fdi in india

VIVEK COLLEGE OF COMMERCE

CHAPTER-1:

INTRODUCTION

The last two decade of the 20th century witnessed a dramatic world-wide

increase in foreign direct investment (FDI), accompanied by a marked

change in the attitude of most developing countries towards inward FDI. As

against a highly suspicious attitude of these countries towards inward FDI in

the past, most countries now regard FDI as beneficial for their development

efforts and compete with each other to attract it. Such shift in attitude lies in

the changes in political and economic systems that have occurred during the

closing years of the last century.

The wave of liberalisation and globalization sweeping across the world has

opened many national markets for international business. Global private

investment, in most part, is now made by multinational corporations

(MNCs). Clearly these corporations play a major role in world trade and

investments because of their demonstrated management skills, technology,

financial resources and related advantages. Recent developments in global

markets are indicative of the rapidly growing international business. The end

of the 20th century has already marked a tremendous growth in international

investments, trade and financial transactions along with the integration and

openness of international markets.

FDI is a subject of topical interest. Countries of the world, particularly

developing economies, are vying with each other to attract foreign capital to

Foreign Direct Investment in India Page | 1


boost their domestic rates of investment and also to acquire new technology

and managerial skills. Intense competition is taking place among the fund-

starved less developed countries to lure foreign investors by offering

repatriation facilities, tax concessions and other incentives. However, FDI is

not an unmixed blessing. Governments in developing countries have to be

very careful while deciding the magnitude, pattern and conditions of private

foreign investment.

In the 1980s, FDI was concentrated within the Triad (EU, Japan and US).

However, in the 1990s, the FDI flows to developed countries declined, while

those to developing countries increased in response to rapid growth and

fewer restrictions. Most FDI flows continue still to be concentrated in 10 to

15 host countries overwhelmingly in Asia and Latin America. South, East

and Southeast Asia has experienced the fastest economic growth in the

world, and emerged as the largest host region. China is now the largest host

country in the developing world.

However, small markets with low growth rates, poor infrastructure, and high

indebtedness, slow progress in introducing market and private-sector

oriented economic reforms and low levels of technological capabilities are

not attractive to foreign investors.

The remarkable expansion of FDI flows to developing countries had belied

the fear that the opening of central and Eastern Europe and the efforts of the

countries of that region to attract such investment would divert investment



flows from developing countries. The most important factors making

developing countries attractive to foreign investors are rapid economic

growth, privatization programmes open to foreign investors and the

liberalisation of the FDI regulatory framework.

In India, prior to economic reforms initiated in1991, FDI was discouraged

by

Imposing severe limits on equity holdings by foreigners and

Restricting FDI to the production of only a few reserved items.

The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by

Foreign Exchange Management Act [FEMA]), prescribed the detailed rules

in this regard and the firms belonging to this group were known as FERA

firms. All foreign investors were virtually driven out from Indian industries

by FERA. Technology transfer was possible only through the purchase of

foreign technology. However, due to severe limits on royalty payments to

foreigners to reduce foreign exchange use, this option was ineffective.

However, the government granted liberal tax incentives to encourage

indigenous generation of technology by domestic firms. In the absence of

foreign technology, Indian industry suffered both in terms of cost of

production and quality.

The initial policy stimulus to foreign direct investment in India came in July

1991 when the new industrial policy provided, inter alia, automatic approval

for project with foreign equity participation up to 51 percent in high priority



areas. In recent years, the government has initiated the second generation

reforms under which measures have been taken to further facilitate and

broaden the base of foreign direct investment in India. The policy for FDI

allows freedom of location, choice of technology, repatriation of capital and

dividends. As a result of these measures, there has been a strong surge of

international interest in the Indian economy. The rate at which FDI inflow

has grown during the post-liberalisation period is a clear indication that India

is fast emerging as an attractive destination for overseas investors.

Encouragement of foreign investment, particularly for FDI, is an integral

part of ongoing economic reforms in India.

Though India has one of the most transparent and liberal FDI regimes

among the developing countries with strong macro-economic fundamentals,

its share in FDI inflows is dismally low. The country still suffers from

weaknesses and constraints, in terms of policy and regulatory framework,

which restricts the inflow of FDI.

Foreign investment policies in the post-reforms period have emphasized

greater encouragement and mobalisation of non-debt creating private

inflows for reducing reliance on debt flows. Progressively liberal policies

have led to increasing inflows of foreign investment in the country.



CHAPTER-2:

WHAT IS FOREIGN DIRECT INVESTMENT?

FDI is the process whereby residents of one country (the home country)

acquire ownership of assets for the purpose of controlling the production,

distribution and other activities of a firm in another country (the host

country).

IMF Definition

According to the BPM5, FDI is the category of international investment that

reflects the objective of obtaining a lasting interest by a resident entity in one

economy in an enterprise resident in another economy. The lasting interest

implies the existence of a long-term relationship between the direct investor

and the enterprise and a significant degree of influence by the investor on the

management of the enterprise.

UNCTAD Definition

The WIR02 defines FDI as ‘an investment involving a long-term

relationship and reflecting a lasting interest and control by a resident entity

in one economy (foreign direct investor or parent enterprise) in an enterprise

resident in an economy other than that of the FDI enterprise, affiliate

enterprise or foreign affiliate. FDI implies that the investor exerts a

significant degree of influence on the management of the enterprise resident

in the other economy. Such investment involves both the initial transaction

between the two entities and all subsequent transaction between them among



foreign affiliates, both incorporated and unincorporated. Individuals as well

as business entities may undertake FDI.

Flows of FDI comprise capital provided (either directly or through other

related enterprises) by a foreign direct investor to an FDI enterprise, or

capital received from an FDI enterprise by a foreign direct investor. FDI has

three components, viz., equity capital, reinvested earnings and intra-

company loans.

Equity capital is the foreign direct investor’s purchase of share of an

enterprise in a country other than its own.

Reinvested earnings comprise the direct investors share (in proportion

to direct equity participation) of earnings not distributed as dividends

by affiliates, or earnings not remitted to the direct investor. Such

retained profits by affiliates are reinvested.

Intra-company loans or intra-company debt transactions refer to short

or long term borrowing and lending of funds between direct investors

(parent enterprises) and affiliate enterprises.

OECD Benchmark Definition of Foreign Direct Investment (Third

Edition)

FDI reflects the objective of obtaining a lasting interest by a resident entity

in one economy (direct investor) in an entity resident in an economy other

than that of the investor (direct investment enterprise). The lasting interest

implies the existence of a long term relationship between the direct investor



and the enterprise and a significant degree of influence on the management

of the enterprise. Direct investment involves both the initial transaction

between the two entities and all subsequent capital transactions between

them and among affiliated enterprises, both incorporated and

unincorporated.

As is evident from the above definitions, there is a large degree of

commonality between the IMF, UNCTAD and OECD definitions of FDI.

The IMF definition is followed internationally.



CHAPTER-3:

FOREIGN DIRECT INVESTMENT (FDI): THEORITICAL

SETTINGS

Most of the present day underdeveloped countries of the world have set out a

planned programme for accelerating the pace of their economic

development. In a country planning for industrialization and aiming to

achieve a target rate of growth, there is a need for resources. The resources

can be mobilized through domestic as well as foreign sources. So far as, the

domestic sources are concerned, they may not be sufficient to acquire the

fixed rate of growth. Generally domestic savings are less than the required

amount of investment. Also the very process of industrialization calls for

import of capital goods which can not be locally produced. Hence comes the

need for foreign sources. They not only supplement the domestic savings but

also provide the recipient country with extra foreign exchange to buy

imports essential for filling the saving investment gap and foreign exchange

gap.

The means of getting foreign resources available to a developing country are

mainly three:

1. Through export of goods and services

2. External aid

3. Foreign investment



Export of goods and services do contribute to foreign resources but they can

meet only a small part of the total demand for foreign resources.

External Aid from foreign governments and international institutions, by

increasing the rate of home savings and removing the foreign gap allows the

utilization of previously under utilized resources and capacity. But generally

the aid is tied and distorts the allocation of resources. So its use has been on

the decline.

Foreign investment is of following two types.

1. Foreign Direct Investment (FDI) and

2. Portfolio Investment.

Foreign Direct versus Portfolio Investment

By Foreign Direct Investment (FDI) we mean any investment in a foreign

country where the investing party (corporation, firm) retains control over

investment. A direct investment typically takes the form of a foreign firm

starting a subsidiary or taking over control of an existing firm in the country

in question. FDI consists of equity capital, technical and managerial

services, capital equipment and intermediate inputs and legal rights to

patented or secret products, processes or trade marks. It is the direct type of

foreign investment which is associated with multinational corporations

because most of FDI is transferred through firms and remains outside of

ordinary, functioning markets.



FDI can be done in the following ways

1. In order to participate in the management of the concerned enterprise, the

stocks of the existing foreign enterprise can be acquired.

2. The existing enterprise and factories can be taken over.

3. A new subsidiary with 100% ownership can be established abroad.

4. It is possible to participate in a joint venture through stock holdings.

5. New foreign branches, offices and factories can be established.

6. Existing foreign branches and factories can be expanded.

7. Minority stock acquisition, if the objective is to participate in the

management of the enterprise.

8. Long term lending, particularly by a parent company to its subsidiary,

when the objective is to participate in the management of the enterprise.

Portfolio investment, on the other hand, does not seek management control,

but is motivated by profit. Portfolio investment occurs when individual

investors invest, mostly through stockbrokers, in stocks of foreign

companies in foreign land in search of profit opportunities.

FDI flows are usually preferred over other forms of external finance because

they are non-debt creating, non-volatile and their returns depend on the

performance of the projects financed by the investors. FDI also facilitates

international trade and transfer of knowledge, skills and technology. In a

world of increased competition and rapid technological change, their

complimentary and catalytic role can be very valuable.



Superiority of FDI over Other Forms of Capital Inflows

FDI is perceived superior to other types of capital inflows for several

reasons:

1. In contrast to foreign lenders and portfolio investors, foreign direct

investors typically have a longer-term perspective when engaging in a

host country. Hence, FDI inflows are less volatile and easier to sustain at

times of crisis.

2. While debt inflows may finance consumption rather than investment in

the host country, FDI is more likely to be used productively.

3. FDI is expected to have relatively strong effects on economic growth, as

FDI provides for more than just capital. FDI offers access to

internationally available technologies and management know-how, and

may render it easier to penetrate word markets.

A recent United Nations report has revealed that FDI flows are less volatile

than portfolio flows. To quote, “FDI flows to developing and transition

economies in 1998 declined by about 5 percent from the peak in 1997, a

modest reduction in relation to the effects on the other capital flows of the

spread of the Asian financial crisis to global proportions. FDI flows are

generally much less volatile than portfolio flows. The decline was modest in

all regions, even in the Asian economies most affected by the financial

crisis.”

FDI is the appropriate form of external financing for developing countries,

which have less capacity than highly developed economies to absorb

external shocks. Likewise, the evidence supports the predominant view that



FDI is more stable than other types of capital inflows. Moreover, the

volatility of FDI remained exceptionally low in the 1990s, when several

emerging economies were hit by financial crisis.

FDI is widely considered an essential element for achieving sustainable

development. Even former critics of MNCs expect FDI to provide a stronger

stimulus to income growth in host countries than other types of capital

inflows. Especially after the recent financial crisis in Asia and Latin

America, developing countries are strongly advised to rely primarily on FDI,

in order to supplement national savings by capital inflows and promote

economic development.

Macro-economic and Micro-economic Aspects of FDI

In judging the significance of FDI, especially from the view point of

developing countries, it is useful to make a distinction between macro-

economic and micro-economic effects. The former is connected with issues

of domestic capital formation, balance of payments, and taking advantage of

external markets for achieving faster growth, while the latter is connected

with the issues of cost reduction, product quality improvement, making

changes in industrial structure and developing global inter-firm linkages.

In this context, it needs to be recognized that FDI is an aggregate entity, the

sum total of the investments made by many diverse multinationals, each

with its own corporate strategy. The micro-economic effects of the



investment made by one multinational may be quite different from that of

another multinational even if the investments are made in the same industry.

Also, what benefits the local economy will depend on the capabilities of the

host country in regard to technology transfer and industrial restructuring.

Resource-seeking and Market-seeking FDI

Two major types of FDI are typically differentiated: resource-seeking FDI

and market-seeking FDI.

Resource-seeking FDI is motivated by the availability of natural resources in

the host countries. This type of FDI was historically important and remains a

relevant source of FDI for various developing countries. However, on a

world-wide scale, the relative importance of resource-seeking FDI has

decreased significantly.

The relative importance of market-seeking FDI is rather difficult to assess. It

is almost impossible to tell whether this type of FDI has already become less

important due to economic globalization. Regarding the history of FDI in

developing countries, various empirical studies have shown that the size and

growth of host country markets were among the most important FDI

determinants. It is debatable, however, whether this is still true with ongoing

globalization.



Globalisation essentially means that geographically dispersed

manufacturing, slicing up the value chain and the combination of markets

and resources through FDI and trade are becoming major characteristics of

the world economy. Efficiency-seeking FDI, i.e. FDI motivated by creating

new sources of competitiveness for firms and strengthening existing ones,

may then emerge as the most important type of FDI. Accordingly, the

competition for FDI would be based increasingly on cost differences

between locations, the quality of infrastructure and business-related services,

the ease of doing business and the availability of skills. Obviously, this

scenario involves major challenges for developing countries, ranging from

human capital formation to the provision of business-related services such as

efficient communication and distribution systems.

Nature of FDI

Almost all modern (FDI) is carried out by corporations rather than

individuals. Somewhat like portfolio investment, the flows of FDI have

historically been highly concentrated, both in terms of geography and by

industry and at both the investor and receptor poles. Geographically, the

ownership of global stocks of FDI is highly skewed towards only a few

large, high income countries. Each investing country has, whether by

accident or design , tended to direct the major part of its FDI to only a very

few receiving countries; in fact the pattern of global distribution of FDI have

been highly similar to historical relationships based on colonial ties or other

forms of political hegemony.



Viewed industrially, for any given country, FDI generally comes from less

than four or five out of twenty or so major industry groups and inflows into

those same industries in the receptor country.

General attribute of FDI is that it has evoked by type over time. Prior to First

World War, a crude but valid generalization would that a large part of FDI

was in service sector of the host economy (particularly transportation,

power, communication and trading) while most of the rest was of the

“backward vertical integration” type. During the inter-war period, most of

the currently largest manufacturing multinational corporations (MNCs)

made their initial foreign investments, but these horizontal or market

extension types of investments have now become major category.

The fourth recognized characteristic of manufacturing FDI is that it

originates in industries that are technologically intensive, “skill oriented” or

progressive. In addition, the FDI prone industries are typically more

concentrated, have higher advertising outlays per unit of sales and exhibit

above average export propensities. Industries from which FDI tends to

originate display many characteristics associated with oligopoly.

Another universal property of FDI is that it is really a package of

complementary inputs, a collective flow of both tangible and intangible

assets & services.



FDI in Developing Countries

FDI is now increasingly recognized as an important contributor to a

developing country’s economic performance and international

competitiveness.

After the debt-crisis that hit the developing world in early 1980s, the

conventional wisdom quickly became that it had been unwise for countries

to borrow so heavily from international banks or international bond markets.

Rather countries should try to attract non-debt-creating private inflows

(DFI). The financial advantage is that such capital inflows need not be

repaid and that outflow of funds (remittance of profits) would fluctuate with

the cycle of the economy. It has also been widely observed that the structural

adjustment efforts of the 1980s failed to lead to new patterns of sustained

growth in developing countries. In particular, structural adjustment programs

failed to restore private investment to desirable levels. Again it is hoped that

FDI could play an important role; the World Bank observes that FDI can be

an important complement to the adjustment effort, especially in countries

having difficulty in increasing domestic savings.

Against this background of balance of payments problems and low level of

private investment, it is probably not surprising that attitudes in developing

countries towards FDI have shifted. In the 1960s and 1970s many countries

maintained a rather cautious, and sometimes an outright negative position

with respect to FDI. In the 1980s, however the attitudes shifted radically



towards a more welcoming policy stance. This change was not so much due

to new research finding on the impact of FDI but to the economic problems

facing the developing world.

Developing countries are liberalizing their foreign investment regimes and

are seeking FDI not only as a source of capital funds and foreign exchange

but also as a dynamic and efficient vehicle to secure the much needed

industrial technology, managerial expertise and marketing know-how and

networks to improve on growth, employment, productivity and export

performance.

At the global level the flows of FDI and PFI to developing countries have

indeed increased. The average net inflow of FDI in developing countries had

been US$ 11 billion in 1980-86, but in 1987 it started to increase, by 1991

the annual net inflow had risen to US$ 35 billion and by 2004 to US$ 233

billion. The share of developing economies in total inflow of Foreign Direct

Investment in the world has been rising continuously since 1989.



CHAPTER-4:

ADVANTAGES AND DISADVANTAGES OF FDI FOR THE HOST

COUNTRY

Advantages of Foreign Direct Investment

Foreign Direct Investment has the following potential benefits for less

developed countries.

1. Raising the Level of Investment : Foreign investment can fill the gap

between desired investment and locally mobilised savings. Local capital

markets are often not well developed. Thus, they cannot meet the capital

requirements for large investment projects. Besides, access to the hard

currency needed to purchase investment goods not available locally can

be difficult. FDI solves both these problems at once as it is a direct

source of external capital. It can fill the gap between desired foreign

exchange requirements and those derived from net export earnings.

2. Upgradation of Technology : Foreign investment brings with it

technological knowledge while transferring machinery and equipment to

developing countries. Production units in developing countries use out-

dated equipment and techniques that can reduce the productivity of

workers and lead to the production of goods of a lower standard.



3. Improvement in Export Competitiveness : FDI can help the host

country improve its export performance. By raising the level of

efficiency and the standards of product quality, FDI makes a positive

impact on the host country’s export competitiveness. Further, because of

the international linkages of MNCs, FDI provides to the host country

better access to foreign markets. Enhanced export possibility contributes

to the growth of the host economies by relaxing demand side constraints

on growth. This is important for those countries which have a small

domestic market and must increase exports vigorously to maintain their

tempo of economic growth.

4. Employment Generation : Foreign investment can create employment in

the modern sectors of developing countries. Recipients of FDI gain

training of employees in the course of operating new enterprises, which

contributes to human capital formation in the host country.

5. Benefits to Consumers : Consumers in developing countries stand to

gain from FDI through new products, and improved quality of goods at

competitive prices.

6. Resilience Factor: FDI has proved to be resilient during financial crisis.

For instance, in East Asian countries such investment was remarkably

stable during the global financial crisis of 1997-98. In sharp contrast,

other forms of private capital flows like portfolio equity and debt flows

were subject to large reversals during the same crisis. Similar



observations have been made in Latin America in the 1980s and in

Mexico in 1994-95. FDI is considered less prone to crises because direct

investors typically have a longer-term perspective when engaging in a

host country. In addition to risk sharing properties of FDI, it is widely

believed that FDI provides a stronger stimulus to economic growth in the

host countries than other types of capital inflows. FDI is more than just

capital, as it offers access to internationally available technologies and

management know-how.

7. Revenue to Government : Profits generated by FDI contribute to

corporate tax revenues in the host country.

Disadvantages of Foreign Direct Investment

FDI is not an unmixed blessing. Governments in developing countries have

to be very careful while deciding the magnitude, pattern and conditions of

private foreign investment. Possible adverse implications of foreign

investment are the following:

1. When foreign investment is competitive with home investment, profits in

domestic industries fall, leading to fall in domestic savings.

2. Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investment



allowances, disguised public subsidies and tariff protection provided by

the host government.

3. Foreign firms reinforce dualistic socio-economic structure and increase

income inequalities. They create a small number of highly paid modern

sector executives. They divert resources away from priority sectors to the

manufacture of sophisticated products for the consumption of the local

elite. As they are located in urban areas, they create imbalances between

rural and urban opportunities, accelerating flow of rural population to

urban areas.

4. Foreign firms stimulate inappropriate consumption patterns through

excessive advertising and monopolistic market power. The products

made by multinationals for the domestic market are not necessarily low

in price and high in quality. Their technology is generally capital-

intensive which does not suit the needs of a labour-surplus economy.

5. Foreign firms able to extract sizeable economic and political concessions

from competing governments of developing countries. Consequently,

private profits of these companies may exceed social benefits.

6. Continual outflow of profits is too large in many cases, putting pressure

on foreign exchange reserves. Foreign investors are very particular about

profit repatriation facilities.



7. Foreign firms may influence political decisions in developing countries.

In view of their large size and power, national sovereignty and control

over economic policies may be jeopardized. In extreme cases, foreign

firms may bribe public officials at the highest levels to secure undue

favours. Similarly, they may contribute to friendly political parties and

subvert the political process of the host country.

Key question, therefore, is how countries can minimize possible negative

effects and maximize positive effects of FDI through appropriate policies.



CHAPTER-5:

DETERMINANTS OF FDI

To understand the scale and direction of FDI flows, it is necessary to

identify their major determinants. The relative importance of FDI

determinants varies not only between countries but also between different

types of FDI. Traditionally, the determinants of FDI include the following.

1. Size of the Market : Large developing countries provide substantial

markets where the consumers demand for certain goods far exceed the

available supplies. This demand potential is a big draw for many

foreign-owned enterprises. In many cases, the establishment of a low

cost marketing operation represents the first step by a multinational into

the market of the country. This establishes a presence in the market and

provides important insights into the ways of doing business and possible

opportunities in the country.

2. Political stability : In many countries, the institutions of government are

still evolving and there are unsettled political questions. Companies are

unwilling to contribute large amounts of capital into an environment

where some of the basics political questions have not yet been resolved.

3. Macro-economic Environment : Instability in the level of prices and

exchange rate enhance the level of uncertainty, making business



planning difficult. This increases the perceived risk of making

investments and therefore adversely affects the inflow of FDI.

4. Legal and Regulatory Framework : The transition to a market

economy entails the establishment of a legal and regulatory framework

that is compatible with private sector activities and the operation of

foreign owned companies. The relevant areas in this field include

protection of property rights, ability to repatriate profits, and a free

market for currency exchange. It is important that these rules and their

administrative procedures are transparent and easily comprehensive.

5. Access to Basic Inputs : Many developing countries have large reserves

of skilled and semi-skilled workers that available for employment at

wages significantly lower than in developed countries. This provides an

opportunity for foreign firms to make investments in these countries to

cater to the export market. Availability of natural resources such as oil

and gas, minerals and forestry products also determine the extent of FDI.

The determinants of FDI differ among countries and across economic

sectors. These factors include the policy framework, economic determinants

and the extent of business facilitation such as macro-economic fundamentals

and availability of infrastructure.



CHAPTER-6:

FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of Indian economy has been

dominated by a regime of multiple controls, restrictive regulations and wide

ranging state intervention. Industrial economy of the country was protected

by the state and insulated from external competition. As a result of which,

India was thrown a long way behind the world of rapid expanding

technology. The cumulative effect of these policies started becoming more

and more pronounced. By the year 1989-90, the situation on the balance of

payment and foreign exchange reserves became precarious and the country

was driven to the brink of default. The credibility reached the sinking level

that no country was willing to advance or lend to India at any cost. In such

circumstances, the government quickly followed a liberalized economic

policy in July 1991.

The main objectives of the liberalized economic policy are two fold. At the

country level the reform aims at freeing domestic investors from all the

licensing requirements, virtual abolition of MRTP restriction on the

investment by large houses, and a competitive industrial structure for Indian

companies to achieve a global presence by becoming as competitive as their

counterparts worldwide. Secondly, the focus on structural reforms intended

to tap foreign investment for economic growth and development.



Gradually & systematically the government has taken a series of measures

like devaluation of rupee, lowering of import duties and allowing foreign

investment upto 51% of the equity in a large number of industries and

investment of large foreign equity (even up to 100%) in selected areas

especially for export oriented products.

In India, since the 1960’s foreign investment and/or foreign collaborations

by the multinationals have been principally viewed as an instrument to

facilitate the much needed ‘transfer of technology’. In technological as well

as financial collaborations with foreign firms, the approval and extent of

ownership participation had been predominantly determined by the

technology component of the respective products. ‘Import of technology’ as

against the direct foreign investment was the main focus of the policies till

mid-eighties.

The New Industrial Policy (NIP) of July 1991 and subsequent policy

amendments have significantly liberalized the industrial policy regime in the

country especially as it applies to FDI. The industrial approval system in all

industries has been abolished except for some strategic or environmentally

sensitive industries. In 35 high priority industries, FDI up to 51% is

approved automatically if certain norms are satisfied. FDI proposals do not

necessarily have to be accompanied by technology transfer agreements.

Trading companies engaged primarily in export activities are also allowed

up to 51% foreign entity. A Foreign Investment Promotion Board (FIPB) has

been set up to invite and facilitate investment in India by international



companies. The use of foreign brand names for goods manufactured by

domestic industry which had earlier been restricted was also liberalized.

New sectors have been opened to private and foreign investment. The

international trade policy regime has been considerably liberalized too. The

rupee was made convertible first on trade and finally on the current account.

Capital market has been strengthened. In spite of all these liberalization

measures taken by the Indian government- foreign investments have not

been up to expectations. Actual inflow of FDI has been less than the

approval FDI.



CHAPTER-7:

POLICIES AND PROCEDURES OF FDI

The initial policy stimulus to foreign direct investment in India came in July

1991 when the new industrial policy provided, inter alia, automatic route

approval for projects with foreign equity participation up to 51 percent in

high priority areas. In recent years, the government has initiated the second

generation reforms under which measures have been taken to further

facilitate and broaden the base of FDI in India. The policy of FDI allows

freedom of location, choice of technology repatriation of capital and

dividends. The rate at which FDI inflow has grown during the post-

liberalisation period is a clear indication that India is a fast emerging as an

attractive destination for overseas investors.

As part of the economic reforms programme, policy and procedures

governing foreign investment and technology transfer have been

significantly simplified and streamlined. Today FDI is allowed in all sectors

including the service sector except in cases where there are sectoral ceilings.

FDI Policy Regime

Most of the problem for investors arises because of domestic policy, rules

and procedures and not the FDI policy per se or its rules and procedure.

India has one of the most transparent and liberal FDI regimes among the

emerging and developing economies. By FDI regime it means those

restrictions that apply to foreign nationals and entities but not to Indian



nationals and Indian owned entities. The differential treatment is limited to a

few entry rules, spelling out proportion of equity that the foreign entrant can

hold in an Indian company or business. There are a few banned sectors and

some sectors with limits on foreign equity proportion. The entry rules are

clear and well defined and equity limits for FDI in selected sectors such as

telecom quite explicit and well-known.

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 Indian owned company would. There is absolutely no

discrimination against foreign invested companies registered in India or in

favour of domestic owned ones. There is however a minor restriction on

those foreign entities who entered a particular sub-sector through a joint

venture with an Indian partner. If they want to set up another company in the

same sector it must get a no-objection certificate from the joint venture

partner. This condition is explicit and transparent unlike many hidden

conditions imposed by some other recipients of FDI.

Routes for Inward Flows of FDI

FDI can be approved either through the automatic route or by the

Government.

1. Automatic Route: Companies proposing FDI under automatic route do

not require any government approval provided the proposed foreign equity is

within the specified ceiling and the requisite documents are filed with

Reserve Bank of India (RBI) within 30 days of receipt of funds. The



automatic route encompasses all proposals where the proposed items of

manufacture/activity does not require an industrial license and is not

reserved for small-scale sector.

The automatic route of the RBI was introduced to facilitate FDI inflows.

However, during the post-policy period, the actual investment flows through

the automatic route of the RBI against total FDI flows remained rather

insignificant. This was partly due to the fact that crucial areas like

electronics, services and minerals were left out of the automatic route.

Another limitation was the ceiling of 51 percent on foreign equity holding.

Increasing number proposals were cleared through the FIPB route while the

automatic route was relatively unimportant. However, since 2000 automatic

route has become significant and accounts for a large part of FDI flows.

2. Government Approval: For the following categories, government

approval for FDI through the Foreign Investment Promotion Board (FIPB) is

necessary:

Proposals attracting compulsory licensing

Items of manufacture reserved for small scale sector.

Acquisition of existing shares.

FIPB ensures a single window approval for the investment and acts as a

screening agency. FIPB approvals are normally received in 30 days. Some

foreign investors use the FIPB application route where there may be absence

of stated policy or lack of policy clarity.



3. Industrial Licensing in FDI Policy : Industrial Licensing is regulated by

Industries (Development and Regulation) Act 1951. Following are the

sectors which require Industrial Licensing:

Industries which abide by compulsory licensing

Manufacturing of items by the larger industrial units for small sector

industries

Locational restrictions on the proposed sites

Sectors Which Require Industrial Licensing:

Electronic aerospace and defense equipment

Alcoholics drinks

Explosives

Cigarettes and tobacco products

Hazardous chemicals such as, hydrocyanic acid, phosgene, isocynates

and di-isocynates of hydro carbon and derivatives.

4. Restricted List of sectors: FDI is not permissible in the following cases:

Gambling and Betting, or

Lottery Business, or

Business of chit fund

Housing and Real Estate business (to a certain extent has been

opened.)

Trading in Transferable Development Rights (TDRs)

Retail Trading

Railways,

Atomic Energy , atomic minerals,



Agricultural or plantation activities or Agriculture (excluding

Floriculture, Horticulture, Development of Seeds, Animal Husbandry,

Pisiculture and Cultivation of Vegetables, Mushrooms etc. under

controlled conditions and services related to agro and allied sectors)

and Plantations(other than Tea plantations)

The new polices have substantially relaxed restrictions on foreign

investment, industrial licensing and foreign exchange. Capital market has

been opened to foreign investment and banking sector controls have been

eased. As a result, India has been rapidly changing from a restrictive regime

to a liberal one and FDI is encouraged in almost all economic activities

under the automatic route. The Government is committed to promoting

increased flow of FDI for better technology, modernization, exports and for

providing products and services of international standards. Therefore, the

policy of the Government has been aimed at encouraging foreign

investment, particularly in core infrastructure sectors so as to supplement

national efforts.

Post-approval Procedures

1. Project Clearance: After the approval has been obtained, the applicant

may get his unit/company registered with the Registrar of Company.

Subsequently, the company needs to obtain various clearances such as land

clearance, building design clearance, pre-construction clearance, labour

clearance, etc. from different authorities before beginning its operations.



These clearances differ from sector to sector and may also differ from state

to state.

2. Registration and Inspection: Each industrial unit is supposed to

maintain records in regard to production, sale and export, use of specified

raw materials including public utilities like water and electricity, labour

related details financial details and details in regard to industrial safety and

environment.

The unit is also subject to periodic inspection by the factories inspector,

labour inspector, food inspector, fire inspector, central excise inspector, air

and water inspector, mines inspector, city inspector and the like, the list of

which may go up to thirty or more.

3. Foreign Exchange Management Act (FEMA), 2000: The additional

provisions which apply only to entry of FDI emanate from the provisions of

FEMA. According to FEMA, no person resident outside India shall without

the approval/knowledge of the RBI may establish in India a branch or a

liaison office or a project office or any other place of business.

FDI in a particular industry may, however, be made through the automatic

route under powers delegated to the RBI or with the approval accorded by

the FIPB. The automatic route means that foreign investors only need to

inform the RBI within 30 days of bringing in their investment. Companies

getting foreign investment approval through FIPB route do not require any



further clearance from RBI for the purpose of receiving inward remittance

and issue of shares to foreign investors. RBI has granted general permission

under FEMA in respect to proposals approved by FIPB. Such companies are,

however, required to notify the concerned regional office of the RBI of

receipt of inward remittances within 30 days of such receipts and again

within 30 days of issue of shares to the foreign investors.

Entry Options for Foreign Investors

A foreign company planning to set up business operations in India has the

following options:

By incorporating a company under the Companies Act, 1956 through

Joint Ventures; or

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on

the requirements of the investor, subject to equity caps in respect of the area

of activities under the Foreign Direct Investment (FDI) policy.

Enter as a foreign Company through

Liaison Office/Representative Office

Project Office

Branch Office

Such offices can undertake activities permitted under the Foreign Exchange

Management Regulations, 2000.

1. Incorporation of Company : For registration and incorporation, an

application has to be filed with Registrar of Companies (ROC). Once a



company has been duly registered and incorporated as an Indian

company, it is subject to Indian laws and regulations as applicable to

other domestic Indian companies.

2. Liaison Office/Representative Office : The role of the liaison office is

limited to collecting information about possible market opportunities and

providing information about the company and its products to prospective

Indian customers. It can promote export/import from/to India and also

facilitate technical/financial collaboration between parent company and

companies in India. Liaison office can not undertake any commercial

activity directly or indirectly and can not, therefore, earn any income in

India. Approval for establishing a liaison office in India is granted by

Reserve Bank of India (RBI).

3. Project Office : Foreign Companies planning to execute specific projects

in India can set up temporary project/site offices in India. RBI has now

granted general permission to foreign entities to establish Project Offices

subject to specified conditions. Such offices can not undertake or carry

on any activity other than the activity relating and incidental to execution

of the project. Project Offices may remit outside India the surplus of the

project on its completion, general permission for which has been granted

by the RBI.

4. Branch Office : Foreign companies engaged in manufacturing and

trading activities abroad are allowed to set up Branch Offices in India for



the following purposes:

Export/Import of goods

Rendering professional or consultancy services

Carrying out research work, in which the parent company is engaged.

Promoting technical or financial collaborations between Indian

companies and parent or overseas group company.

Representing the parent company in India and acting as buying/selling

agents in India.

Rendering services in Information Technology and development of

software in India.

Rendering technical support to the products supplied by the parent/

group companies.

Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its

own but is permitted to subcontract these to an Indian manufacturer. Branch

Offices established with the approval of RBI may remit outside India profit

of the branch, net of applicable Indian taxes and subject to RBI guidelines

Permission for setting up branch offices is granted by the Reserve Bank of

India (RBI).

5. Branch office on Stand-Alone Basis in Special Economic Zones

(SEZs): Such branch offices would be isolated and restricted to the SEZ

and no business activity/transaction will be allowed outside the SEZ in

India, which include branches/subsidiaries of their parent office in India.

No approval shall be necessary from RBI for a company to establish a



branch/unit in SEZs to undertake manufacturing and service activities,

subject to specified conditions.

6. Investment in a Firm or a Proprietary Concern by NRIs : A Non-

Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside

India may invest by way of contribution to the capital of a firm or a

proprietary concern in India on non-repatriation basis provided:

The amount is invested by inward remittance or out of specified

account types (NRE/FCNR/NRO accounts) maintained with an

Authorized Dealer.

The firm or proprietary concern is not engaged in any

agriculture/plantation or real estate business, i.e. dealing in land and

immovable property with a view to earning profit or earning income

there from.

The amount invested shall not be eligible for repatriation outside

India. NRIs/PIOs may invest in sole proprietorship

concerns/partnership firms with repatriation benefits with the approval

of Government/ RBI.

7. Investment in a Firm or a Proprietary concern Other Than NRIs : No

person resident outside India other than NRI/PIO shall make any

investment by way of contribution to the capital of a firm or a

proprietorship concern or any association of persons in India. The RBI

may, on an application made to it, permit a person resident outside India

to make such an investment subject to such terms and conditions as may



be considered.

Other Modes of Foreign Direct Investments

1. Global Depository Receipts (GDR)/American Deposit Receipts

(ADR)/Foreign Currency Convertible Bonds (FCCB): Foreign

Investment through GDRs/ADRs, Foreign Currency Convertible Bonds

(FCCBs) are treated as Foreign Direct Investment. Indian companies are

allowed to raise equity capital in the international market through the issue

of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment.

An applicant company seeking Government's approval in this regard should

have a consistent track record for good performance (financial or otherwise)

for a minimum period of 3 years. This condition can be relaxed for

infrastructure projects such as power generation, telecommunication,

petroleum exploration and refining, ports, airports and roads.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated

by a company or a group of companies in a financial year. A company

engaged in the manufacture of items covered under Automatic Route is

likely to exceed the percentage limits under the Automatic Route, whose

direct foreign investment after a proposed GDR/ADR/FCCBs issue is likely

to exceed 50 per cent/51 per cent/74 per cent as the case may be, or which is

implementing a project not contained in project falling under Government

Approval route, would need to obtain prior Government clearance through

FIPB before seeking final approval from the Ministry of Finance.



There are no end-use restrictions on GDR/ADR issue proceeds, except for

an express ban on investment in real estate and stock markets. The FCCB

issue proceeds need to conform to external commercial borrowing end use

requirements; in addition, 25 per cent of the FCCB proceeds can be used for

general corporate restructuring.

2. Preference Shares :

Foreign investment through preference shares is treated as foreign direct

investment. Proposals are processed either through the automatic route or

FIPB as the case may be. The following guidelines apply to issue of such

shares:-

Foreign investment in preference share are considered as part of share

capital and fall outside the External Commercial Borrowing (ECB)

guidelines/cap

Preference shares to be treated as foreign direct equity for purpose of

sectoral caps on foreign equity, where such caps are prescribed,

provided they carry a conversion option. If the preference shares are

structured without such conversion option, they would fall outside the

foreign direct equity cap.

Duration for conversion shall be as per the maximum limit prescribed

under the Companies Act or what has been agreed to in the share

holders agreement whichever is less.



The dividend rate would not exceed the limit prescribed by the

Ministry of Finance.

Issue of Preference Shares should conform to guidelines prescribed by

the SEBI and RBI and other statutory requirements.

Foreign Technology Agreements

Foreign technology induction is encouraged both through FDI and through

foreign technology agreements. India has one of the most liberal policy

regimes in regard to technology agreements. Foreign technology

collaboration is permitted either through automatic route or through FIPB.

1. Automatic Approval: RBI accords automatic approval for foreign

technology collaboration agreements for all industries subject to the

following:

The lump sum payment should not exceed US$ 2 million.

Royalty payable is limited to 5 percent for domestic sales and 8

percent for exports subject to total payment of 8 percent on sales over

a 10 year period.

The period for payment of royalty not exceed 7 years from the date of

commencement of commercial production, or 10 years from the date

of agreement whichever is earlier.

2. FIPB Route: For the following categories, Government approval is

necessary:

Proposals attracting compulsory licensing.



Items of manufacture reserved for small-scale sector.

Proposals involving any previous joint venture or technology

transfer/trade mark agreement in the same or allied field in India.

Extension of foreign technology collaboration agreements.

Proposals not meeting any or all of the parameters for automatic

approval.

The different components of foreign technology collaboration such as

technical know how fees, payment for design and drawing, payment for

engineering service and royalty are eligible for approval through the

automatic route, and by the Government.



CHAPTER-8:

SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA

Hotel & Tourism Sector

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist

complexes providing accommodation and/or catering and food facilities to

tourists. Tourism related industry include travel agencies, tour operating

agencies and tourist transport operating agencies, units providing facilities

for cultural, adventure and wild life experience to tourists, surface, air and

water transport facilities to tourists, leisure, entertainment, amusement,

sports, and health units for tourists and Convention/Seminar units and

organizations.

For foreign technology agreements, automatic approval is granted if

1. Up to 3% of the capital cost of the project is proposed to be paid for

technical and consultancy services including fees for architects, design,

supervision, etc.

2. Up to 3% of net turnover is payable for franchising and

marketing/publicity support fee, and up to 10% of gross operating profit

is payable for management fee, including incentive fee.

Private Sector Banking:

49% FDI is allowed from all sources on the automatic route subject to

guidelines issued from RBI from time to time.



1. FDI/NRI/OCB investments allowed in the following 19 NBFC activities

shall be as per levels indicated below:

a. Merchant banking

b. Underwriting

c. Portfolio Management Services

d. Investment Advisory Services

e. Financial Consultancy

f. Stock Broking

g. Asset Management

h. Venture Capital

i. Custodial Services

j. Factoring

k. Credit Reference Agencies

l. Credit rating Agencies

m. Leasing & Finance

n. Housing Finance

o. Foreign Exchange Brokering

p. Credit card business

q. Money changing Business

r. Micro Credit

s. Rural Credit

2. Minimum Capitalization Norms for fund based NBFCs:

a. For FDI up to 51% - US$ 0.5 million to be brought upfront



b. For FDI above 51% and up to 75% - US $ 5 million to be brought

upfront

c. For FDI above 75% and up to 100% - US $ 50 million out of which

US $ 7.5 million to be brought upfront and the balance in 24 months

3. Minimum capitalization norms for non-fund based activities: Minimum

capitalization norm of US $ 0.5 million is applicable in respect of all

permitted non-fund based NBFCs with foreign investment.

4. Foreign investors can set up 100% operating subsidiaries without the

condition to disinvest a minimum of 25% of its equity to Indian entities,

subject to bringing in US$ 50 million as at 2.(c) above (without any

restriction on number of operating subsidiaries without bringing in

additional capital)

5. Joint Venture operating NBFC's that have 75% or less than 75%

foreign investment will also be allowed to set up subsidiaries for

undertaking other NBFC activities, subject to the subsidiaries also

complying with the applicable minimum capital inflow i.e. 2.(a) and 2.(b)

above.

6. FDI in the NBFC sector is put on automatic route subject to

compliance with guidelines of the Reserve Bank of India. RBI would

issue appropriate guidelines in this regard.



Insurance Sector

FDI up to 26% in the Insurance sector is allowed on the automatic route

subject to obtaining licence from Insurance Regulatory & Development

Authority (IRDA)

Telecommunication sector

1. In basic, cellular, value added services and global mobile personal

communications by satellite, FDI is limited to 49% subject to licensing

and security requirements and adherence by the companies (who are

investing and the companies in which investment is being made) to the

license conditions for foreign equity cap and lock- in period for transfer

and addition of equity and other license provisions.

2. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is

permitted up to 74% with FDI, beyond 49% requiring Government

approval. These services would be subject to licensing and security

requirements.

3. No equity cap is applicable to manufacturing activities.

4. FDI up to 100% is allowed for the following activities in the telecom

sector :

a. ISPs not providing gateways (both for satellite and submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category 1);

c. Electronic Mail; and



d. Voice Mail

The above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such

companies would divest 26% of their equity in favor of Indian public

in 5 years, if these companies are listed in other parts of the world.

The above services would be subject to licensing and security

requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case

basis.

Trading Companies

Trading is permitted under automatic route with FDI up to 51% provided it

is primarily export activities, and the undertaking is an export house/trading

house/super trading house/star trading house. However, under the FIPB

route:-

1. 100% FDI is permitted in case of trading companies for the following

activities:

a. exports;

b. bulk imports with ex-port/ex-bonded warehouse sales;

c. cash and carry wholesale trading;

d. Other import of goods or services provided at least 75% is for

procurement and sale of goods and services among the companies of the

same group and not for third party use or onward

transfer/distribution/sales.



2. The following kinds of trading are also permitted, subject to provisions

of EXIM Policy:

a. Companies for providing after sales services (that is not trading per

se)

b. Domestic trading of products of JVs is permitted at the wholesale

level for such trading companies who wish to market manufactured

products on behalf of their joint ventures in which they have equity

participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which,

based on technology provided and laid down quality specifications, a

company can market that item under its brand name.

g. Domestic sourcing of products for exports.

h. 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 facilities

commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the condition

that such companies would divest 26% of their equity in favor of the Indian

public in five years, if these companies are listed in other parts of the world.

Such companies would engage only in business to business (B2B) e-

commerce and not in retail trading.



Power Sector

Up to 100% FDI allowed in respect of projects relating to electricity

generation, transmission and distribution, other than atomic reactor power

plants. There is no limit on the project cost and quantum of foreign direct

investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of

drugs and pharmaceutical, provided the activity does not attract compulsory

licensing or involve use of recombinant DNA technology, and specific cell /

tissue targeted formulations. FDI proposals for the manufacture of licensable

drugs and pharmaceuticals and bulk drugs produced by recombinant DNA

technology, and specific cell / tissue targeted formulations will require prior

Government approval.

Infrastructure Sector

FDI up to 100% under automatic route is permitted in projects for

construction and maintenance of roads, highways, vehicular bridges, toll

roads, vehicular tunnels, ports and harbors.

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and

consultancy for integration of pollution control systems is permitted on the

automatic route.



Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends

in the following sectors:

a. 34 High Priority Industry Groups

b. Export Trading Companies

c. Hotels and Tourism-related Projects

d. Hospitals, Diagnostic Centers

e. Shipping

f. Deep Sea Fishing

g. Oil Exploration

h. Power

i. Housing and Real Estate Development

j. Highways, Bridges and Ports

k. Sick Industrial Units

l. Industries Requiring Compulsory Licensing

m. Industries Reserved for Small Scale Sector



n. Up to 40% Equity with full repatriation: New Issues of Existing

Companies raising Capital through Public Issue up to 40% of the new

Capital Issue.

o. On non-repatriation basis: Up to 100% Equity in any Proprietary or

Partnership engaged in Industrial, Commercial or Trading Activity.

p. Portfolio Investment on repatriation basis: Up to 1% of the Paid up

Value of the equity Capital or Convertible Debentures of the

Company by each NRI. Investment in Government Securities, Units

of UTI, National Plan/Saving Certificates.

q. On Non-Repatriation Basis: Acquisition of shares of an Indian

Company, through a General Body Resolution, up to 24% of the Paid

Up Value of the Company.

r. Other Facilities: Income Tax is at a Flat Rate of 20% on Income

arising from Shares or Debentures of an Indian Company.

Certain terms and conditions do apply.

Foreign Direct Investment in Small Scale Industries (SSI's) in India

Recently, India has allowed Foreign Direct Investment up to 100% in many

manufacturing industries which were designated as Small Scale Industries.

India further ended in February 2008 the monopoly of small-scale units on

79 items, leaving just 35 on the reserved list that once had as many as 873

items.



CHAPTER-9:

FACTORS AFFECTING FDI

The factors that can narrow the gap between FDI approvals and actual

foreign direct investment inflows and indeed make India a preferred

destination for global capital are,

1. Availability of infrastructure in all areas i.e. transports hospitality,

telecom, power, etc.

2. Transparency of processes, policies and decision making and reduction of

government decision making lead time.

3. Stability of policies i.e. entry, exit, labour laws, etc. over a definite time

horizon so that definite plans can be made.

4. Acceptance of International Standards including accounting standards.

5. Capital account convertibility so that all capital and payments can flow

easily in and out of the economy.

6. Simplification of the regulatory framework in general and tax laws.

7. Improvement in bandwidth for internet and data communication.

8. Improvement in the enforcement of intellectual property rights.

9. Implementation of the WTO agreement full.

All investments foreign and domestic are made under the expectation of

future profits. The economy benefits if economy policy fosters competition,

creates a well functioning modern regulatory system and discourages

artificial monopolies created by the government through entry barriers. A



recognition and understanding of these facts can result in a more positive

attitude towards FDI. The future policies should be designed in the light of

the above observations. The most important initiatives that need attention

are:

1. Empowering the State Governments with regard to FDI.

2. Developing fast track clearance system for legal disputes.

3. Changing the mind set of bureaucracy through HR practices.

4. Developing basic infrastructure.

5. Improving India’s image as an investment destination.

While the magnitudes of inflows have recorded impressive growth, they are

still at a small level compared to India’s potential. The policy reforms

undertaken have undoubtedly enabled the country to widen the sectoral and

source composition of FDI inflows. Within a generation, the countries of

East Asian transformed themselves. China, Indonesia, Korea, Thailand and

Malaysia today have living standards much above ours.

When competing for FDI, policy makers have to be aware that various

measures intended to induce FDI are necessary. These include liberalisation

of FDI regulations and various business facilitation measures. Other reforms,

such as privatization, tend to be more effective in stimulating FDI inflows,

but need to be complemented by reform in other areas, in order to ensure

that FDI inflows are beneficial. Other determinants of FDI, which were

sufficient in the past, may prove to be less relevant in the future



CHAPTER-10:

FDI TRENDS IN INDIA

India is the second most populous country and the largest democracy in the

world. The far reaching and sweeping economic reform undertaken since

1991 have unleashed the enormous growth potential of the economy. There

has been a rapid, yet calibrated, move towards deregulation and

liberalisation, which has resulted in India becoming a favourite destination

for investment. Undoubtedly, India has emerged as one of the most vibrant

and dynamic of the developing economies.

India as an Investment Destination

FDI is seen as a means to supplement domestic investment for achieving a

higher level of economic growth and development. FDI benefits domestic

industry as well as the Indian consumers by providing opportunities for

technological upgradation, access to global managerial skills and practices,

optimal utilization of human and natural resources, making Indian industry

internationally competitive, opening up export markets, providing backward

forward linkages and access to international quality goods and services. FDI

policy has been constantly reviewed and necessary steps have been taken to

make India a most favourable destination for FDI. There are several good

reasons for investing in India.

1. Third largest reservoir of skilled manpower in the world.

2. Large and diversified infrastructure spread across the country.



3. Abundance of natural resources and self-efficiency in agriculture.

4. Package of fiscal incentives for foreign investors.

5. Large and rapidly growing consumer market.

6. Democratic government with independent judiciary.

7. English as the preferred business language.

8. Developed commercial banking network of over 63000 branches

supported by a number of National and State level financial institutions.

9. Vibrant capital market consisting of 22 stock exchanges with over 9400

listed companies.

10.Congenial foreign investment environment that provides freedom of

entry, investment, location, choice of technology, import and export, and

11.Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal,

Pakistan and Sri Lanka.

India’s Performance in the Global Context

According to UNCTAD World Investment Report, 2007, FDI inflows to

South Asia surged by 126% amounting to $22 billion in 2006, mainly due to

investment in India. The country received more FDI than ever before

equivalent to the total inflows during 2003-2005. Inward FDI inflows to

China declined for the first time in 7years. The modest decline by 4% or $69

billion was mainly due to reduced inflows of financial services.

UNCTAD’s World Investment Report publishes a set of benchmarks for

inward FDI performance that ranks countries by how they do in attracting



inward direct investment. In contrast, despite enjoying a healthy rate of

economic growth India ranked 120th on UNCTAD’s inward FDI

performance index 1999-2001, far below China which ranked 59th and lower

than both Pakistan (116th) and Srilanka (111th). As far as inward FDI

potential index is concerned, India ranks 84th as against China’s 40th rank.

The World Investment Report, 2005 noted, “While India has been catching

up in inward FDI, it still ranks near the bottom”.

Top Investing Countries FDI Inflows in India

In FDI equity investments Mauritius tops the list of first ten investing

countries followed by US, UK, Singapore, Netherlands, Japan, Germany,

France, Cyprus and Switzerland. Between April 2000 and July 2008 FDI

inflows from Mauritius stood at $ 30.18 billion followed by $5.80 billion

from Singapore; $ 5.47 billion from the US; $ 4.83 billion from the UK;

$ 3.12 billion from the Netherlands; $ 2.26 billion from Japan; $1.83 billion

from Germany; $ 1.41 billion from Cyprus; and $1.02 billion from France.



TOP TEN INVESTING (FDI EQUITY) COUNTRIES (In Rs. Crore)

Country 2005-06 2006-07 2007-082008-09 (from April-

March, 2009)

Cumulative (From April

2000 to April2009)

% with total

(inflows in

terms of

rupees)

Mauritius 11441(2570)

28759(6363)

44483(11096)

50794(11208)

168485(38305) 44%

USA 2210(502)

3861(856)

4377(1089)

8002(1802)

28303(6404) 7%

UK 1164(266)

8389(1878)

4690(1176)

3840(864)

23002(5246) 6%

Singapore 1218(275)

2662(578)

12319(3073)

15727(3454)

34467(7934) 9%

Netherlands 340(76)

2905(644)

2780(695)

3922(883)

15957(3611) 4%

Japan 925(208)

382(85)

3336(815)

1889(405)

12041 (2694) 3%

Germany 1345(303)

540(120)

2075(514)

2750(629)

9580(2191) 3%

France 82(18)

528(117)

583(145)

2098(467)

5489(1229) 1%

Cyprus 310(70)

266(58)

3385(834)

5983(1287)

11140(2491) 3%

UAE 219(49)

1174(260)

1039(258)

1133(257)

4146(948) 1%

Total FDI inflows*

24613(5546)

70630(15726)

98664(24579)

122919(27309)

404728(92158) -

Figures in bracket are in US$ million

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India



Top Sectors in India attracting FDI

The average FDI inflows per year during the 9th Plan were $ 3.2 billion and

during the 10th Plan it increased manifold to stand at $ 16.33 billion the

annual average being $ 6.16 billion. The top five sectors attracting FDI in

fiscal 2007-08 included Services sector; Housing and Real Estate;

Construction activities; Computer Software & hardware; and

Telecommunications. The infrastructure sector that offers massive potential

to attract FDI witnessed marked increase in FDI inflows during this five-

year period. The extant policy for most of the infrastructure sectors permits

FDI up to 100 percent on the automatic route. From $ 1902 million in fiscal

2001-02 the foreign investment in India's infrastructure sector increased to $

2179 million in 2006-07. But fiscal 2007-08 witnessed significant increase

in the FDI inflows in the infrastructure. In first nine months till December

2007 of fiscal 2007-08 stood at $ 4095 million. From 2000-01 to December

2007, total FDI in India's infrastructure sector stood at $ 10575 million.



SECTORS ATTRACTING HIGHEST FDI Inflows (In Rs crore)

SECTOR 2005-06 2006-07 2007-082008-09 (April-Jan '09)

Cumulative

(Apr.2000- Jan 2009)

% of total

inflows*

Services (Financial & non-financial)

2399(543)

21047(4664)

26589(6615)

23045(5061) 78742

(181189)22%

Computer Software & Hardware

6172(1375)

11786(2614)

5623(1410)

6944(1599)

39111(8876) 11%

Telecommunications 2776(624)

2155(478)

5103(1261)

10797(2374)

27544(6216) 8%

Construction 667(151)

4424(985)

6989(1743)

6224(1483)

19606(4646) 6%

Automobile 630(143)

1254(276)

2697(675)

1792(441)

11648(2678) 4%

Housing and Real estate

171(38)

2121(467)

8749(2179)

10632(2408)

21794(5119) 6%

Power 386(87)

713(157)

3875(967)

4079(924)

13709(3130) 4%

Metallurgical 6540(147)

7866(173)

4686(1177)

3608(850)

10956(2613) 3%

Chemicals (Other than fertilizers)

1731(390)

930(205)

920(229)

2561(579)

9442(2244) 2%

Petroleum & Natural Gas

64(14)

401(89)

5729(1427)

1196(263)

8509(2043) 3%

Figures in bracket are in US$ million. * In terms of Rs.

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of

India

FDI Inflows Year-wise (1990-2009)



Fiscal Year (April-March)

EquityReinveste

d earnings+

Other capital+

Total FDI inflows

YOY growth (%)

FIPB Route/ RBI's

Automatic Route

Equity capital of

unincorporated bodies#

1991(Aug)-2000 (Mar) 15483 - - - 15483 -

2000-01 2339 61 1350 279 4029 -

2001-02 3904 191 1645 390 6130 (+) 52

2002-03 2574 190 1833 438 5035 (-) 18

2003-04 2197 32 1460 633 4322 (-) 14

2004-05 3250 528 1904 369 6051 (+) 40

2005-06 5540 435 2760 226 8961 (+) 48

2006-07 15585 896 5828 517 22826 (+) 146

2007-08 24575 2292 7168 327 34362 (+) 51

2008-09(April-Dec) 23885 334 3004 203 27426 -

Cumulative Total

(From Aug 1991-Jan

2009)

99332 4959 26952 3382 134625 -


Foreign Technology Transfer



Country Wise Technology Transfer Approvals (Aug 1991-Feb 2008)

COUNTRY No. of FTA % with total technical approvals

USA 1772 22.31

Germany 1106 13.93

Japan 868 10.93

UK 860 10.83

Italy 484 6.09

Other countries 2851 35.91

All Countries 7941 100.00


Sector Wise Technology Transfer Approvals (Aug 1991-Feb 2008)

SECTORNo. Technical Collaborations

approved

% of total Technical Collaborations

approved

Electrical Equipments (Incl. computer

software & electronics)1255 15.80

Chemicals (other than fertilizers) 886 11.16



Industrial Machinery 869 10.94

Transportation Industry 742 9.34

Misc. Mach. Engineering Industry 442 5.57

Other sectors 3747 47.19

Total all sectors 7941 100.00


CHAPTER-11:

CONCLUSION

Economic reforms in India have deregulated the economy and stimulated

domestic and foreign investment, taking India firmly into the forefront of

investment destinations. The Government, keen to promote FDI in the

country, has radically simplified and rationalized policies, procedures and

regulatory aspects. Foreign direct investment is welcome in almost all

sectors; expect those strategic concerns (defence and atomic energy).

Since the initiation of the economic liberalisation process in 1991, sectors

such as automobiles, chemicals, food processing, oil and natural gas, petro-

chemicals, power, services, and telecommunications have attracted

considerable investments. Today, in the changed investment climate, India

offers exciting business opportunities in virtually every sector of the



economy. Telecom, electrical equipment (including computer software),

energy and transportation sector have attracted the highest FDI.

Despite its market size and potential, India has yet to convert considerable

favourable investor sentiment into substantial net flows of FDI. Overall,

India remains high on corporate investor radar screens, and is widely

perceived to offer ample opportunities for investment. The market size and

potential give India a definite advantage over most other comparable

investment destinations.

India’s investment profile, however, is also conditioned by factors that affect

the flow of FDI, which are bureaucratic delays, wide spread corruption, poor

infrastructure facilities pro-labour laws, political risk and weak intellectual

property regime.

A perceived slowdown in the process of reforms generates doubts about the

market’s long-term potential. To capitalize on its potential for FDI, would

seem that India needs to accelerate efforts to institutionalize government

efficiency and advance the implementation of promised reforms. Other

strategic efforts should include focusing the market on India’s relatively

higher rates of return on existing investments and long-term potential,

addressing the issue of transforming the country into a viable export

platform and encouraging strategic alliances with foreign investors. In short,

this means accelerating India’s integration with the global economy.



BIBLIOGRAPHY

Books:

Foreign Investment in India: 1947-48 to 2007-08, Dr. Kamlesh Gakhar

Foreign Direct Investment in India: 1947 to 2007, Dr. Nitin Bhasin

Websites:

http://business.mapsofindia.com

http://www.economywatch.com

http://siadipp.nic.in


http://siadipp.nic.in/

http://www.economywatch.com/

http://business.mapsofindia.com/

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