Foreign Direct Investment in India


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Foreign Direct Investment in India

  1. 1. Economics Project FDI in India Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Finance minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political problems, even in the current (2012) election. India disallowed overseas corporate bodies (OCB) to invest in India. Submitted by: Pratyush Kumar BFIA 1-B 75244
  2. 2. Acknowledgement I student of BFIA 1-B of SSCBS express my deep sense of gratitude and sincere thanks to our respective teacher Ms Kirti Mahajan ma’am for her valuable guidance, interest and constant encouragement for the completion of this project. I am also very grateful to my classmates and my siblings for their support and coordination for completing this project. Without them I would have not been able to complete my project. Page | 2
  3. 3. Declaration I certify that the project work entitled “FDI in India” submitted to SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES is a record of an original work done under the guidance of Ms Kirti Mahajan ma’am and any content that is not my own has been quoted and attributed appropriately. We also declare that this project work has not performed the basis for the award of any degree or diploma/fellowship and similar project if any. Name: Pratyush Kumar BFIA 1-B (75244) Page | 3
  4. 4. Overview I student of SSCBS have made this project on the topic “FDI in India”. I am going to enhance our knowledge on the current scenario of FDI in India, and the recent debate over this issue. Through my research I wanted to find out the role of FDI in the Indian economy. I have also studied about the history of FDI and how different countries have adapted this for their development. I choose this topic because this has been a very hot issue of debate in the parliament and it is going to affect a lot of things in Indian economy. I have collected information from internet and newspapers. I am the only member to prepare and present this project. This project is kind of a summary to the happenings in couple of years regarding the issue whether FDI should be allowed in India or not. Page | 4
  5. 5. Foreign direct investment Foreign direct investment (FDI) is a direct investment into production or business in a country by a 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. Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just to building new facilities As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 per cent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements Types 1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it. 2. Platform FDI platform FDI is generally defined as investment and production in a host country where the output is largely sold in third markets, not the parent or host-country markets. 3. 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. Page | 5
  6. 6. 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 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  soft loan or loan guarantees  free land or land subsidies  relocation & expatriation  infrastructure subsidies  R&D support  derogation from regulations (usually for very large projects) Importance and barriers to FDI The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has not been matched by similar increases in per-capita income and access to the basics of modern life, like education, health care, or - for too many - even sanitary water and waste disposal. FDI has proven — when skilfully applied — to be one of the fastest means of, with the highest impact on, development. However, given its many benefits for both investing firms and hosting countries, and the large jumps in development were best practices followed, eking out advances with even moderate long-term impacts often has been a struggle. Recently, research and practice are finding ways to make FDI more assured and beneficial by continually engaging with local realities, adjusting contracts and reconfiguring policies as blockages and openings emerge. Page | 6
  7. 7. Foreign direct investment and the developing world A recent 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. Difficulties limiting FDI Foreign direct investment may be politically controversial or difficult because it partly reverses previous policies intended to protect the growth of local investment or of infant industries. When these kinds of barriers against outside investment seem to have not worked sufficiently, it can be politically expedient for a host country to open a small "tunnel" as focus for FDI. The nature of the FDI tunnel depends on the country's or jurisdiction's needs and policies. FDI is not only restricted to developing countries. For example, lagging regions in the France, Germany, Ireland, and USA have for a half century maintained offices to recruit and incentivize FDI primarily to create jobs. China, starting in 1979, promoted FDI primarily to import modernizing technology, and also to leverage and uplift its huge pool of rural workers. To secure greater benefits for lesser costs, this tunnel need be focused on a particular industry and on closely negotiated, specific terms. These terms define the trade-offs of certain levels and types of investment by a firm, and specified concessions by the host jurisdiction. The investing firm needs sufficient cooperation and concessions to justify their business case in terms of lower labour costs, and the opening of the country's or even regional markets at a distinct advantage over (global) competitors. The hosting country needs sufficient contractual promises to politically sell uncertain benefits—versus the better-known costs of concessions or damage to local interests. The benefits to the host may be: creation of a large number of more stable and higher-paying jobs; establishing in lagging areas centres of new economic development that will support attracting or strengthening of many other firms without costly concessions; hastening the transfer of premium-paying skills to the host country's work force; and encouraging technology transfer to local suppliers. Concessions to the investor commonly offered include: tax exemptions or reductions; construction or cheap lease-back of site improvements or of new building facilities; and large local infrastructures such as roads or rail lines; More politically difficult (certainly for less-developed regions) are concessions which change policies for: reduced taxes and tariffs; curbing protections for smallerbusiness from the large or global; and laxer administration of regulations on labour safety and environmental preservation. Often these impolitic "cooperation" are covert and subject to corruption. Page | 7
  8. 8. Foreign direct investment in India Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Finance minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political problems, even in the current (2012) election. India disallowed overseas corporate bodies (OCB) to invest in India. Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010– 2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year. Current supermarkets Existing Indian retail firms such as Spencer's, Food world Supermarkets Ltd, Nilgiri's and ShopRite support retail reform and consider international competition as a blessing in disguise. They expect a flurry of joint ventures with global majors for expansion capital and opportunity to gain expertise in supply chain management. Spencer's Retail with 200 stores in India, and with retail of fresh vegetables and fruits accounting for 55 per cent of its business claims retail reform to be a win-win situation, as they already procure the farm products directly from the growers without the involvement of middlemen or traders. Spencer’s claims that there is scope for it to expand its footprint in terms of store location as well as procuring farm products. Foodworld, which operates over 60 stores, plans to ramp up its presence to more than 200 locations. It has already tied up with Hong Kong-based Dairy Farm International. With the relaxation in international investments in Indian retail, India’s Foodworld expects its global relationship will only get stronger. Competition and investment in retail will provide more benefits to consumers through lower prices, wider availability and significant improvement in supply chain logistics. Page | 8
  9. 9. India retail reforms Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets, to sell multiple products from different brands directly to Indian consumers. The government of Manmohan Singh, prime minister, announced on 24 November 2011 the following:  India will allow foreign groups to own up to 51 per cent in "multi-brand retailers", as supermarkets are known in India, in the most radical pro-liberalization reform passed by an Indian cabinet in years;  single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up from the previous cap of 51 percent;  both multi-brand and single brand stores in India will have to source nearly a third of their goods from small and medium-sized Indian suppliers;  All multi-brand and single brand stores in India must confine their operations to 53-odd cities with a population over one million, out of some 7935 towns and cities in India. It is expected that these stores will now have full access to over 200 million urban consumers in India;  multi-brand retailers must have a minimum investment of US$100 million with at least half of the amount invested in back end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing to considerably reduce the post-harvest losses and bring remunerative prices to farmers;  The opening of retail competition will be within India's federal structure of government. In other words, the policy is an enabling legal framework for India. The states of India have the prerogative to accept it and implement it, or they can decide to not implement it if they so choose. Actual implementation of policy will be within the parameters of state laws and regulations. The opening of retail industry to global competition is expected to spur a retail rush to India. It has the potential to transform not only the retailing landscape but also the nation's ailing infrastructure. A Wall Street Journal article claims that fresh investments in Indian organized retail will generate 10 million new jobs between 2012–2014, and about five to six million of them in logistics alone; even though the retail market is being opened to just 53 cities out of about 8000 towns and cities in India. It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by millions of small retailers, who see large foreign chains as a threat. Traders add huge mark-ups to farm prices, while offering little by way of technical support to help farmers boost their productivity, packaging technology, pushing up retail prices significantly. Analysts said allowing in big foreign retailers would provide an impetus for them to set up modern supply chains, with refrigerated vans, cold storage and more efficient logistics. "I think foreign chains can also bring in humongous logistical benefits and capital," Chandrajit Banerjee, director-general, Page | 9
  10. 10. Confederation of Indian Industry, told Reuters. "The biggest beneficiary would be the small farmers who will be able to improve their productivity by selling directly to large organized players," Mr. Banerjee said. Indian retail reforms on hold According to Bloomberg, on 3 December 2011, the Chief Minister of the Indian state of West Bengal, Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19 votes to the ruling Congress party-led coalition, claimed that India’s government may put the FDI retail reforms on hold until it reaches consensus within the ruling coalition. Reuters reports that this risked a possible dilution of the policy rather than a change of heart. India Today claimed that the resistance to Indian retail reforms is primarily because it has been badly sold, even though it can help fix the exploitation of Indian farmers by the decades-old "Arhtiya" and "Mandi" monopoly system. India Today claims the policy is good for the small Indian farmer and the Indian consumer. Pratap Mehta, president of the Centre for Policy Research, claimed any U-turn or postponement of retail reforms will cause an immense loss of face to the Congress-led central government of Manmohan Singh. The mom-and-pop farmers of India support these reforms. The consumers of India want the reforms. The government has already annoyed those who oppose change and innovation in retail. By putting retail reforms on hold, the government will additionally alienate much larger segment of India's population supporting FDI. So they will now have the worst of both worlds, claims Mehta. Deepak Parekh, Ashok Ganguly and other economic policy leaders of India, on 4 December 2011, called placing investment and innovation in retail on hold for the sake of vested interests as unfair and detrimental to vast majority in India. They urged farmers, consumers and the common people to raise their voice against this false drama of apprehension against investment and modernizing trade in organized retailing. They called upon Indians to come out and strongly support progressive measures and reforms with the same spirit and gusto with which we take the liberties to criticize policies or issues we do not appreciate. Anand Sharma, India's Commerce and Industry Minister, after a meeting of all political parties on 7 December 2011 said, "The decision to allow foreign direct investment in retail is suspended till consensus is reached with all stakeholders.” On 19 Feb, 2013 Tamil Nadu became the first state in the country to stoutly resist MNC ‘invasion’ into the domestic retail sector. In Chennai, Tamil Nadu CMDA authorities placed a seal on the massive warehouse spreading across 7 acres that had reportedly been built for one of the world’s leading multinational retail giants, Wal-Mart. Page | 10
  11. 11. Single-brand retail reforms approved On January 11, 2012, India approved increased competition and innovation in single-brand retail. The reform seeks to attract investments in operations and marketing, improve the availability of goods for the consumer, encourage increased sourcing of goods from India, and enhance competitiveness of Indian enterprises through access to global designs, technologies and management practices. In this announcement, India requires single-brand retailer, with greater than 51% foreign ownership, to source at least 30% of the value of products from Indian small industries, village and cottage industries, artisans and craftsmen. Mikael Ohlsson, chief executive of IKEA, announced IKEA is postponing its plan to open stores in India. He claimed that IKEA's decision reflects India’s requirements that singlebrand retailers such as IKEA source 30 percent of their goods from local small and mediumsized companies. This was an obstacle to IKEA's investment in India, and that it will take IKEA some time to source goods and develop reliable supply chains inside India. Ikea announced that it plans to double what it sources from India already for its global product range, to over $1 billion a year, within three years. IKEA in the near term plans to focus expansion instead in China and Russia, where such restrictions do not exist. Controversy over allowing foreign retailers A horticultural produce retail market in Kolkata, India; produce loss in these retail formats is very high for perishables Critics of the Indian retail reforms announcement are making one or more of the following points:  Independent stores will close, leading to massive job losses. Wal-Mart employs very few people in the United States. If allowed to expand in India as much as Wal-Mart has expanded in the United States, few thousand jobs may be created but millions will be lost.  Wal-Mart’s efficiency at supply chain management leads to "direct" procurement of goods from the supplier. In addition to eliminating the "middle-man", due to its status as the leading retailer, suppliers of goods also bend over backwards to drop prices in order Page | 11
  12. 12.  The small retailer and the middle man present in the retail industry plays a large part in supporting the local economy, since they typically themselves procure goods and services from the area they have their retail shops in. This leads to increased economic activity, and wealth redistribution. With large, efficient retailers, the corporate profits are not spent in the areas where they're generated, hence killing the local economy.  Wal-Mart will lower prices to dump goods, get competition out of the way, become a monopoly, and then raise prices. We have seen this in the case of the soft drinks industry. Pepsi and Coke came in and wiped out all the domestic brands.  India doesn't need foreign retailers, since homegrown companies and traditional markets may be able to do the job.  Work will be done by Indians, profits will go to foreigners.  Remember East India Company. It entered India as a trader and then took over politically.  There will be sterile homogeneity and Indian cities will look like cities anywhere else.  The government hasn't built consensus.  The government claims modern retail will create 4 million new jobs. This cannot be true because Wal-Mart, with over 9000 stores worldwide, has only 2.1 million employees. Supporters claim none of these objections has merit. They claim:  Organized retail will need workers. Wal-Mart employs 1.4 million people in United States alone. With United States population of about 300 million, and India's population of about 1200 million, if Wal-Mart-like retail companies were to expand in India as much as their presence in the United States, and the staffing level in Indian stores kept at the same level as in the United States stores, Wal-Mart alone would employ 5.6 million Indian citizens. WalMart has a 6.5% market share of the total United States retail. Adjusted for this market share, the expected jobs in future Indian organized retail would total over 85 million. In addition, millions of additional jobs will be created during the building of and the maintenance of retail stores, roads, cold storage centers, software industry, electronic cash registers and other retail supporting organizations. Instead of job losses, retail reforms are likely to be massive boost to Indian job availability.  KPMG - one of the world's largest audit companies - finds that in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post China opening its retail to foreign and domestic innovation and competition. In absolute terms, China experienced the creation of 26 million new jobs within 9 years; post China announcing FDI retail reforms. Additionally, contrary to some concerns in China, post retail reforms, the number of traditional small retailers also grew by 30% over 5 years.  India needs trillions of dollars to build its infrastructure, hospitals, housing and schools for its growing population. Indian economy is small, with limited surplus capital. Indian government is already operating on budget deficits. It is simply not possible for Indian investors or Indian government to fund this expansion, job creation and growth at the rate Page | 12
  13. 13. India needs. Global investment capital through FDI is necessary. Beyond capital, Indian retail industry needs knowledge and global integration. Global retail leaders, some of which are partly owned by people of Indian origin, can bring this knowledge. Global integration can potentially open export markets for Indian farmers and producers. Wal-Mart, for example, expects to source and export some $1 billion worth of goods from India every year, since it came into Indian wholesale retail market.  Wal-Mart, Carrefour, Tesco, Target, Metro, Coop are some of over 350 global retail companies with annual sales over $1 billion. These retail companies have operated for over 30 years in numerous countries. They have not become monopolies. Competition between Wal-Mart-like retailers has kept food prices in check. Canada credits their very low inflation rates to Wal-Mart-effect. Anti-trust laws and state regulations, such as those in Indian legal code, have prevented food monopolies from forming anywhere in the world. Price inflation in these countries has been 5 to 10 times lower than price inflation in India. The current consumer price inflation in Europe and the United States is less than 2%, compared to India's double digit inflation.  The Pepsi and Coke example is meaningless in the context of Indian beverage market. More competition is lacking because of limited demand. Indian consumer has limited interest in soft drinks. Soft drinks represent less than 5% of Indian beverage market. Indian consumer prefers milk-based, tea and coffee and these account for 90% of Indian beverage market. In these markets, Coca Cola and Pepsi have plenty of competition. The next most important market in India is bottled water that outsells combined soft drink sales of the Pepsi and Coca Cola. Bottled water, milk, coffee and tea market in India are big markets, and have plenty of domestic brands, European brands like Nestle, as well as Pepsi and Coca Cola. Organized retail too will have numerous brands and strong competition.  Comparing 21st century to 18th century is inappropriate. Conditions today are not same as in the 18th century. India wasn't a democracy then, it is today. Global awareness and news media were not the same in 18th century as today. Consider China today. It has over 57 million square feet of retail space owned by foreigners, employing millions of Chinese citizens. Yet, China hasn't become a vassal of imperialists. It enjoys respect from all global powers. Other Asian countries like Malaysia, Taiwan, Thailand and Indonesia see foreign retailers as catalysts of new technology and price reduction; and they have benefitted immensely by welcoming FDI in retail. India too will benefit by integrating with the world, rather than isolating itself.  With 51% FDI limit in multi-brand retailers, nearly half of any profits will remain in India. Any profits will be subject to taxes, and such taxes will reduce Indian government budget deficit. Many years ago, China adopted the retail reform policy India has announced; China allowed FDI in its retail sector. It has taken FDI-financed retailers in China between 5 to 10 years to post profits, in large part because of huge investments they had to make initially. Like China, it is unlikely foreign retailers will earn any profits in India for the first 5 to 10 years.  States have a right to say no to retail FDI within their jurisdiction. States have the right to add restrictions to the retail policy announced before they implement them. Thus, they can place limits on number, market share, style, diversity, homogeneity and other factors to suit Page | 13
  14. 14. their cultural preferences. Finally, in future, states can always introduce regulations and India can change the law to ensure the benefits of retail reforms reach the poorest and weakest segments of Indian society, free and fair retail competition does indeed lead to sharply lower inflation than current levels, small farmers get better prices, jobs created by organized retail pay well, and healthier food becomes available to more households.  Inbuilt inefficiencies and wastage in distribution and storage account for why, according to some estimates, as much as 40% of food production doesn't reach consumers. Fifty million children in India are malnourished. Food often rots at farms, in transit, or in antiquated state-run warehouses. Cost-conscious organized retail companies will avoid waste and loss, making food available to the weakest and poorest segment of Indian society, while increasing the income of small farmers. Wal-Mart, for example, since its arrival in Indian wholesale retail market, has successfully introduced "Direct Farm Project" at Haider Nagar near Malerkotla in Punjab, where 110 farmers have been connected with Bharti Wal-Mart for sourcing fresh vegetables directly, thereby reducing waste and bringing fresher produce to Indian consumers.  Indian small shops employ workers without proper contracts, making them work long hours. Many unorganized small shops depend on child labor. A well-regulated retail sector will help curtail some of these abuses.  Organized retail has enabled a wide range of companies to start and flourish in other countries. For example, in the United States, an organized retailer named Whole Foods has rapidly grown to annual revenues of $9 billion by working closely with farmers, delighting customers and caring about the communities it has stores in.  The claims that there is no consensus are without merit. About 10 years ago, when opposition formed the central government, they had proposed retail reforms and suggested India consider FDI in retail. Retail reforms discussions are not new. More recently, retail reforms announced evolved after a process of intense consultations and consensus building initiative. In 2010, the Indian government circulated a discussion paper on FDI retail reforms. On July 6, 2011, another version of the discussion paper was circulated by the central government of India. Comments from a wide cross-section of Indian society including farmers' associations, industry bodies, consumer forums, academics, traders' associations, investors, economists were analyzed in depth before the matter was discussed by the Committee of Secretaries. By early August 2011, the consensus from various segments of Indian society was overwhelming in favor of retail reforms. The reform outline was presented in India's Rajya Sabha in August 2011. The announced reforms are the result of this consensus process.  A study by Global Insights research found that modern retailers such as Wal-Mart create jobs directly, indirectly and induced effects. In Dallas-Fort Worth area of the United States, with a population of about 2 million people, Global Insights found that Wal-Mart alone had helped create about 6,300 new net jobs with an average salary of over $21,000 each. For India's urban population of over 400 million, an average salary of less than $2,100 per year, this scales to over 12 million new jobs. Other multi-brand retailers, such as Mitsukoshi of Page | 14
  15. 15. Japan, employ a much higher number of sales support employee per store, than Walmart, to suit local consumer culture. Opposition to retail reforms Within a week of retail reform announcement, Indian government has faced a political backlash against its decision to allow competition and 51% ownership of multi-brand organized retail in India. The opposition claims the entry of organized retailers would lead to their dominance that would decimate local retailers and force millions of people out of work. Mamata Banerjee, the chief minister of West Bengal and the leader of the Trinamool Congress, announced her opposition to retail reform, claiming “Some people might support it, but I do not support it. You see America is America … and India is India. One has to see what one’s capacity is.” Other state who’s Chief Ministers have either personally announced opposition or announced reluctance to implement the retail reforms: Tamil Nadu, Uttar Pradesh, Bihar and Madhya Pradesh. Chief Ministers of many states have not made a personal statement in opposition or support of India needing retail reforms. Gujarat, Kerala, Karnataka and Rajasthan are examples of these states. A Wall Street Journal article reports that in Uttar Pradesh, Uma Bharti, a senior leader of the opposition Bharatiya Janata Party (BJP), threatened to "set fire to the first Wal-Mart store whenever it opens" with her colleague Sushma Swaraj busy tweeting up a storm of misinformation about how Wal-Mart allegedly ruined the U.S. economy. On 1 December 2011, an India-wide "bandh" (close all business in protest) was called by political parties opposing the retail reform. While many organizations responded, the reach of the protest was mixed. The Hindu, widely circulated newspaper in India, claimed the opposition's call for a nationwide shutdown on 1 December 2011, in protest of retail reform received a mixed response. The political parties opposing the retail reforms physically disrupted and forced India's parliament to adjourn again on Friday 2 December 2011. The Indian government refused to cave in, in its attempt to convince through dialogue that retail reforms are necessary to protect the farmers and consumers. Indian parliament has been dysfunctional for the entire week of November 28, 2011 over the opposition to retail reforms. Support for retail reforms In a pan-Indian survey conducted over the weekend of 3 December 2011, overwhelming majority of consumers and farmers in and around ten major cities across the country support the retail reforms. Over 90 per cent of consumers said FDI in retail will bring down prices and offer a wider choice of goods. Nearly 78 per cent of farmers said they will get better prices for their produce from multiformat stores. Over 75 per cent of the traders claimed their marketing resources will continue to be needed to push sales through multiple channels, but they may have to accept lower margins for greater volumes. Page | 15
  16. 16. Farmer groups Various farmer associations in India have announced their support for the retail reforms. For example:  Shriram Gadhve of All India Vegetable Growers Association (AIVGA) claims his organization supports retail reform. He claimed that currently, it is the middlemen commission agents who benefit at the cost of farmers. He urged that the retail reform must focus on rural areas and that farmers receive benefits. Gadhve claimed, "A better cold storage would help since this could help prevent the existing loss of 34% of fruits and vegetables due to inefficient systems in place." AIVGA operates in nine states including Maharashtra, Andhra Pradesh, West Bengal, Bihar, Chattisgarh, Punjab and Haryana with 2,200 farmer outfits as its members.  Bharat Krishak Samaj, a farmer association with more than 75,000 members says it supports retail reform. Ajay Vir Jakhar, the chairman of Bharat Krishak Samaj, claimed a monopoly exists between the private guilds of middlemen, commission agents at the sabzi mandis (India's wholesale markets for vegetables and farm produce) and the small shopkeepers in the unorganized retail market. Given the perishable nature of food like fruit and vegetables, without the option of safe and reliable cold storage, the farmer is compelled to sell his crop at whatever price he can get. He cannot wait for a better price and is thus exploited by the current monopoly of middlemen. Jakhar asked that the government make it mandatory for organized retailers to buy 75% of their produce directly from farmers, bypassing the middlemen monopoly and India's sabzi mandi auction system.  Consortium of Indian Farmers Associations (CIFA) announced its support for retail reform. Chengal Reddy, secretary general of CIFA claimed retail reform could do lots for Indian farmers. Reddy commented, “India has 600 million farmers, 1,200 million consumers and 5 million traders. I fail to understand why political parties are taking an anti-farmer stand and worried about half a million brokers and small shopkeepers.”  Prakash Thakur, the chairman of the People for Environment Horticulture & Livelihood of Himachal Pradesh, announcing his support for retail reforms claimed FDI is expected to roll out produce storage centers that will increase market access, reduce the number of middlemen and enhance returns to farmers. Highly perishable fruits like cherry, apricot, peaches and plums have a huge demand but are unable to tap the market fully because of lack of cold storage and transport infrastructure. Sales will boost with the opening up of retail. Even though India is the second-largest producer of fruits and vegetables in the world, its storage infrastructure is grossly inadequate, claimed Thakur.  Sharad Joshi, founder of Shetkari Sangathana (farmers’ association), has announced his support for retail reforms. Joshi claims FDI will help the farm sector improve critical infrastructure and integrate farmer-consumer relationship. Today, the existing retail has not been able to supply fresh vegetables to the consumers because they have not invested in the backward integration. When the farmers' produce reaches the end consumer directly, the farmers will naturally be benefited. Joshi feels retail reform is just a first step of needed agricultural reforms in India, and that the government should pursue additional reforms. Page | 16
  17. 17. Suryamurthy, in an article in The Telegraph, claims farmer groups across India do not support status quo and seek retail reforms, because with the current retail system the farmer is being exploited. For example, the article claims:  Indian farmers get only one third of the price consumers pay for food staples, the rest is taken as commissions and markups by middlemen and shopkeepers  For perishable horticulture produce, average price farmers receive is barely 12 to 15% of the final price consumer pays  Indian potato farmers sell their crop for Rs. 2 to 3 a kilogram, while the Indian consumer buys the same potato for Rs. 12 to 20 a kilogram. Economists and entrepreneurs Many business groups in India are welcoming the transformation of a long-protected sector that has left Indian shoppers bereft of the scale and variety of their counterparts in more developed markets. B. Muthuraman, the president of the Confederation of Indian Industry, claimed the retail reform would open enormous opportunities and lead to much-needed investment in cold chain, warehousing and contract farming. Organized retailers will reduce waste by improving logistics, creating cold storage to prevent food spoilage, improve hygiene and product safety, reduce counterfeit trade and tax evasion on expensive item purchases, and create dependable supply chains for secure supply of food staples, fruits and vegetables. They will increase choice and reduce India’s rampant inflation by reducing waste, spoilage and cutting out middlemen. Fresh investment in organized retail, the supporters of retail reform claim will generate 10 million new jobs by 2014, about five to six million of them in logistics alone. Organized retail will offer the small Indian farmer more competing venues to sell his or her products, and increase income from less spoilage and waste. A Food and Agricultural Organization report claims that currently, in India, the small farmer faces significant losses post-harvest at the farm and because of poor roads, inadequate storage technologies, inefficient supply chains and farmer's inability to bring the produce into retail markets dominated by small shopkeepers. These experts claim India's post-harvest losses to exceed 25%, on average, every year for each farmer. Unlike the current monopoly of middlemen buyer, retail reforms offer farmers access to more buyers from organized retail. More buyers will compete for farmers produce leading to better support for farmers and to better bids. With less spoilage of staples and agricultural produce, global retail companies can find and provide additional markets to Indian farmers. Not only do these losses reduce food security in India, the study claims that poor farmers and others loose income because of the waste and inefficient retail. Over US$50 billion of additional income can become available to Indian farmers by preventing post-harvest farm losses, improving transport, proper storage and retail. Organized retail is also expected to initiate infrastructure development creating millions of rural and urban jobs for India’s growing population. One study claims that if Page | 17
  18. 18. these post-harvest food staple losses could be eliminated with better infrastructure and retail network in India, enough food would be saved every year to feed 70 to 100 million people over the year. Amartya Sen, the Indian born Nobel prize winning economist, in a December 2011 interview claims foreign direct investment in multi brand retail can be good thing or bad thing depending on the nature of the investment. Quite often, claims Professor Sen, FDI is a good thing for India. Allowed in some states, banned in others The governments of some states, particularly Congress-ruled states have said they will allow foreign supermarkets to open in their state:  Andhra Pradesh, Assam, Delhi, Haryana, Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman & Diu and Dadra and Nagar Haveli, will allow foreign retailers.  The Chief Minister of the state of Maharashtra - the state with the biggest GDP in India and home to its financial capital Mumbai - has also welcomed the retail reform. Other states, particularly BJP-ruled states have said they will not allow foreign supermarkets to open in their state, these are:  West Bengal, Gujarat, Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Orissa.  The Chief Ministers of Haryana and Punjab claim that the announced retail reforms will never benefit farmers in their states. Supporters of retail reform who have voiced the need to promote organized retail include Chief Ministers of several states of India, several belonging to political parties that have no affiliation with Congress-led central government of India. The list includes the Chief Ministers of Maharashtra, Andhra Pradesh, Tamil Nadu and Gujarat. In a report submitted earlier in 2011, these Chief Ministers urged the Prime Minister to prioritize reforms to help promote organized retail, shorten the retail path from farm to consumer, allow organized retail to buy direct from farmers at remunerative produce prices, and reduce farm to retail costs. Similarly, the Chief Minister of Delhi has come out in support of the retail reform, as have the Chief Ministers of the two farming states of Haryana and Punjab in north India. Tarun Gogoi, the Chief Minister of Assam, an eastern state in India, announcing his support to the retail reform, claimed "this will go a long way in bringing about a sea change in rural economy. The decision will boost agriculture and allied sectors, manufacturing, logistics, integrated cold chains, refrigerated transportation and food processing facilities in a big way." Criticizing the BJP-organized opposition, Gogoi claimed that these parties, who had just a few years ago dubbed opening up retail as good for India, are now singing a different tune. Page | 18
  19. 19. SECTOR SPECIFIC CONDITIONS ON FDI PROHIBITED SECTORS. FDI is prohibited in: (a) Retail Trading (except single brand product retailing) (b) Lottery Business including Government /private lottery, online lotteries, etc. (c) Gambling and Betting including casinos etc. (d) Chit funds (e) Nidhi company (f) Trading in Transferable Development Rights (TDRs) (g) Real Estate Business or Construction of Farm Houses (h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes (i) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities. PERMITTED SECTORS In the following sectors/activities, FDI up to the limit indicated against each sector/activity is allowed, subject to applicable laws/ regulations; security and other conditionalities. In sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to applicable laws/ regulations; security and other conditionalities. Wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement; Page | 19
  20. 20. S no. 1 2 3 3.1 3.2 4 Sector/Activity Agriculture & Animal Husbandry a) Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions; b) Development and production of Seeds and planting material; c) Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture, under controlled conditions; and d) services related to agro and allied sectors Note: Besides the above, FDI is not allowed in any other agricultural sector/activity Tea Plantation Tea sector including tea plantations Note: Besides the above, FDI is not allowed in any other plantation sector/activity Mining and Exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores; subject to the Mines and Minerals (Development & Regulation) Act, 1957. Coal and Lignite (1) Coal & Lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to the provisions of Coal Mines (Nationalization) Act, 1973 (2) Setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing. Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities Mining and mineral separation of titanium bearing minerals & ores, its value addition and integrated activities subject to sectoral regulations and the Mines and Minerals (Development and Regulation Act 1957) Petroleum & Natural Gas Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural gas/pipelines, LNG Regasification infrastructure, market study and formulation and Petroleum refining in the private sector, subject to the existing sectoral policy and regulatory framework in the oil marketing sector and the policy of the Government on private participation in exploration of % of FDI Cap/Equity Entry Route 100% Automatic 100% Government 100% Automatic 100% Automatic 100% Automatic 100% Government 100% Automatic Page | 20
  21. 21. 5 6 oil and the discovered fields of national oil companies Petroleum refining by the Public Sector Undertakings 49% Government (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs. Manufacture of items reserved for production in Micro and Small Enterprises (MSEs) FDI in MSEs (as defined under Micro, Small And Meduim Enterprises Development Act, 2006 (MSMED, Act 2006)) will be subject to the sectoral caps, entry routes and other relevant sectoral regulations. Any industrial undertaking which is not a Micro or Small Scale Enterprise, but manufactures items reserved for the MSE sector would require Government route where foreign investment is more than 24% in the capital. Such an undertaking would also require an Industrial License under the Industries (Development & Regulation) Act 1951, for such manufacture. The issue of Industrial License is subject to a few general conditions and the specific condition that the Industrial Undertaking shall undertake to export a minimum of 50% of the new or additional annual production of the MSE reserved items to be achieved within a maximum period of three years. The export obligation would be applicable from the date of commencement of commercial production and in accordance with the provisions of section 11 of the Industries (Development & Regulation) Act 1951. DEFENCE Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act 1951 26% Government 26% (FDI, NRI & PIO investments and portfolio investment) Government 49% (FDI, NRI & PIO investments and portfolio investment) 49% (FDI, NRI & PIO investments and portfolio investment) Within this limit, FDI component not to exceed 20% Government SERVICES SECTOR 7 Broadcasting 7.1 Terrestrial Broadcasting FM (FM Radio) subject to such terms and conditions as specified from time to time by Ministry of Information and Broadcasting for grant of permission for setting up of FM Radio Stations Cable Network, subject to Cable Television Network Rules, 1994 and other conditions as specified from time to time by Ministry of Information and Broadcasting Direct–to-Home subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting 7.2 7.3 Government Page | 21
  22. 22. 7.4 FDI limit in (HITS) Broadcasting Service is subject to such guidelines/terms and conditions as specified from time to time by Ministry of Information and Broadcasting. 74% (total direct and indirect foreign investment including portfolio and FDI) Automatic up to 49% Government route beyond 49% and up to 74% 8 Setting up hardware facilities such as uplinking, HUB etc. Setting up of Up-linking HUB/ Teleports 49% (FDI & FII) Government Up-linking a Non-News & Current Affairs TV Channel Up-linking a News & Current Affairs TV Channel subject to the condition that the portfolio investment from FII/ NRI shall not be ―persons acting in concert‖ with FDI investors, as defined in the SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Print Media 100% Government 26% (FDI & FII) Government 9.1 Publishing of Newspaper and periodicals dealing with news and current affairs Government 9.2 Publication of Indian editions of foreign magazines dealing with news and current affairs 9.3 Publishing/printing of Scientific and Technical Magazines/specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting. Publication of facsimile edition of foreign newspapers Civil Aviation 26% (FDI and investment by NRIs/PIOs/FII) 26% (FDI and investment by NRIs/PIOs/FII) 100% 100% Government 8.1 8.2 8.3 9 9.4 10 10.1 Government Government The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and Repair organizations; Flying training institutes; and Technical training institutions. For the purposes of the Civil Aviation sector: (i) ―Airport‖ means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facilities and includes aerodrome as defined in clause (2) of section 2 of the Aircraft Act, 1934; (ii) "Aerodrome" means any definite or limited ground or water area intended to be used, either wholly or in part, for the landing or departure of aircraft, and includes all buildings, sheds, vessels, piers and other structures thereon or pertaining thereto; (iii)"Air transport service" means a service for the transport by air of persons, mails or any other thing, animate or inanimate, for any kind of remuneration whatsoever, whether such service consists of a single flight or series of flights; Page | 22
  23. 23. 10.2 11 11.1 11.2 11.3 11.4 (iv) "Air Transport Undertaking" means an undertaking whose business includes the carriage by air of passengers or cargo for hire or reward; (v) "Aircraft component" means any part, the soundness and correct functioning of which, when fitted to an aircraft, is essential to the continued airworthiness or safety of the aircraft and includes any item of equipment; (vi) "Helicopter" means a heavier-than -air aircraft supported in flight by the reactions of the air on one or more power driven rotors on substantially vertical axis; (vii) "Scheduled air transport service" means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public; (viii) ―Non-Scheduled Air Transport service‖ means any service which is not a scheduled air transport service and will include Cargo airlines; (ix) ―Cargo airlines‖ would mean such airlines which meet the conditions as given in the Civil Aviation Requirements issued by the Ministry of Civil Aviation; (x) "Seaplane" means an aeroplane capable normally of taking off from and alighting solely on water; (xi) ―Ground Handling‖ means (i) ramp handling , (ii) traffic handling both of which shall include the activities as specified by the Ministry of Civil Aviation through the Aeronautical Information Circulars from time to time, and (iii) any other activity specified by the Central Government to be a part of either ramp handling or traffic handling. Airports Greenfield projects 100% Automatic 100% Automatic up Existing projects to 74% Government route beyond 74% Air Transport Services Scheduled Air Transport Service/ Domestic 49% FDI Automatic Scheduled Passenger Airline (100% for NRIs) Non-Scheduled Air Transport Service 74% FDI Automatic up (100% for NRIs) to 49% Government route beyond 49% and up to 74% Helicopter services/seaplane services requiring 100% Automatic DGCA approval Other services under Civil Aviation sector Ground Handling Services subject to sectoral regulations and security clearance 74% FDI (100% for NRIs) Maintenance and Repair organizations; flying training institutes; and technical training institutions 100% Automatic up to 49% Government route beyond 49% and up to 74% Automatic Page | 23
  24. 24. 12 12.1 12.2 13 13.1 13.2 13.3 14 14.1 14.2 14.3 14.4 15 Satellites – Establishment and operation Satellites – Establishment and operation, subject to the sectoral guidelines of Department of Space/ISRO Private Security Agencies Telecom Services Investment caps and other conditions for specified services are given below. However, licensing and security requirements notified by the Department of Telecommunications will need to be complied with for all services. (i) Telecom services (a) ISP with gateways (b) ISP‘s not providing gateways i.e. without gate-ways (both for satellite and marine cables) Note: The new guidelines of August 24, 2007 Department of Telecommunications provide for new ISP licenses with FDI up to 74%. (c) Radio paging (d) End-to-End bandwidth (a) Infrastructure provider providing dark fibre, right of way, duct space, tower (IP Category I) (b)Electronic Mail (c) Voice Mail TRADING Cash & Carry Wholesale Trading/ Wholesale Trading (including sourcing from MSEs) E-commerce activities Test marketing of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing. Single Brand product retail trading Pharmaceuticals Greenfield Existing Companies 74% Government 49 % Government 74% Automatic up to 49% Government route beyond 49% and up to 74% Automatic up to 49% Government route beyond 49% and up to 74% 74% 100% Automatic up to 49% Government route beyond 49% 100% Automatic 100% 100% Automatic Government 100% Government 100% 100% Automatic Government There is more data but it’s not wise to put up all of that. *source- Circular 1 of 2012 - Consolidated FDI Policy Page | 24
  25. 25. Year wise FDI equity inflows Country - Wise FDI Equity Inflows Page | 25
  26. 26. Sector - Wise Distribution of FDI Equity Inflows Page | 26
  27. 27. Bibliography The Indian Express The Financial Express Page | 27