FLOW of FOREIGN DIRECT

INVESTMENT In INDIA

Submitted To: Under the guidance of:

Ms. Renu Agarwal Mr. S.C. Malhotra

Head of Commerce Department Associate Professor

Shri Ram College of Commerce Shri Ram College of Commerce

University of Delhi University of Delhi

ACKNOWLEDGEMENT

I take immense pleasure in thanking Shri Ram College of Commerce, along with Delhi University for having permitted me to carry out this project work.

I wish to express my deep sense of gratitude to my Internal Guide, Mr. S.C.Malhotra (Associate Professor, Shri Ram College of Commerce) for his able guidance and useful suggestions, which helped me in completing the project work, in time.

Words are inadequate in offering my thanks to the all the other faculty of this college for their encouragement and cooperation in carrying out the

project work.

Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for their blessings, my friends/classmates for their help

and wishes for the successful completion of this project.

Ankita Nirola

DECLARATION

I hereby declare that that the project work titled “Flow of Foreign Direct Investment in India”, submitted to Shri Ram College of Commerce, Delhi University, is a record of original work done by me under the guidance of Mr. S.C. Malhotra ( SRCC) and this project work has not performed the basis for the award of any degree/ diploma/ associate ship/ fellowship and similar project if any. However, any citations, references and quotations

that may be taken directly from any source have been clearly mentioned as footnotes on the concerned pages.

ANKITA NIROLAB.COM(HONS.)-IIIROLL NO-106SECTION-HSHRI RAM COLLEGE OF COMMERCEUNIVERSITY OF DELHI

FLOW OF FOREIGN DIRECT INVESTMENT IN INDIA

Once unlocking up of the Indian economy to the world economy, the country witnessed crowd stream of foreign capital into the economy. In the era of globalization foreign direct investment (FDI) takes vital part in the development of both developing and developed countries. Foreign Direct Investment (FDI) offers a number of profits like overture of new technology, innovative products, extension of new markets, and introduction of new skills etc., which reflect in the growth of Nation’s Income. India is ranked as the most favored end for foreign direct investment showing a remarkable growth rate year by year. India is in the midst of a retail boom. The sector witnessed significant transformation in the past decade from small-unorganized family-owned retail formats to organized retailing. Many international brands have entered the market. With the growth in organized retailing, unorganized retailers are fast changing their business models. However, retailing is one of the few sectors where foreign direct investment (FDI) is not allowed at present. This project tries to analyze the trends of flow of foreign direct investment in India.

Objectives of the Study

The objective of the study is to throw light on the following aspects of foreign direct investment:

Foreign Market Entry Modes Advantages of allowing Foreign Direct Investment in India Drawbacks of Foreign Direct Investment in India View by Mr. Biyani: Confederation of Indian Industry (CII) Chairman Sectors not allowing Foreign Direct Investment Foreign Direct Investment in major sectors in India Foreign Direct Investment in Retail Sector - Impact and analysis Trends of Foreign Direct Investment in India Country wise presentation of Foreign Direct Investment in India

(monetary terms) and Inflow of Foreign Direct Investment in various sectors (monetary terms).

Methodology of the StudyTo study the trends of Foreign Direct Investment in India (country wise and sector wise), the required data has been collected from the secondary source and used. This data has been collected from the websites of Reserve Bank of India (RBI). The required information is also gathered from the publications of Department of Industrial Policy and Promotion and Ministry of Finance. To analyze this data, simple statistical techniques like percentages, averages are applied.

India has been ranked at the third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD).

Globalization

The concept of globalization has increased across the world in recent years due to the fast progress that has been made in the field of technology especially in communications and transport. In India globalization started when the government of India opened the country's markets to foreign investments in the early 1990s through changes in its economic policy in 1991. As a result of this, globalization of the Indian Industry took place on a major scale. Globalization means the dismantling of trade barriers between nations and the integration of the nations economies through financial flow, trade in goods and services, and corporate investments between nations. Globalization of the Indian Industry took place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, BPO etc.

As far as the Indian economy is concerned the impact of globalization has been highly effective and positive in all spheres of economic and social life and virtually no negative effect. It is only because of opening the earlier closed, tyrannical policies to globalization that has helped the Indian economy to develop rapidly since the last 15 years. India's economic growth has been high, exports have boomed, incidence of poverty has been reduced, India's companies are setting up their business units abroad. India has better technological spreading out for the benefit of the common man in terms of mobiles, road

transport, cheap clothes, chemicals, medicines, electronic and electrical gadgets etc., only because of globalization.

Foreign Market Entry Modes

The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:

Exporting Licensing

Joint Venture

Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

Exporter Importer

Transport provider

Government

Licensing

Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:

the partners' strategic goals converge while their competitive goals diverge;

the partners' size, market power, and resources are small compared to the industry leaders; and

Partners are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions.

Potential problems include:

conflict over asymmetric new investments mistrust over proprietary knowledge

performance ambiguity - how to split the pie

lack of parent firm support cultural clashes

if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

The Case of Euro Disney

Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly.

Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection decision, and a company carefully must define and evaluate the criteria for

choosing a location. The problems with the Euro Disney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.

Comparison of Market Entry Options

The following table provides a summary of the possible modes of foreign market entry:

Comparison of Foreign Market Entry Modes

ModeConditions Favoring

this ModeAdvantages Disadvantages

Exporting

Limited sales potential in target country; little product adaptation required

Distribution channels close to plants

High target country production costs

Liberal import policies

High political risk

Minimizes risk and investment.

Speed of entry

Maximizes scale; uses existing facilities.

Trade barriers & tariffs add to costs.

Transport costs

Limits access to local information

Company viewed as an outsider

Licensing Import and investment barriers

Legal protection possible in target environment.

Low sales potential in

Minimizes risk and investment.

Speed of entry

Able to circumvent

Lack of control over use of assets.

Licensee may become competitor.

target country.

Large cultural distance

Licensee lacks ability to become a competitor.

trade barriers

High ROI

Knowledge spillovers

License period is limited

Joint Ventures

Import barriers

Large cultural distance

Assets cannot be fairly priced

High sales potential

Some political risk

Government restrictions on foreign ownership

Local company can provide skills, resources, distribution network, brand name, etc.

Overcomes ownership restrictions and cultural distance

Combines resources of 2 companies.

Potential for learning

Viewed as insider

Less investment required

Difficult to manage

Dilution of control

Greater risk than exporting a & licensing

Knowledge spillovers

Partner may become a competitor.

Direct Investment

Import barriers

Small cultural distance

Assets cannot be fairly priced

High sales potential

Low political risk

Greater knowledge of local market

Can better apply specialized skills

Minimizes knowledge spillover

Can be viewed as an insider

Higher risk than other modes

Requires more resources and commitment

May be difficult to manage the local resources.

Investment is putting money into something with the hope of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income {dividend}, or appreciation of the value of the instrument.

Foreign Direct Investment

Foreign Direct Investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.

Foreign Direct Investment (FDI) is normally defined as a form of investment made in order to gain unwavering and long-lasting interest in enterprises that are operated outside of the economy of the shareholder or depositor. In other words it is the investment made by an enterprise of the one nation in an enterprise in another country. In FDI, there is a parent enterprise and a foreign associate, which unites to form a Multinational Corporation (MNC). In order to be deemed as a FDI, the investment must give the parent enterprise power and control over its foreign affiliate. As a source of capital to the corporate it effects the development of nation’s economy by the way of overture of new technology, innovative products, extension of new markets, introduction of new skills etc. It also effects positively on business environment. With the flow of FDI, the nation can develop the infrastructural facilities which are key to rapid industrialization of the country. It has the direct effect on the nation’s balance of payments (BoP). It considered as the device of development which helps in achieving the self-reliance in all segments of the economy. It had been rightly recognized by the government of India, in the year 1948 itself and prepared a separate policy to satisfy the interest of foreign investors and gave the strong bigotry on foreign capital.

Advantages of FDI

Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments.

Foreign Direct Investment plays a pivotal role in the development of India's economy. It is an integral part of the global economic system. Advantages of FDI can be enjoyed to full extent through various national policies and international investment architecture. Both the factors contribute enormously to the maximum FDI inflows in India, which stimulates the economic

development of the country. FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same.

Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under:

Economic growth: This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Trade: Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels: - FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer: - FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms: - Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

FDI inflows raise the capital for investment: - Foreign capital has taken over the domestic capital in terms of purchasing issue. Domestic capital is usually used or invested in other sectors of the Indian market.

Foreign Direct Investment in green field ventures has introduced technological advancement and contemporary techniques for management in India, which the country lacked badly before FDI made its entry.

The inflow of foreign capital in India has opened up a surfeit of options in the Indian market by ensuring foreign capital shares which stabilizes the country's economy.

Drawbacks of FDI

The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret – something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment.

Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.

At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.

This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.

The global investors would collude and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers.

Hence, both the consumers and the suppliers would lose, while the profit margins of such chains would go up.

Thus, it would lead to lopsided growth in cities, causing discontent and social tension elsewhere.

View by Mr. Biyani The foreign direct investment (FDI) in Indian should be allowed in a phased manner so that it could serve the purpose of much-needed capital and bring boom in various sectors, according to Confederation of Indian Industry (CII) Chairman Kishore Biyani. 1. FDI should be gradually allowed first in relatively less sensitive sectors like

garments, lifestyle products, house ware and entertainment.2. Alternative funding mechanisms and investment opportunities should be

considered like FIIs and venture capital in the primary market, besides FDI. Hence they should be legalized and encouraged in the primary market.

3. He said the industries needed time for capital formation, which would take at least two-three years. The gradual inflow of FDI should not be a hindrance for the growth of the various sectors.

Flow of FDI in India

In the year 1991, the government of India was sanctioned in its new Industrial Policy, large number of concessions and incentives, to attract the flow of the foreign capital to India. Factors like prospect opportunities in industries, favorite government policy, political stability in the country etc., were ranked India as second favorite country in the world, following China, in terms of attractiveness of FDI. AT Kearney’s 2007 Global Services Location Index ranked India as the most preferred destination in terms of financial attractiveness, people and skills availability and business environment. The positive perceptions as a result of strong economic fundamentals driven by 19 years of reforms has helped FDI inflows grow at about 20 times since the opening up of the economy to foreign investment since 1991.

Foreign Direct Investment in India

India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. In

India, Foreign Direct Investment Policy allows for investment only in case of the following form of investments:

Through financial alliance Through joint schemes and technical alliance Through capital markets, via Euro issues Through private placements or preferential allotments

Foreign Direct Investment in India is not allowed under the following industrial sectors:

Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,

diamonds, copper, zinc

A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.

FDI in major sectors in IndiaThe major sectors of the Indian economy that have benefited from FDI in India are -

Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals

Software and Information Technology.

Private Sector Banking:

FDI up to 74% from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by the RBI from time to time.

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)

Telecommunication: FDI in Telecommunication sector

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

Hotel & Tourism: FDI in Hotel & Tourism sector in India

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

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.

Software and Information Technology

FDI up to 100 percent is permitted for E-Commerce activities subject to the condition that such companies would divest 26 percent of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world.

Some other sectors benefited by FDI in India are as follows:

Business Process Outsourcing BPO in India

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

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. 

 Roads, Highways, Ports and Harbors

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.

Power: FDI in Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants.

Trading: FDI in Trading Companies in India

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

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 Opens up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance

operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%.

The Indian government made several reforms in the economic policy of the country in the early 1990s. This helped in the liberalization and deregulation of the Indian economy and also opened the country's markets to foreign direct investment.

As a result of this, huge amounts of foreign direct investment came into India through non- resident Indians, international companies, and various other foreign investors. The growth of FDI in India boosted the economic growth of the country. Major advantages of FDI in India have been in terms of

Increased capital flow. Improved technology. Management expertise. Access to international markets.

Foreign Direct Investment in Retail Sector- Impact and Analysis

After considerable deliberation, the Government had opened FDI up to 51 per cent under single-brand retail trading, and 100 per cent in cash-and-carry wholesale formats under the automatic route.

However, FDI in retailing of goods under several brands, even if the goods are produced by the same manufacturer, is still prohibited under the current guidelines. The industry has constantly advocated that FDI should be allowed in multi-brand retailing, as it believes it would speed up the growth of organized formats in the country, leading to lowering of prices, improving the quality of products and widening the choice of products available to consumers.

Additionally, the industry has long demanded that the Government give retail its due and recognize it as an industry, something that the Government has not paid heed to for decades.

Foreign players can use the following routes to enter India:

• Franchisee route — Pizza Hut, Domino's, Marks & Spencer, Tommy Hilfiger, Subway

• Cash and carry wholesale retailing — Metro, ShopRite

• Manufacturing — Bata, United Colors of Benetton

• Distribution — Swarovski, Hugo Boss, Mango

• Joint ventures — Reebok, Miss 60

Market liberalization, a growing middle-class, and increasingly assertive consumers are sowing the seeds for a retail transformation that will bring more Indian and multinational players on the scene. The big Indian retail players looking to expand their operations include Shopper's Stop, Pantaloon, Lifestyle, Subhiksha, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus, Barista, Qwiky's, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and Westside. Well-established business houses such as Wadia, Godrej, Tata, Hero, Malhotras, etc., are drawing up plans to enter the fast-growing organized retail market in India. The international players currently in India include McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony, Sharp, Kodak, and the Medicine Shoppe. Global players are entering India indirectly, via the licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector.

Despite all these developments, the organized retail business still comprises a small proportion of the total size of the Rs 9,00,00-crore ($200 billion) retail sector. Retail business growing at 5-6 per cent per annum. The size of organized retailing was estimated around Rs 26,000 crore in 2004, about three per cent of the total. However, it is now set to grow at 25-30 per cent per annum. In developed countries, organized retailing makes for over 70 per cent of the total business.

Even as the government is debating the level FDI in of retail, a number of foreign players, including the world's largest corporation, the $288- billion Wal-Mart Stores, Inc., have announced their intention to enter India in a big way. With the impending opening up of the sector to overseas investment, they are now keen on forays into the sector in partnership with multinational chains. According to industry analysts, as many as 20 big Indian companies are working on plans to enter the sector in partnership with foreign investors.

For instance, it has opened up the real estate sector by allowing 100 per cent FDI in the construction projects. The move is expected to attract foreign funds and new technology into the market. Second, Foreign Trade Policy 2005-06 has extended the benefit of the export promotion capital goods (EPCG) scheme to the real estate sector. This is expected to tremendously boost the organized retail sector by enabling it to create better and modern infrastructure. Also, the extension of concessional duty scheme for import of capital goods by retailers

with minimum area of 1,000 square meters and implementation of VAT will significantly help organized retailing.

Despite all these favorable developments, the Government appears to be still dithering in giving a green signal to FDI in this sector in view of the opposition from Left parties and some sections within the Congress. It is indeed unfortunate that this issue is hanging fire for nearly four years now, even as the government has allowed foreign investment in a number of sectors including banking, telecom and insurance. As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited access to capital, labor and suitable real estate options. In contrast, China, which allowed 49 per cent FDI in the retail sector since 1992, benefited immensely with foreign players bringing capital and new technologies and growing export market for domestic products. At present, around 40 foreign retail players account for almost 20 per cent of the organized retailing in that country. India is tipped as the second largest retail market after China, and the total size of the Indian retail industry is expected to touch the $300 billion mark in the next five years from the current $200 billion. The size of organized retailing is expected to touch $30 billion by 2010 or approximately 10 per cent of the total. Various retailers from across the word have been visiting India over the past few months with a view to establishing their presence in a market that is expected to witness exiting developments.

On the contrary, the opening up of the sector to FDI will lead new economic opportunities and there will be more employment generation. According to a policy paper prepared by the Department of Industrial Policy and Promotion (DIPP), FDI in retail must result in backward linkages of production and manufacturing and spur domestic retailing as well as exports.

According to sources in the PMO, the opening up of retail to FDI would be designed in a such as way that many sectors — including agriculture, food processing, manufacturing, packaging and logistics — reap benefits. It is understood that the multinationals that invest in retail business in India would also source Indian goods for their international outlets in a big way and thus provide a boost to Indian exports. Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing.

According to the World Bank, opening the retail sector to FDI would be beneficial for India in terms of price and availability of products. Experience everywhere has shown that organized retailing tends to have a major controlling effect on inflation because large organized retailers are able to buy directly from producers at most competitive prices. The scale of operation and technology help organized retailers score over the unorganized players, giving the consumers both cost and service advantages.

Government has opened up the real estate sector by allowing 100 per cent FDI in the construction projects. The move is expected to attract foreign funds and new technology into the market. Second, Foreign Trade Policy 2005-06 has extended the benefit of the export promotion capital goods (EPCG) scheme to the real estate sector.

This is expected to tremendously boost the organized retail sector by enabling it to create better and modern infrastructure. Also, the extension of concessional duty scheme for import of capital goods by retailers with minimum area of 1,000 square meters and implementation of VAT will significantly help organized retailing.

Trends of FDI in India

India has continually sought to attract FDI from the world’s major investors. Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. The trend of FDI inflow in India has presented in the following two tables. The table no.1 depicts that the cumulative FDI flows in the country. The total inflow of FDI up to October 2009 amounted to Rs. 5, 86,962 crore. Cumulative amount of FDI inflows from April 2000 to March 2009 were Rs. 5, 01,900 crore. For the month of April the flow of FDI amounted to Rs. 9,854 crores. The year wise analysis of inflow of FDI was presented in the following lines with help of table no.2.

The year wise trend of inflow of FDI in India and rate of growth over the 10 years are shown in the table 2. It can be observed from the table that the maximum growth rate recorded in the year 2006-07 with 186.96 percent growth over the previous year amounting Rs. 70,630 crore. Due to 100 percent FDI allowed in many industrial sectors and an automatic approval was given. With this reason this year showed highest growth rate of FDI inflows. This is the most favored year in respect of FDI inflow. Following this 2001-02, 2005-06 and 2004-05 also recorded better growth rate showing 53.11 percent, 43.61 percent and 41.44 percent respectively. It is also found those two years i.e. 2002-03

Table No. 1CUMULATIVE FDI EQUITY INFLOWS

(1991-2009)(Rs.in crores)

ACumulative amount of FDI inflows (from Aug. 1991 -

Oct. 2009)

Rs. 5,86,962

B.1Cumulative amount of FDI inflows (from April 2000 to

March 2009)

Rs. 5,01,900

B.2Amount of FDI inflows

during 2010-11 (for April 2010)

Rs. 9,854

B.3Cumulative amount of FDI inflows (updated up to Oct. 2009)

Rs.5,11 ,754

Source: RBI Reports 2010-11

and 2003-04 showed negative growth rate representing (29.66percent) and (18.85percent) respectively. The main reason behind this decrease had found that the prohibition of FDI in some sensitive sectors like agriculture, railways, retail industry, real estate etc. Yearly average of FDI based on the 10 years amounted to Rs. 53,366.55 crore i.e. 35 percent of the total. It can be concluded, from the above analysis, that the FDI growth rate is not constant since 1991, when the market was opened to the world. This gone up to Rs. 5, 87,032 crore with an average growth rate of 35 percent irrespective of up and down movements.

Country Wise Share of FDI: The inflow of Foreign Direct Investment (FDI) in India from the highest investment inflow of 10 countries are selected for the study and presented in the table no. 3. The table presents the amount of money invested by the top 10 countries during the last three years period, averages inflow

Table No.2Trend of FDI in India

YeaInflow (Rs.in crores)

Growth (%)

1991-2000 (Aug.1991 - March00)

60,604 -

2000-01 12,646 22.642001-02 19,361 53.112002-03 14,932 -29.662003-04 12,117 -18.852004-05 17,138 41.442005-06 24,613 43.612006-07 70,630 186.962007-08 98,664 39.692008-09 1,23,025 24.70

2009-10 1,23,378 0.30

2009-10 (for April)

11,708 -

2010-11(For

April’10)9,854 -18.81

Total 5,87,032 345.13Average of

10 years (2000 - 2009)

53,366.55 35.00

Source: RBI Reports 2010-11

Table - No. 3

COUNTRY WISE INFLOW OF FDI

Coutry2007-08 (April - March)

% of Total

2008-09 (April - March)

% of Total

2009-10 (April - March)

% of Total

2010-11 (for April'10)

Cumulative Inflows

% of Total

Ranks

Mauritius 44,483 45.09 50,794 41.29 49,633 40.23 2,528 2,13,434 43% 1

Singapore 12,319 12.49 15,727 12.78 11,295 9.15 1,900 47,080 9% 2

U.S.A. 4,377 4.44 8,002 6.50 9,230 7.48 404 37,593 7% 3

U.K. 4,690 4.75 3,840 3.12 3,094 2.51 265 26,263 5% 4

N.Lands 2,780 2.82 3,922 3.19 4,283 3.47 312 20,438 4% 5

Japan 3,336 3.38 1,889 1.54 5,670 4.60 1,455 18,350 4% 6

Cyprus 3,385 3.43 5,983 4.86 7,728 6.26 123 17,900 4% 7

Germany 2,075 2.10 2,750 2.24 2,980 2.42 102 12,571 3% 8

France 583 0.59 2,098 1.71 1,437 1.16 184 7,102 1% 9

U.A.E. 1,039 1.05 1,133 0.92 3,017 2.45 31 7,054 1% 10

TOTAL 98,664   123,025   123,378   9,854 526,357    

Source: RBI Reports 2009-10

along with the proportion a country has in the total FDI in any particular year. Mauritius was stood at top in all four years of the study. It had made substantial share of an average of 43 percent of total FDI of 10 countries of the study. The above table also showed that the inflow from this country was Rs. 28,759 crores

in 2006-07, Rs. 44,483 crores in 2007-08, Rs. 50,794 crores in 2008-09, Rs.49,633 crore in 2009-10 and Rs. 2,528 crore in the month of April 2010 respectively. As far as second position concerned, contributors kept on changing. Singapore stood in the second position in 2007-08, 2008-09 and 2009-10 with contribution of 15.58 percent, 16.36 percent and 9 percent respectively and in the year 2006-07 U.K occupied this position with 16.96 percent. During the study France and UAE countries stood in last position in contributing the FDI to India. The share of these two countries was just one percent of the total cumulative investment.

Sector - Wise Inflow of FDI:

Having discussed the country FDI inflow into India and attempt is made to focus the sectors that are attracted highest part of FDI are studies further analysis. For this the sector-wise amount of FDI along with their proportion, average annual investment is presented in the Table-4.

TABLE – 4SECTROS ATTRACTING HIGHEST FDI EQUITY INFLOWS

Ranks Sector2007-08 (April-March)

2008-09 (April-March)

2009-10 (April-March)

2010-11 (for

April'10)

Cummulative inflows

(April'00-April10)

% to total

Inflows

1SERVICE SECTOR (Financial & Non-financial)

26,589 28,41

1 20,95

8 1,581 106,992 21%

2COMPUTER SOFTWARE & HARDWARE

5,623 7,329 4,350 765 44,611 9%

3

TELECOMMUNICATIONS (Radio,Paging, CellularMobile, Basic Teleohonic Services)

5,103 11,72

7 12,33

8 1,914 42,620 8%

4HOUSING & REAL ESTATE 8,749

12,621

13,586

246 37,615 77%

5

CONSTRUCTION ACTIVITES (Including Roada and Highways)

6,989 8,792 13,54

4 345 36,066 7%

6 POWER 3,875 4,382 6,908 547 21,466 4%

7 AUTOMOBILE INDUSTRY 2,697 5,212 5,609 187 20,864 4%

8METALLURGICAL INDUSTRY

4,686 4,157 1,935 404 13,845 3%

9 PETROLEUM & NATURAL 5,729 1,931 1,328 522 12,026 2%

GAS

10CHEMICALS (Other than Fertilizers)

920 3,427 1,707 115 11,390 2%

Source: RBI Reports 2009-10

The major portions of FDI was attracted by the service sector representing 21 percent of the total FDI inflow amounting to Rs.109,992 crores. Following computers software and hardware and telecommunication sector occupied the second and third position in attracting the FDI inflows registering 9 and 8.5 percent of total FDI inflow representing RS.41,888 crores and Rs.38,345 crores respectively. Petroleum & Natural Gas and Chemicals sectors registered only two percent of total FDI inflows into India.

Conclusion

Indian government had set the path for attracting the copious open flow of FDI with its globalization and liberalization policy. On an average, the growth rate of FDI since globalization was found 37 percent. Opening Indian economy to the world economy, relaxation of previous rigid norms for foreign trade and enlarging the limit of FDI in various sectors are the main reasons of ample growth in FDI inflows in India. Inflow of FDI adversely affected with the reasons of prohibition of FDI in some sectors and recent economic slowdown. This flow boosts the exports and national income in positive way which indications of macroeconomic performance of the nation. These foreign investment inflows are to be diverted to manufacturing and infrastructure sectors which will increase the national product at large. With this it is clear that the India has to attract more and more FDI to make nation self-sufficient by arranging required facilities and creating trade opportunities. For this it is required that the government should amend and revise the norms in a way to expand the foreign trade, attracting joint ventures, minimizing the risk and providing the opportunities like diversifications of sales, acquiring the resources to the investors.

References

1. FDI in India Statistics.2. RBI Reports on RBI site.3. “FDI inflows to exceed USD 35 billion target in 2008-09”

Economic Times.4 http://www.ibef.org/economy/fdi.aspx : INDI BRAND EQUITY

FOUNDATION.5. Reports of Department of Industrial Policy & Promotion, Ministry

of Commerce and Industry.6. FDI Policy 2009-14.