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)
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.
FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI.
Foreign direct investment in India is allowed through joint ventures, preferential allotments, capital markets, and financial collaborations. The advantages of foreign direct investment in India are that it has led to transfer of technology, generation of new opportunities for employment, and infrastructure development. FDI from Mauritius to India is the highest in comparison with all the other countries that invest in India. FDI from Mauritius to India is the highest due to the special treatment of tax that is given in India to the investments that come through Mauritius.
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.
What is FDI..?
Foreign direct investment (FDI)-
It is a direct investment into production or
business in a country by an individual or company
in another country.
It can be either by buying a company in the target
country or by expanding operations of an existing
buisness in that country.
Ranked 2nd most favored destination for foreign
investments after China
India ranks among the top 12 producers of manufacturing value
In textiles, the country is ranked 4th after China, USA and Italy.
In electrical machinery and apparatus, it is ranked 5th.
6th position in the basic metals category
7th in chemicals and chemical products
10th in leather, leather products, refined petroleum products and
12th in machinery and equipment and motor vehicles.
Foreign Direct Investment (FDI) up to 100% is
permitted in all manufacturing activities
India in the
ed for Small
$3.4 billion of
on an average
every year from
2000 to 2008
67% of China’s
total FDI comes
to 37% in case of
Acc to FICCI
India can attract
$12billion of FDI
India’s share in outward FDI stock is negligible
(Chemicals, Automobiles, Food Processing, Electrical &
Electronic Equipment, Metals and Machinery Equipment)
Sectors like Industrial Machinery, Agricultural
Machinery, Ship Building, Medical & Surgical Devices
and Computer Hardware
Rather India imports these items.
FDI Inflows for SelectedSectorsin India(Jan
2000 to September 2008)
Sector FDI Inflows ($ million)
Ship Building 59.15
Industrial Machinery 283.77
Agricultural Machinery 148.37
Earth Moving Machinery 134.51
Medical and Surgical Appliances 140.77
Computer hardware 99.7
A concrete and
should aim at
Cut ting down
in the project
India's large service industry accounts for more
than 50% of the country's GDP.
It makes up more than 25% Employment
Service sectors like telecommunication, IT enabled
services, insurance, air transport are becoming
Introduction of ‘Manmohanomics’ in 1991
Growing presence of transnational corporations and
the technological progress.
Liberalization of many service sectors activities
(telecom, transport, finance etc.)
Attracted $3.12 billion FDI in the first seven
months of 2009-10
22 per cent of the total FDI inflows of $17.64 billion
in the April-October for service sector
In 2008-09, attracted the maximum FDI worth
USD 6.11 billion.
FDI Policy in Services Sector
100% FDI is permitted for many service sectors
(Real estate, Construction, Hotels, tourism, films,
IT - enabled services, Consultancy, Medical,
Education, Advertising, etc)
Restricted sectors in Services
Atomic Energy, Lottery Business, Gambling and
Betting, Business of Chit Fund, and any
activity/sector that is not opened to private sector
Besides the above, FDI is not allowed in
CurrentissueswithFDI in ServicesSector
Very weak linkages of service sector with the
Indian economy (only few cities)
Requires highly skilled workers
Employee Welfare in time of crisis
Allowed up to
19% to the GDP
To connect 66,800 habitations
To construct 1,46,000Km of new rural roads
To Upgrade and modernize 1,94,000Km of existing rural
To provide corpus of Rs. 8000 crore RIDF(rural
infrastructure development fund)
Low share of organized retailing
Increase in disposable income and customer
aspiration or demand.
Increase in expenditure for luxury items.
Generate huge employment
Increased investment in technology
The huge tax revenue generated.
The consumer gains from the wide variety of choices and a
more diversified basket.
The indirect benefits like better roads, online marketing,
expansion of telecom sector etc. Will give a ‘big push’ to
other sectors like agriculture, small and medium size
Second-most favoured destination for FDI in the
Norms to allow 100% FDI in Mar 2005 .
100 acre criterion to 25 acre criterion.
India produces an estimated 2 million new
Presence in the list of top 500 sectors complied by
US taking into consideration of the growth rate.
Real estate investments in India yield huge
Raised to $120 million.
Major source of employment.
Third largest earner of foreign exchange.
Private investments through public private
100% FDI permitted.
Foreign tourist arrivals are expected to grow to 10
million by 2010-12
Estimated that tourism in India could contribute
Rs.8,50,000 crores to the GDP by 2020
Highest import duty on imported liquor used in
Service Tax on Tour Operators
Inland Air Travel Tax
FDI Policies in India(overview)
FDI Policy permits FDI up to 100 % from foreign/NRI
investor without prior approval in most of the sectors. Known as
the automatic route.
The FDI policies in INDIA are formulated on 4 parameters:
-Increased capital flow.
-Access to international markets.
Hence 100% inflow was allowed in sectors like Power, Renewable
energy , Agriculture, mining etc.
Also sectors like insurance and defence have a cap of 26% and the
banking sector has cap of 49%.
Someof the MajorInvesting Countries
FDI may provide better access to latest technologies for the
FDI provides compitition to the local industries which intern
make them compitant. Hence product quality improvement.
The increased flow of FDI in a country has given a major boost
to the country's economy .
Hence measures must be taken in order to ensure that the flow
of FDI in the country to continue to progess in all perspectives.