of infrastructure Provide better value to end consumers Increased local sourcing Generates more employment Inflow of investments and funds 9. Increase in real estate prices Creating monopoly Cutthroat competition 10. 11. The Indian Cabinet Committee on Economic Affairs(CCEA) is strongly expected to raise the FDI ceiling in theInsurance and Pension sectors. FDI threshold to 49% in the Insurance sector from theexisting limit of 26%, has been submitted to the cabinet forproper approval in the quickest possible period. 12. Increment in the FDI ceiling in the insurancesector of India, will certainly be highly and greatlyappreciated by domestic and foreign insurancecompanies, for the purpose of expanding and enrichingtheir insurance and re-insurance businesses 13. The proposal to allow foreign direct investment, orFDI, in the pension space has to clear the parliamentaryhurdle before pension funds become a reality in the countrywhere more and more people are working in private sectorenterprises that do not offer a pension after retirement. "What the pension reforms will do is attract moremoney and help the companies sustain their businesses overa long period of time, which is key for the sector. The aviation sector of India has been serving about 100 million aviation travellers every year, both international and domestic markets, in the recent years. The latest visionary decision of the Government of India to allow FDI up to 49% in Indias domestic aviation, is expected to heal the cash-strapped aviation industry of India, and attract massive foreign direct investment in the aviation sector of India, in short and long future. 14. 15. According to RNCOS Report, India is one among thetop ten largest markets of the world, in respect ofaviation, and is growing tremendously.The domestic aviation market of India will emerge outas the third biggest domestic aviation market in theentire world by 2020 with over 450 million domesticpassengers. 16. Liberalize the Broadcasting sector of India to foreign directinvestment, the Indian Cabinet Committee on EconomicAffairs (CCEA) raised the FDI cap from 49% to 74% manyfields of the Broadcasting sector . CCEA opted to retain theexisting cap of 26% in the fields of TV News Channels andthe FM Radio. Mobile TVs Cable Networks (Multi-Service Operators who undertake up-gradation of networks for digitalization and addressability) Head-end in the Sky (HITS) Direct-to Home (DTH) Teleports (Up-linking HUBs/Teleports) 17. The recent governmental decision will be applied tothe following Broadcast Carriage Service Providers. 18. Consider these all aspect finally I conclude that FDImore boon than bane because foreign direct investment hasmore advantages than this disadvantages.
  • 2. 19. website www.globaljurix.com/foreign-direct-investment.php Scrib.com wikipedia.org/wiki/Foreign_direct_investment investorpadia.comNews Paper Economic Time Business Line Prajav 1. CONTENTS • FOREIGN DIRECT INVESTMENT (DEFINITION) • TYPES OF FDI • METHODS • FORMS OF FDI INCENTIVES • IMPORTANCE AND BARRIERS TO FDI • DEVELOPING WORLD • FDI IN INDIA • FDI IN RETAIL 2. FDI ( FOREIGN DIRECT INVESTMENT ) • FOREIGN DIRECT INVESTMENT (FDI) IS A DIRECT INVESTMENT INTO PRODUCTION OR BUSINESS IN A COUNTRY BY AN INDIVIDUAL OR COMPANY IN ANOTHER COUNTRY, EITHER BY BUYING A COMPANY IN THE TARGET COUNTRY OR BY EXPANDING OPERATIONS OF AN EXISTING BUSINESS IN THAT COUNTRY. FOREIGN DIRECT INVESTMENT IS IN CONTRAST TO PORTFOLIO INVESTMENT WHICH IS A PASSIVE INVESTMENT IN THE SECURITIES OF ANOTHER COUNTRY SUCH AS STOCKS AND BONDS. • BROADLY, FOREIGN DIRECT INVESTMENT INCLUDES "MERGERS AND ACQUISITIONS, BUILDING NEW FACILITIES, REINVESTING PROFITS EARNED FROM OVERSEAS OPERATIONS AND INTRA COMPANY LOANS. 3. TYPES OF FDI • HORIZONTAL FDI ARISES WHEN A FIRM DUPLICATES ITS HOME COUNTRYBASED ACTIVITIES AT THE SAME VALUE CHAIN STAGE IN A HOST COUNTRY THROUGH FDI. • PLATFORM FDI FOREIGN DIRECT INVESTMENT FROM A SOURCE COUNTRY INTO A DESTINATION COUNTRY FOR THE PURPOSE OF EXPORTING TO A THIRD COUNTRY. • VERTICAL FDI TAKES PLACE WHEN A FIRM THROUGH FDI MOVES UPSTREAM OR DOWNSTREAM IN DIFFERENT VALUE CHAINS I.E., WHEN FIRMS PERFORM VALUE-ADDING ACTIVITIES STAGE BY STAGE IN A VERTICAL FASHION IN A HOST COUNTRY. 4. METHODS THE FOREIGN DIRECT INVESTOR MAY ACQUIRE VOTING POWER OF AN ENTERPRISE IN AN ECONOMY THROUGH ANY OF THE FOLLOWING METHODS: • BY INCORPORATING A WHOLLY OWNED SUBSIDIARY OR COMPANY ANYWHERE • BY ACQUIRING SHARES IN AN ASSOCIATED ENTERPRISE • THROUGH A MERGER OR AN ACQUISITION OF AN UNRELATED ENTERPRISE • PARTICIPATING IN AN EQUITY JOINT VENTURE WITH ANOTHER INVESTOR OR ENTERPRISE 5. FORMS OF FDI INCENTIVES FOREIGN DIRECT INVESTMENT INCENTIVES MAY TAKE THE FOLLOWING FORMS: • • • • • • • • • • • • • LOW CORPORATE TAX AND INDIVIDUAL INCOME TAX RATES. TAX HOLIDAYS. OTHER TYPES OF TAX CONCESSIONS PREFERENTIAL TARIFFS SPECIAL ECONOMIC ZONES EPZ – EXPORT PROCESSING ZONES BONDED WAREHOUSES MAQUILADORAS INVESTMENT FINANCIAL SUBSIDIES INFRASTRUCTURE SUBSIDIES RELOCATION & EXPATRIATION R&D SUPPORT FREE LAND OR LAND SUBSIDIES 6. IMPORTANCE AND BARRIERS TO FDI • THE RAPID GROWTH OF WORLD POPULATION SINCE 1950 HAS OCCURRED MOSTLY IN DEVELOPING COUNTRIES THIS GROWTH HAS BEEN MATCHED BY MORE RAPID INCREASES IN GROSS DOMESTIC PRODUCT, AND THUS INCOME PER CAPITA HAS INCREASED IN MOST COUNTRIES AROUND THE WORLD SINCE 1950. WHILE THE QUALITY OF THE DATA FROM 1950 MAY BE OF QUESTION, TAKING THE AVERAGE ACROSS A RANGE OF ESTIMATES CONFIRMS THIS. ONLY WAR-TORN AND COUNTRIES WITH OTHER SERIOUS EXTERNAL PROBLEMS, SUCH AS HAITI, SOMALIA, AND NIGER HAVE NOT REGISTERED SUBSTANTIAL INCREASES IN GDP PER CAPITA. THE DATA AVAILABLE TO CONFIRM THIS ARE FREELY AVAILABLE AN INCREASE IN FDI MAY BE ASSOCIATED WITH IMPROVED ECONOMIC GROWTH DUE TO THE INFLUX OF CAPITAL AND INCREASED TAX REVENUES FOR THE HOST COUNTRY. HOST COUNTRIES OFTEN TRY TO CHANNEL FDI INVESTMENT INTO NEW INFRASTRUCTURE AND OTHER PROJECTS TO BOOST DEVELOPMENT. 7. DEVELOPING WORLD A 2010 META – ANALYSIS OF THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON LOCAL FIRMS IN DEVELOPING AND TRANSITION COUNTRIES SUGGESTS THAT FOREIGN INVESTMENT ROBUSTLY INCREASES LOCAL PRODUCTIVITY GROWTH . THE COMMITMENT TO DEVELOPMENT INDEX RANKS THE "DEVELOPMENT-FRIENDLINESS" OF RICH COUNTRY INVESTMENT POLICIES. • CHINA FDI IN CHINA, ALSO KNOWN AS RFDI (RENMINBI FOREIGN DIRECT INVESTMENT), HAS INCREASED CONSIDERABLY IN THE LAST DECADE, REACHING $59.1 BILLION IN THE FIRST SIX MONTHS OF 2012, MAKING CHINA THE LARGEST RECIPIENT OF FOREIGN DIRECT INVESTMENT AND TOPPING THE UNITED STATES WHICH HAD $57.4 BILLION OF FDI. • INDIA FOREIGN INVESTMENT WAS INTRODUCED IN 1991 UNDER FOREIGN EXCHANGE MANAGEMENT ACT(FEMA ) DRIVEN BY THEN FINANCE MINISTER MANMOHAN SINGH AS SINGH SUBSEQUENTLY BECAME THE PRIME MINISTER, THIS HAS BEEN ONE OF HIS TOP POLITICAL PROBLEMS, EVEN IN THE CURRENT TIMES. INDIA DISALLOWED OVERSEAS CORPORATE BODIES (OCB) TO INVEST IN INDIA. 8. • UNITED STATES BROADLY SPEAKING, THE U.S. HAS A FUNDAMENTALLY OPEN ECONOMY AND LOW BARRIERS TO FOREIGN DIRECT INVESTMENT. U.S. FDI TOTALED $194 BILLION IN 2010. 84% OF FDI IN THE
  • 3. U.S. IN 2010 CAME FROM OR THROUGH EIGHT COUNTRIES: SWITZERLAND, THE UNITED KINGDOM, JAPAN, FRANCE, GERMANY, LUXEMBOURG, THE NETHERLANDS, AND CANADA. A 2008 STUDY BY THE FEDERAL RESERVE BANK OF SAN FRANCISCO INDICATED THAT FOREIGNERS HOLD GREATER SHARES OF THEIR INVESTMENT PORTFOLIOS IN THE UNITED STATES IF THEIR OWN COUNTRIES HAVE LESS DEVELOPED FINANCIAL MARKETS, AN EFFECT WHOSE MAGNITUDE DECREASES WITH INCOME PER CAPITA. COUNTRIES WITH FEWER CAPITAL CONTROLS AND GREATER TRADE WITH THE UNITED STATES ALSO INVEST MORE IN U.S. EQUITY AND BOND MARKETS. • CANADA FOREIGN DIRECT INVESTMENT BY COUNTRY AND BY INDUSTRY ARE TRACKED BY STATICS CANADA FOREIGN DIRECT INVESTMENT ACCOUNTED FOR CAD$634BN IN 2012. CANADA ECLIPSES THE US IN THIS IMPORTANT ECONOMIC MEASURE. GLOBAL FDI INFLOWS AND OUTFLOWS ARE TABULATED BY STATISTICS CANADA. 9. FDI IN INDIA • INDIA HAS BEEN RANKED AT THE SECOND PLACE IN GLOBAL FOREIGN DIRECT INVESTMENTS IN 2010 AND WILL CONTINUE TO REMAIN AMONG THE TOP FIVE ATTRACTIVE DESTINATIONS FOR INTERNATIONAL INVESTORS DURING 2010-12 PERIOD, ACCORDING TO UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD) IN A REPORT ON WORLD INVESTMENT PROSPECTS TITLED, 'WORLD INVESTMENT PROSPECTS SURVEY 2009-2012'. • THE 2010 SURVEY OF THE JAPAN BANK FOR INTERNATIONAL COOPERATION RELEASED IN DECEMBER 2010, CONDUCTED AMONG JAPANESE INVESTORS, CONTINUES TO RANK INDIA AS THE SECOND MOST PROMISING COUNTRY FOR OVERSEAS BUSINESS OPERATIONS. 10. • A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14. • According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010. However, it is ranked the 2nd most attractive destination following China in the next three years. • Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more Canadian firms are now focusing on India as an investment destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010. 11. FDI IN RETAIL FINE POINTS OF PROPOSED FDI IN RETAIL: Govt allowed 51% FDI in multi brand retail and increased FDI limit in single brand retail from 49% to 100%. This is right now put on the back burner due to opposition from the political parties. Following are some of the points are the fine points of the FDI in retail. FDI is not likely under the automatic route implying that FIPB approval on case by case basis. Minimum Investment to be done is $100 million. 50% of the investment should be done in improving the back end infrastructure. 30% of all raw materials have to be procured from the small and medium enterprises. Permission to set retail stores only in cities with a minimum population of 10 lakhs. Govt has the first right to procure material from the farmers. 12. THANK YOU 2012 India’s Foreign Direct Investment Current Status, Issues and Policy Recommendations Ankur Pandey; IM-2K8007 Purvi Yadav; IM-2K8-75 Guided by: Ms. Navneet Bhatia International Institute of Professional Studies, DAVV 4/23/2012 India’s Foreign Direct Investment: Current Status, Issues and Policy RecommendationsAbstract:Foreign Direct Investment (FDI) as an important driver of growth. It is an important source ofnon debt financial resources for country for economic development. Besides it is a means ofachieving technical knowhow and employment generation of employment. However, many areof the view that FDI is a big threat to sovereignty of host and domestic business houses. Fasterexploitation of natural resources for profit may deprive host from such resources in long run.Midst of debate on pros and cons of FDI, world economy has observed a phenomenal change involume and pattern of FDI. There is clearly an intense global competition of FDI. India is notbehind this global race of attracting foreign investment. India emerged as an attractive FDIdestination in services but has failed to evolve a manufacturing hub which has greater economicbenefit. FDI though one of the important sources of financing the economic development, but notis not a solution for poverty eradication, unemployment and other economic ills. India needs amassive investment to achieve the goals of vision 20-20. Policy makers need to ensuretransparency and consistency in policy making along with comprehensive long termdevelopment strategy.Key words: Foreign Direct Investment (FDI), analysis of investments in India, flow of FDI,policy recommendation.IntroductionForeign Direct Investment (FDI) is now regarded as an important driver of growth.Emerging Market Economies (EMEs) look upon FDI as one the easiest means to fulfill theirfinancial, technical, employment generation and competitive efficiencyrequirements. Gradually they also realized that substantial economic growth isinevitable without global integration of business process. This created opportunities forlocational advantages and thus facilitated strategic alliances, joint ventures and collaborationsover R & D.The world economy has observed a phenomenal change in volume and pattern ofFDI flow from developed nations to EMEs in 1980s and 1990s compared to earlierdecades. The hostile attitude of developing nations regarding multinationals investment hasbecome
  • 4. generous during this transition period. FDI was fostered by liberalization and market-based reforms in EMEs. The financial sector deregulation and reforms in the industrial policyfurther paved the way for global investments.There is clearly an intense global competition for FDI. India has emerged as thesecond most attractive destination for FDI after China and ahead of the US, Russia and Brazil. Inview of these facts, the present paper takes stock of current status of FDI in India, aims to findreasons for comparatively lesser flow of FDI and suggest measures to boost flow of FDI to India.2|Page Literature ReviewIt is universally acknowledged that FDI inflow offers many benefits to an economy. UNCTAD(1999) reported that Transnational Corporations (TNCs) can complement local developmentefforts by (i) increasing financial resources for development; (ii) boost export competiveness;(iii) generate employment and strengthening the skill base; (iv) protecting the environment tofulfill commitment towards social responsibility; and (v) enhancing technological capabilitiesthrough transfer, diffusion and generation. However, Te Velde, (1999) has rightly reported thatin the absence of pro-active government policies there are risk that TNCs may actually inhibittechnological development in a host country. Borensztein, et. al. (1998) reveals that FDI has anet crowding in effect on domestic private and public investment thus advancing overalleconomics growth. Crowding in effects of FDI varies with regions. There has been strongevidence of crowding-in in Asia and strong net crowding out effect in Latin America (Agosinand Mayer, 2000).By and large, studies have found a positive links between FDI and growth. However, FDI hascomparatively lesser positive links in least developed economies, thereby suggesting existence of“threshold level of development” (Blomstrom and Kokka, 2003 and Blomstrom et. al., 1994).Athreye and Kapur (2001) emphasized that since the contribution of FDI to domestic capital isquite small, growth-led FDI is more likely than FDI-led growth. Dua and Rasheed (1998)indicted that the Industrial production in India had a unidirectional positive Granger-Casualimpact on inward FDI flows. They also concluded that economics activity is an importantdeterminant of FDI inflows in India and not vice-versa. Tseng and Zebregs (2002) reported thateven in case of China causality between market size/growth and magnitude of FDI holds true.There is global race for attracting FDI, but how much it would contribute to host country’seconomics development is to be assessed. Developing countries need to have reached a certainlevel of educational, technological and infrastructure development before being able to benefitfrom a foreign presence in their markets. Blomstrom et. al., (1994) have rightly observed that,the host country must be capable of absorbing the new technology manifested in FDI. Anadditional factor that may prevent a country from reaping the full benefits of FDI is imperfectand underdeveloped financial markets (OECD 2002). India appears to be well placed in terms ofreaping benefits because it has relatively well developed financial sector, strong industrial baseand critical mass of well educated workers (Rajan et. al., 2008).Research MethodologyObjective of the StudyThe present study has been undertaken with a conduct empirical analysis of status of FDI inIndia and made some policy recommendation to boost flow of FDI to India. Thus the objectivesof the study can be enumerated as follows: To analyze the pattern and direction of FDI flow in India. To identify factors those are responsible for comparatively lesser flow of FDI. To identify reasons for regional imbalances in terms of flow of FDI. To review FDI policy of India3|Page To address various issue and concern relating to FDI. To make policy recommendation to improve the level of FDI.Nature and Source of DataThe present study is of analytical nature and makes use of secondary data. The relevantSecondary data are collected from various publications of Government of India, Reserve Bank ofIndia and World Investment Report 2009 Published by UNCTAD etc.Period of study and Data AnalysisThe reference period is restricted from 2000 to 2009. To have an empirical idea about the statusof FDI in India trend analysis has been conducted. For this purpose parameter such as FDI equityinflows country-wise, sector-wise, region-wise and foreign technology approval and transferfrom different country to different sector have been taken into consideration. An attempt has alsobeen made to present composition of capital inflows in recent years. Ratios such as Net FDIFlows, FDI as a percentage of GDP, FDI as a percentage of Gross Fixed Capital Formation, FDIas percentage of Gross Fixed Investment and FDI per head are used to present better picture offlow of FDI in the country.Result and DiscussionFDI is now regarded as one of the key indicators of economic health. Thus, there is a global raceto attract foreign funds through this route. India too is not behind in this race. Investors areshowing their growing confidence in the immediate and medium term prospects of the Indianeconomy. This section of the paper aims to conduct an indepth analysis of pattern and directionof flow of FDI in India.Status of FDI in IndiaVarious studies have projected India among the top 5 favoured destination for FDI. CumulativeFDI equity inflows has been Rs.5,54,270 crore (1,27,460 Million US$) for the period 1991-2009.This is attributed to contribution from service sector, computer software, telecommunication, realestate etc. India’s 83% of cumulative FDI is contributed by nine countries while remaining 17per cent by rest of the world. Country-wise, FDI inflows to India are dominated by Mauritius (44percent), followed by the Singapore (9 per cent), United States (8 percent) and UK (4 percent)(Table 1). Countries like Singapore, USA, and UK etc. invest in India mainly in service, power,telecommunication, fuels, electric equipments, food processing sector.4|Page Table 1: Share of top investing countries FDI Equity InflowsSource: Government of India (GOI) (2009). FDI Statistics, Ministry of Commerce & Industry, Department ofIndustrial Policy and Promotion.Though India has observed a remarkable rise in the flow of FDI over the last few years, itreceives comparatively much lesser FDI than China. Even smaller economies in Asia such asHong Kong, Mauritius and Singapore are much ahead of India in terms of FDI inflows(UNCTAD, WIR, 2007). This is largely due to India’s economic policy of protecting domesticenterprise and its dependence on domestic demand as compared to above mentioned NewlyIndustrialized Asian Economies.There is a positive link between FDI and India’s growth story. India has been observing aconsistent growth in net FDI flow. Ratio of FDI Inflow to Gross Capital Formation has improvedfrom 1.9 per cent during the period 1990-2000 to 9.6 per cent in the year 2008. Similarly ratio ofFDI Outflow to Gross Capital Formation also improved from 0.1 per cent during 1999-200 to 4.1per cent by the year 2008. This seems to be impressive when compared with corresponding datafor China, South Asia, Asia and Oceania, Developing Economies and even whole world. NetFDI flow to China is reported to much more than India in absolute term (Table 2 and Table 3).5|Page
  • 5. Table 2: FDI Overview of Select Years6|Page Table 3: FDI Sector wise for selected YearsFDI stock of India has also registered a consistent growth over the period of study. Net FDI stockfor the period 1990-2000 was 1533 Million US$ which rose to 61523 Million US$. However, netFDI stock of China is about 4 time than that of India. India’s inward FDI stock to GDP ratioimproved from 0.5 per cent for the 1990-2000 to 9.9 per cent by the year 2008. Similarly, ratio ofoutward FDI Stock to GDP for the corresponding period has registered a consistent rise and wasat the level of 5 per cent in the year 2008 (Table 3).FIPB Route has been the most important source of FDI inflow for India and has been reported atcumulative 1,23,508 Million US$ since 1991. For the period 1991- 2000 and 2001-2009 FDIinflows though this FIPB route was 15,483 Million US$ and 1,08,025 US Million $ respectivelywhich is seven time than previous decade. However, due to liberalization in economic policy ofthe government other routes of FDI are also becoming popular. For the corresponding periodFDI inflow of reinvested earning has been 34,718 Million US$, which is about one-fifth of thetotal FDI inflow so far. This may be attributed to government initiatives of providing special taxbenefits and other facilities for reinvestment of earnings. Trends of FDI and FII in India havebeen cyclical for the period under study (Diagram 1). For the financial year 2008- 09 FDI growthwas only 1% while for the financial year 2009-10 FDI growth was negative i.e. (-25%) due toglobal financial crisis followed by world wide recession (Table 4). Global financial crisis led toexcess pressure on international liquidity which was responsible for FII’s movement to south.Gradually FII are gaining confidence in Indian economy with economic recovery world wide.7|Page Table 4: Modes of FDI Sector wise8|Page Diagram 1: Yearly FDI modes and amountDiagram 2: Trend of FDI inflows and FII in IndiaSource: Government of India (GOI) (2009). FDI Statistics, Ministry of Commerce & Industry,Department of Industrial Policy and Promotion.9|Page Sector-wise FDI inflowsSector-wise classification of FDI is essential to understand better structure and direction offoreign investment in the country.Service sector has been the highest contributor of FDI inflow to India (22%) followed bycompute software and hardware (9%), telecommunication (8%), housing and real estate (8%),construction activities and power (7%), (Table 5).Net inward FDI into India remained buoyant during April-June of 2009-10 as manufacturingsector continued to attract most part of FDI (19.2 per cent), followed by real estate activities(15.6 per cent) and financial services (15.4 per cent). This trend reversal could be attributed torelatively better macroeconomic performance of India during 2008-09, continuing liberalisationmeasures to attract FDI and positive sentiments of global investors about the growth potential ofEMEs, including India.Diagram 3: Sector wise cumulative inflows (1990-91 to 2009-10)Source: Government of India (GOI) (2009). FDI Statistics, Ministry of Commerce & Industry, Department ofIndustrial Policy and Promotion.India evolved as one of the most favoured destination for investment in the service sector due tolow cost wages and wide demand-supply gap in financial services particularly in banking,insurance and telecommunication. Gradually India has become important centre for back-officeprocessing, call centers, technical support, medical transcriptions, knowledge processoutsourcing (KPOs), financial analysis and business processing hub for financial services andinsurance claims. However due to increased completion, rising wages and other costs has causedIndian firms to face tough times.10 | P a g e Geographical Distribution of FDI inflowsBalanced geographical distribution of FDI inflows could have been instrumental in achievingsustainable growth. However, there seems to wide concentration of FDI inflows around MumbaiRegion (36%) followed by New Delhi Region (19%), Karnataka (6%), Gujarat (6 %), TamilNadu (5%) and Andhra Pradesh (4%), (Diagram 3). It is alarming that these regions receive 77%of FDI equity inflow while rest of India accounts for only 23%. Lack of proper initiative fromthe various state governments is responsible for wide disparities of foreign investments. Thesestates are also backward in terms of skilled manpower and infrastructure.Diagram 4: Geographical Distribution of FDI Inflows: April 2000 to December 2009(Cumulative)Foreign Technology TransfersCumulative foreign technology transfer so far has been 8,080 during the period 1991 to 2009.USA contributes 1832 technical collaboration followed by Germany 1,115, Japan 879, U.K. 874,Italy 488 and other counties 2,892 (Diagram 4). 52% of foreign technology transfer to India isconcentrated to five sectors only while 48% to other sectors (Diagram 5). Five statesMaharashtra, Tamil Nadu, Gujarat, Karnataka and Haryana have the credit of 45% of thetechnology transfers to India (Diagram 6)11 | Page Daigram 5: Country-Wise foreign technology approvalsDiagram 6: Sector –wise foreign technology transfer approvals12 |Page Diagram 7: Geographical Distribution of foreign Technology TransferMaharashtra Region attracts FDI in energy, transportation, services, telecommunication andelectrical equipment. Delhi and NCR attracts FDI inflows in telecommunications, transportation,electrical equipment (including software) and services. While Haryana emerged as a preferreddestination for electrical equipment, transportation and food processing, Tamil Nadu has beensuccessful in attracting FDI in automotive related and auto components sector. Andhra Pradeshand Karnataka emerged as a popular destination for software, computer hardware andtelecommunication. India’s rural areas such as Orissa has also been successful in attracting FDIin securing large Greenfields FDI projects in bauxite, mining, aluminum & automotive facilities.Review of FDI’s PolicyThe Government of India (GoI) has been selective in opening various sectors for FDI. Graduallydifferent sectors were opened for investment in FDI with varying rates of sectoral caps. GoI istrying best to introduce simple and transparent FDI policy. The policy seems to reduce regionaldisparities, protect the interest of small retailers and health hazard of its citizens due to foreigninvestment. The area which are of strategic importance are not opened for FDI under automaticroute.However, the GoI has taken number of measures to boost FDI inflow. Besides, allowing FDI innew sectors, the need of multiple approvals from government and regulatory agencies that existsin certain sector has been given up. FDI upto 100 per cert is allowed under automatic route inmost sectors and no
  • 6. approval is required either from government or RBI. Investors are onlyrequired to notify within 30 days to concerned regional RBI office. In some sector such as air13 | P a g e transportation services there is cap of 49% (no restriction for NRI investment), and FDI ininsurance sector though under automatic route there is a cap of 49%. FDI is not permitted inretail trade (except single brand product with a cap of 51% only), lottery, gambling and atomicenergy is not permitted.The government has also broadened list of sector for automatic route. In the New IndustrialPolicy, all industrial undertakings are exempt from licensing except for Atomic Energy, Railwaytransport, distillation and brewing of alcoholic drinks, cigars and cigarettes, manufacturedtobacco substitutes, Industrial explosives hazardous, chemicals, drugs and pharmaceuticals andthose reserved for the small scale sector (Annexure I and II of Manual on FDI in India, 2003).The project should not be located within 25 kilometers of a city with a population of more thanone million as per 1991 Population Census. The Government has substantially liberalised theprocedures for obtaining an Industrial License. The application in form IL-FC should be filedwith the SIA. Approvals normally granted within 6-8 weeks. An Industrial undertaking exemptedfrom licensing needs only to file information in the Industrial Entrepreneurs Memorandum(IEM) with the SIA, which will issue an acknowledgement. No further approvals are required.Given the federal structure of India, states are also partners in the economic reforms of thecountry. So many states are simplifying the rules and procedures for setting up and operating theindustrial units. Single Window System is now in existence in most of the states for grantingapproval to set up industrial units. Moreover, with a view to attract foreign investors in theirstates, many of them are offering incentive packages in the form of various tax concessions,capital and interest subsidies, reduced power tariff, land at low cost etc.Foreign Investment through GDRs/ADRs, Foreign Currency Convertible Bonds (FCCBs) aretreated as FDI. Indian companies are allowed to raise equity capital in the international marketthrough the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. Anapplicant company seeking Government’s approval in this regard should have a consistent trackrecord for good performance (financial or otherwise) for a minimum period of 3 years. Thiscondition can be relaxed for infrastructure projects such as power generation,telecommunication, petroleum exploration and refining, ports, airports and roads. There is norestriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group ofcompanies in a financial year.The Reserve Bank of India, through its regional offices, accords automatic approval to allindustries for foreign technology collaboration agreements subject to (i) the lump sum paymentsnot exceeding US $ 2 Million; (ii) royalty payable being limited to 5 per cent for domestic salesand 8 per cent for exports, subject to a total payment of 8 per cent on sales over a 10 year period;and (iii) the period for payment of royalty not exceeding 7 years from the date of commencementof commercial production, or 10 years from the date of agreement, whichever is earlier.14 | P a g e FDI issues and Policy RecommendationIndia is striving hard to achieve a growth rate of 10%. Improving the level of productivity can beinstrumental in achieving this target as growth rate is positively related to rates of return. Theavailable data on FDI reveals that India’s volume of FDI has increase largely due to Merger andAcquisitions (M&As) rather than large Greenfields projects. M&As not necessarily implyinfusion of new capital into a country if it is through reinvested earnings and intra-companyloans. Business friendly environment must be created on priority to attract large Greenfieldsprojects. Regulations should be simplified so that realization ratio is improved (Percentage ofFDI approvals to actual flows). To maximize the benefits of FDI persistently India should alsofocus on developing human capital and technology.India has failed to evolve as inward FDI manufacturing destination which is sweetest of allsources of FDI. Manufacturing investment has potentiality to develop ancillary industries also.There is a wide spread under employment in agriculture. Manufacturing sector has greater scopeof low end, labour intensive manufacturing jobs for unskilled population when compared withservice sector. It is widely reported in large number of studies that India lags behind in terms ofbusiness environment (ranked 72 of 82 countries by EIU, 2007) which is not conducive for doingbusiness. These factors are acute labour market rigidities, lack of world class ports, airports, roadand on an average 6-7 hours of power cuts. Other problems are that of norms of registeringproperty, protection of investors, excessive bureaucracy, lack of rationale tax structure,competition rules and time taken in enforcing contracts (1420 days with a cost average cost oftwo-fifth of claim). The issues of geographical disparities of FDI in India need to address on priority. India is afederal country consisting of States and Union Territories. States are also partners in theeconomic reforms. Many states are making serious efforts to simplify regulations for setting upand operating the industrial units. In order to attract foreign investors in their states, many ofthem are offering packages in the form of tax rebates, capital and interest subsidies, reducedpower tariff, etc. However, efforts by many state governments are still not encouraging. Even thestate like West Bengal which was once called Manchester of India attracts only 1.2% of FDIinflow in the country. West Bengal, Bihar, Jharkhand, Chhattisgarh are endowed with richminerals but due to lack of proper initiatives by governments of these states, they fail to attractFDI.India is striving hard to achieve a growth rate of 10%. Improving the level of productivitycan be instrumental in achieving this target as growth rate is positively related to rates of return.The available data on FDI reveals that India’s volume of FDI has increase largely due to Mergerand Acquisitions (M&As) rather than large Greenfields projects. M&As not necessarily implyinfusion of new capital into a country if it is through reinvested earnings and intracompany loans.Business friendly environment must be created on priority to attract large Greenfields projects.Regulations should be simplified so that realization ratio is improved (Percentage of FDIapprovals to actual flows). To maximize the benefits of FDI persistently India should also focuson developing human capital and technology.Mauritius contributes about 44% of FDI inflow in the country. Such a high level of FDIcontributed by a low tax country like Mauritius indicates that all is not well. Mauritius haveagreement with India on avoidance of double taxation. There are likely chances that many MNCs15 | P a g e may be first dummy companies in Mauritius before investing in India. This is not good forfinancial stability of the country and is also a reason for loss to state exchequers.FDI can be instrumental in developing rural economy. There is abundance opportunity inGreenfield Projects. But the issue of land acquisition and steps taken to protect local interests bythe various state governments are not encouraging. MOU Arecelor-Mittal controversy is one ofthe best examples of such disputes.India has a huge pool of working population. However, due to poor quality primary educationand higher
  • 7. there is still an acute shortage of talent. This factor has negative repercussion ondomestic and foreign business. FDI in Education Sector is less than 1%. Given the status ofprimary and higher education in the country, FDI in this sector must be encouraged. However,appropriate measure must be taken to ensure quality. The issues of commercialization ofeducation, regional gap and structural gap have to be addressed on priority.Indian economy is largely agriculture based. There is plenty of scope in food processing,agriculture services and agriculture machinery. FDI in this sector should be encouraged. Theissue of food security, interest of small farmers and marginal farmers need cannot be ignored forthe shake of mobilization of foreign funds for development.India has a well developed equity market but does not have a well developed debt market. Stepsshould be taken to improve the depth and liquidity of debt market as many companies may preferleveraged investment rather than investing their own cash. Looking for debt funds in their owncountry invites exchange rate risk.In order to improve technological competitiveness of India, FDI into R&D should be promoted.Various issues pending relating to Intellectual Property Rights, Copy Rights and Patents need tobe addressed on priority. Special package can be also instrumental in mobilizing FDI in R&D.Though service sector is one of the major sources of mobilizing FDI to India, plenty of scopeexists. Still we find the financial inclusion is missing. Large part of population still doesn’t havebank accounts, insurance of any kind, underinsurance etc. These problems could be addressed bymaking service sector more competitive. Removal of sectoral cap in insurance is still awaited.ConclusionFDI can complement local development by boosting export competitiveness, employmentgeneration and strengthening skills, transfer-diffusion-generation of technology and enhancedfinancial resources for development. According to report Global Competitive Index (2007-08)published by World Economic Forum (WEF), India is has been ranked at 48 out of 131countries. It is worth noting that India is ranked poorer than economies of Asia with which Indiacompetes i.e. China (34th rank), Taiwan & Singapore (14th rank) and Thailand (28th rank). Indiais attracting a low level of FDI largely due to poor business environment prevailing in thecountry. The investment climate in India has become much friendlier today than previousdecades. Infrastructure is being developed and FDI policy is being liberalized to improve the16 | P a g e situation. However, a lot is to be done if we want to emerge as one of the major export orientedmanufacturing hub.Investors are showing their growing confidence in the immediate and medium term prospects ofIndian Economy. FDI off course might be one of the important sources of financing theeconomic development. However, one should not forget that FDI alone is not a solution forpoverty eradication, unemployment and other economic ills. India needs a massive investment toachieve the goals of vision 20-20. Policy makers need to ensure transparency and consistency inpolicy making along with comprehensive long term development strategy.RefrencesAsher, M.G. (2007). “India’s Rising Role in Asia”, http://www.spp.nus.edu.sg/wp/wp0701b.pdfAthreye, S. and S. Kapur (2001). “Private Foreign Investment in India: Pain or Panacea?” TheWorld Economy, 24, pp.399-424.Agosin, M. and R. Mayer (2000). “Foreign investment in Developing Countries: Does it Crowdin Domestic Investment?” Discussion Paper No.146, UNCTAD, Geneva.Blomström, M. and A. Kokko (2003). “The Economics of Foreign Direct InvestmentIncentives”, Working Paper No.9489, NBER.Borensztein, E., J. De Gregorio and J. Lee (1995). “How does Foreign Direct Investment AffectGrowth”, Journal of International Economics, 45, pp.115-135.Blomström, M., R. Lipsey and M. Zejan (1994). “Host Country Competition and TechnologyTransfer by Multinationals”, Weltwirtschaftliches Archiv, 130, pp.521-533.Daisuke, H. (2008). “Japan’s Outward FDI in the Era of Globalization”, in R.S. Rajan, R. Kumarand N. Vargill, eds. (2008) "New Dimensions of Economic Globalization: Surge of Outward FDIfrom Asia", World Scientific Press, Chapter 4.Dua, P. and A.I. 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World Investment Report 1999, New York and Geneva: Oxford UniversityPress.World Economic F