foreign capital

Ahmedabad

AMITY GLOBALBUSINESS SCHOOL

Foreign CapitalForeign CapitalKalika BansalAmity Global Business School, Ahmedabad.

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Need for Foreign CapitalNeed for Foreign Capital

Sustaining a high level of investment

The technological gapExploitation of natural resourcesUndertaking the initial riskDevelopment of basic economic

infrastructureThe foreign exchange gap

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ComponentsComponents

Two main forms

◦Private foreign investment Direct Portfolio

◦Foreign aid

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Foreign AidForeign Aid

Includes “all official grants and concessional loans, which are broadly aimed at transferring resources from developed to less developed nations on developmental or income distributional grounds.

Lower rLonger maturity periodForeign Governments, IMF, World Bank

etc.4

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India’ policy towards Foreign India’ policy towards Foreign CapitalCapital

No discrimination between foreign and domestic capital

Full opportunities to earn profits

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Reasons for sharp increase Reasons for sharp increase in FDIin FDI

Among the developing countries, India has now emerged as the second most preferred destination for FDI

India’s share (2.3% in 05 to 4.5% in 06)

Expansion in domestic activityPositive investment climateProgressive liberalisation of the FDI

policy Simplification of proceduresGrowth in financial services,

information technology etc. 6

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Sectoral CompositionSectoral CompositionLargest recipient- Electronic equipment

and computer software (17.54% = one – sixth)

Followed by services sector (12.69%)Telecommunication (10.39%) Transportation (9.31%)Power and oil refinery (7.45%)Chemicals (5.79%)Food processing industry (3.12%)Drugs and pharmaceuticals (2.19%)Metallurgical industries (2.14%) 7

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Determinants of FDI Determinants of FDI inflowsinflows: :

◦market size (income levels and population)

◦extent of urbanization◦quality of infrastructure◦ policy factors such as ◦tax rates,◦ investment incentives, ◦ performance requirements.

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Impact of FDI inflows: Impact of FDI inflows: some issuessome issues

Generation of Output Employment Generation Balanced Regional DevelopmentExport Expansion Technological spilloversAugmenting Capital Stock

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FDI - Growth relationship is a two way relationship◦Some times FDI projects actually

crowd out domestic investment with their well-known brand names and other resources.

◦Indian evidence suggests that regulations have prompted foreign enterprises in undertaking exports.

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India as a destination for India as a destination for F.D.I. F.D.I.

Investors are generally upbeat about the country, but somewhat hesitant to invest because of a perception that India has done less than other emerging markets to reduce fundamental obstacles to investment. Companies operating in India continue to face serious business constraints.

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This is partly because the government has deliberately moved to liberalize the economy at a measured pace.

FDI caps or restrictions continue to apply in a few key sectors.

Meanwhile, a variety of other factors--such as

excessive red tape, an opaque and complex tax system,

and concerns about corruption--can

dampen investors' enthusiasm. 12

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Other types of regulations also continue to hamper the flow of investment.

For example, foreign companies are required to obtain a "no-objection" certificate from their existing joint-venture partner if they wish to set up a new venture in the same line of business in India.

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The World Bank ranks India 121st out of 181 countries as a place to start a business.

However, India's high level of bureaucracy dampens interest from companies, which like to respond quickly to market forces, and slows down the growth of the private sector

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Besides direct corporate income taxes, firms are subject to indirect taxes such as

excise duties and levies from individual states and municipalities. The indirect tax system is frighteningly complicated.

Corruption is another major deterrent. India's plethora of red tape and slow

legal system create an environment that fosters corruption.

India ranked 85th out of 180 countries in Transparency International's Corruption Perceptions Index 2008. 15

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What is the government What is the government doing about it? doing about it? Successive Indian governments

have repeatedly emphasised their openness to foreign investment.

In 2008, the FDI limit in state-run refineries has been increased;

the FDI cap in the mining sector has been removed;

and foreign airlines have been given permission to buy stakes in certain domestic civil-aviation companies. 16

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raising the upper limit on FDI in private insurance companies from 26% to 49%.

The government is also currently reviewing some aspects of FDI policy to ease bureaucratic controls and to define FDI rules more systematically.

Most foreign investment has been brought under the automatic-approval facility.

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This means that companies need not obtain permission from the government or the central bank before investing;

they simply file documents ex post facto with the central bank.

The government has promised to decide on proposed FDI projects within 30 days.

The dismantling of this "licence raj" and the computerisation of certain services have helped to decrease corruption by reducing the number of interactions required between the private sector and the government. 18

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AMITY GLOBALBUSINESS SCHOOLKey issues?Key issues?

Capital Flows and Balance of Payments

Displacement of Indigenous production

Extent of technology transfer

Income distribution19