foreign direct investment in india and political instability in business

8/9/2019 Foreign Direct Investment in India and Political Instability in Business

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Foreign Direct Investment In India And Political Instability In Business

Chapter 1: Introduction

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India’s FDI Overall ViewThe early nineties was a period when the Indian economy faced a

severe Balance of Payment crisis. Exports e!an to experience serio"s diffic"lties. The cripplin!

external de ts were p"ttin! press"re on the economy. In view of all these developments therewas a serio"s threat of the economy defa"ltin! in respect of external payments lia ility. It was in

the li!ht of s"ch adverse sit"ations that the policy ma#ers decided to adopt a more li eral and

!lo al approach there y$ openin! its door to FDI inflows in order to restore the confidence of

forei!n investors.FDI provides a sit"ation wherein oth the host and the home nations derive

some enefit. The home co"ntries want to ta#e the advanta!e of the vast mar#ets opened y

ind"strial !rowth. %hereas the host co"ntries !et to ac&"ire reso"rces ran!in! from financial$

capital$ entreprene"rship$ technolo!ical #now'how and mana!erial s#ills which assist it in

s"pplementin! its domestic savin!s and forei!n exchan!e.

The contri "tion or impact of FDI has een well ac#nowled!ed in vario"s disc"ssion papers and

st"dies amon!st these in one of the recent st"dy done on India’s FDI inflows trends and

concepts( it is mentioned that$ )The Economic *"rvey +,,-', reiterated that/ FDI is considered

to e the most attractive type of capital flow for emer!in! economies as it is expected to rin!

latest technolo!y and enhance prod"ction capa ilities of the economy. 0nd the 1ational

2an"fact"rin! 3ompetitiveness 3o"ncil specified that/ Forei!n investments mean oth forei!n

portfolio investments and forei!n direct investments 4FDI5. FDI rin!s etter technolo!y and

mana!ement$ access to mar#etin! networ#s and offers competition$ the latter helpin! Indian

companies improve$ &"ite apart from ein! !ood for cons"mers. This efficiency contri "tion of

FDI is m"ch more important6. The evol"tion of Indian FDI can roadly e divided into three

phases classified on the premises of the initiatives ta#en to ind"ce forei!n investments into the

Indian economy/

4a5 The first phase$ etween ( 7 and ( ($ was mar#ed y the comin! into force of the

2onopolies and 8estrictive Trade Practices 3ommission 428TP5 in ( 7 $ which imposed

restrictions on the si9e of operations$ pricin! of prod"cts and services of forei!n companies. The

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A. FDI Inflows Trends: 1991-2011

The data on FDI inflows into the co"ntry shows that forei!n investors have shown a #een interest

in the Indian economy ever since it has een li erali9ed. 0n increasin! trend of flows can e

o served since ( ( with the pea# of FDI flows ein! reached in +,,-', . Therefore the trend!ives s"pport to the fact that as and when the !overnment has ta#en initiatives to open "p and

li erali9e the economy f"rther$ the investors have welcomed the initiative and reciprocated y

inf"sin! investments into India. There are vario"s reasons which wor# in favo"r of India and

increase the level of interest shown in y forei!n or!ani9ation’s some of them ein! its

demo!raphics’ with a yo"n! pop"lation there is a h"!e cons"mer ase that is to e tapped$ the

!rowin! middle class$ increased "r ani9ation and awareness$ risin! disposa le incomes.

B. FDI Inflow ! Co"ponents:

There has een a chan!e in the method of estimation of FDI inflows since +,,,',($ prior to this

only e&"ity inflows was ta#en as the FDI inflow fi!"re however post +,,,',( the 8BI has started

followin! the international practice and ta#en into acco"nt other components of FDI inflows

namely re'invested earnin!s and other capital. 0 loo# at the contri "tion of vario"s components

of FDI reveals that the share of re'invested earnin!s was risin! from +,,, onwards "ptil +,,A',7

after which it has constantly een declinin!. The share of e&"ity inflows has risen sharply since

+,,,',( when it stood at A .7 per cent to :


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FDI in activities not covered "nder the a"tomatic ro"te re&"ires prior approval of the

?overnment which are considered y the Forei!n Investment Promotion Board 4FIPB5$

Department of Economic 0ffairs$ 2inistry of Finance. Indian companies havin! forei!n

investment approval thro"!h FIPB ro"te do not re&"ire any f"rther clearance from the 8eserveBan# of India for receivin! inward remittance and for the iss"e of shares to the non'resident

investors. 0s can e seen that since +,,A',7 there has een a si!nificant difference in the amo"nt

of FDI inflows thro"!h the two ro"tes a possi le explanation for which co"ld e that with the

investment climate in India improvin! and healthy competition amon! states to attract FDI$ the

!overnment eased forei!n investment re!"lations leadin! to a sp"rt in FDI comin! thro"!h the

8BI ro"te$ which is a positive si!n. 0s per the data availa le there is an increase in share of

inflows thro"!h the 8BI’s a"tomatic ro"te$ a decrease in the shares of inflows thro"!h the

*I0CFIPB.

D. &ectoral FDI Flow:

3han!in! Dynamics of Investment/

Overall FDI into almost all the sectors had declined in the year +,(,'(($ a reason for which

co"ld e the !lo al sit"ation that prevailed d"rin! that time frame.

0ltho"!h services sector remain the sector attractin! the hi!hest FDI inflows since +,,7',: its

share has een constantly declinin!.

The FDI flows into comp"ter hardware and software has een downward ever since +,,A',7. It

has drastically !one down from +


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Chapter 2: 'ele$ance (f FDI In India

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Technolo!y transfer co"pled with #nowled!e diff"sion that leads to improvement in

prod"ctivity. It can$ th"s$ fasten the rate of technolo!ical pro!ress thro"!h a @conta!ion’ effect

that permeates domestic firms

The transfer of etter or!anisational and mana!ement practices thro"!h the lin#a!es etweenthe investin! forei!n company and local companies.

*ome of these enefits have een seen in the cases of a"tomo ile and the telecom ind"stry as

disc"ssed in the st"dy earlier. 2oreover it can e seen that a promotion and !rowth in one

ind"stry sim"ltaneo"sly f"els the !rowth in its interconnected sectors as well.

It is well accepted that India’s risin! !rowth wo"ld re&"ire a sim"ltaneo"s expansion of its

infrastr"ct"re facilities to s"pport it. The ?overnment of India has een fre&"ently ta#in!

initiatives to li erali9e and incentivi9e its forei!n direct investment policies to attract investments

however the recent decision to s"spend FDI in retail as well as hold all other FDI decisions co"ld

dampen the international investor’s confidence$ as the initial anno"ncement and then the roll ac#

of the initiative mi!ht e interpreted as a si!n of political insta ility in ta#in! #ey policy

decisions. In today’s !lo al scenario when investors mi!ht e loo#in! at alternate aven"es$ to

invest their money there are only a few nations across the world that provide opport"nities to

forei!n companies$ with a hi!hly potential mar#et and a low cost man"fact"rin! opport"nity and

India is one of them. FDI in retail wo"ld have een an opport"nity to attract inflow of f"nds

which wo"ld have res"lted in ma>or enefits for the Indian economy/

(. 0!ric"lt"re/ Or!ani9ed retailin! wo"ld have led to a complete overha"lin! of the existin!

a!ric"lt"ral s"pply chain. It wo"ld have led to ypassin! of vario"s intermediaries there y

red"cin! costs. Investments made y them wo"ld have helped in creatin! ac# end infrastr"ct"re

li#e wareho"sin! and distri "tion centres$ transport and cold stora!e facilities. It wo"ld havecreated oth direct as well as indirect employment at vario"s levels. 0ll these wo"ld have

res"lted in enhanced farmer’s reali9ations$ improved &"ality of prod"cts and red"ction in

cons"mer price.


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+. ?rowth in allied ind"stries/ The inflow of f"nds into retailin! wo"ld have sim"ltaneo"sly led

to the !rowth of allied ind"stries as happened in the case of a"tomo iles$ which led to the !rowth

of a"to components sector. Hi#ewise FDI in retail wo"ld assist !rowth in s"pplier ind"stries s"chas food'processin! and textiles moreover$ !rowin! demand for retail space$ constr"ction of real

estate wo"ld have also ta#en place.

;. Increase in Employment/ 0s mentioned in the previo"s point the !rowth in a n"m er of allied

ind"stries wo"ld also res"lt in the !rowth of employment opport"nities across sectors. Both

direct and indirect la o"r wo"ld e re&"ired to s"pport the ind"strial and operational machinery

that wo"ld have een formed as a res"lt of openin! "p of the sector.


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followin! !lo ally reco!ni9ed models of

man"fact"rin!.

The technolo!ical capa ility of Indian

firms has also seen improvements over the years.

FDI o"!ht the re&"ired capital into the

sector which assisted players in scalin!

"p their s"pply there y assistin! their

overall efficiency and !rowth

have improved tremendo"sly.

Over the years there have een new

prod"ct cate!ories that have een

created #eepin! in mind the chan!ein c"stomer preferences. The recent

s"r!e in demand for l"x"ry and hi!h

end a"tomo iles has een noticed y

vario"s international rands which have

now started loo#in! at India as a f"t"re

!rowth driver.

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Chapter ): *ost (pportunit!

0s the lar!est democracy with the second lar!est pop"lation in the world and with r"le of law

and a hi!hly ed"cated$ En!lish spea#in! wor# force$ India m"st have een considered as a safe

haven for forei!n investors. et$ India seems to e s"fferin! from a host of self'imposed

restrictions and pro lems re!ardin! openin! its mar#ets completely to !lo al investors y

implementin! f"ll scale economic reforms. India seems to have lost a !olden opport"nity for

attractin! a si9a le amo"nt of FDI at least commens"rate with that of 3hina. *ome of the ma>or

impediments for India’s poor performance in the area of FDI are/ political insta ility$ poor

infrastr"ct"re$ conf"sin! tax and tariff policies$ Draconian la or laws$ well entrenched corr"ption

and !overnmental re!"lations.

(. Political insta ility/ Indian politics is cacophono"s and fractio"s$ playin! itself o"t in one of

the most socially hetero!eneo"s societies in the world with sharp social ine&"ities$ a corr"pt and

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inefficient "rea"cracy$ and poor acco"nta ility of politicians 4Jap"r and 8amam"rti$ +,,(5.

0ddin! to these pro lems is the political insta ility at the central !overnment arisin! o"t of

the m"ltiplicity of re!ional political parties and the need to form sha#y coalition !overnments.

3onse&"ently$ there were fo"r !eneral elections and six prime ministers d"rin! the last decade. Ins"ch an environment$ the m"ch needed economic reforms have een slow and inade&"ate. Even

tho"!h the present Va>apayee’s !overnment is more sta le than the three previo"s ones$ it is still

a sha#y coalition of +< disparate parties with diver!ent a!endas. There is a !eneral consens"s

across party lines to p"sh for s"stained economic reforms and !rowth "t$ in reality$ !overnments

are repeatedly o li!ed to dil"te the reforms in order to #eep their coalition partners on oard

4Jripalani$ ( 5.

+. Infrastr"ct"re/ It is !enerally reco!ni9ed that the state'controlled physical infrastr"ct"re is the

wea#est lin# in the economy 4*heel$ +,,(5. / Hac# of ade&"ate infrastr"ct"re is cited as a ma>or

h"rdle for FDI inflows into India. Badale 4( -5 states that re!ional differences in infrastr"ct"re

have ecome critical determinants for o"tside investors. The Indian !overnment has

vowed to rin! its infrastr"ct"re "p to date$ "t power c"ts remain daily events$ and transportin!

!oods from place to place ta#es wee#s 4Hane$ ( -5. This ottlenec# in the form of poor

infrastr"ct"re may disco"ra!e forei!n investors from p"ttin! their money in India. owever$ this

in itself can e an opport"nity for investment with the !overnment’s willin!ness to open the

infrastr"ct"re sector to forei!n investors. Even state !overnments are welcomin! pro>ects li#e

roads$ r"ral electrification$ and power !eneration and transmission 4Patha#$ Ven"!opal and

3handra$ +,,,5. India’s a!e old and i!!est infrastr"ct"re pro lem is the s"pply of electricity.

Power c"ts are so common that most "sinesses stopped dependin! on state electricity

s"pply and started havin! their own power !enerators. Even the little power s"pplied y state'

owned electricity oards$ the power is so "ncertain and "neven that it leads to "rnt o"t motors

and lost o"tp"t. It is no s"rprise that India is the world’s i!!est mar#et for items s"ch as volta!ere!"lators and power sta ili9ers. Enron 3orporation came with the lar!est FDI pro>ect so far in

India and started the G+. illion Dha oli power pro>ect six years a!o. B"t contin"o"s liti!ation

with its sole c"stomer$ the *tate of 2aharashtra$ res"lted in Enron stoppin! wor# and finally

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p"llin! o"t of India. Enron acc"sed the state !overnment of slowin! the pro>ect for political

reasons. Enron decided to p"ll o"t of India and the company’s decision to flee is

havin! a chillin! effect on other forei!n power companies 4Jripalani$ +,,(5 If the disp"te is not

resolved soon$ India co"ld harm its already li!hted ima!e as destination of FDI.

;. 3ommercial Haw and ?overnment re!"lations/ Indian company law has "nder!one a n"m er

of si!nificant chan!es in ( $ s"pposedly pavin! for smoother inflow of FDI. The 3ompanies

40mendment5 0ct of ( allowed Indian companies for the first time to "y ac# their shares

and s" stantially relaxed the restrictions on inter'corporate loans and investments. owever$

an indirect amendment of the law y the new !"idelines of the 2inistry of Ind"stry has

effectively rendered investments y international investors s" >ect to veto y their local partners

4Viswanathan$ +,,,5. *everal >oint vent"res etween forei!n and Indian companies have

"nraveled$ forcin! the investors to waste a lot of time ne!otiatin! with their Indian partners over

the premi"m demanded for a "y'o"t. Knder the new law$ written approvals have to e o tained

from oth past and present >oint vent"re partners and technolo!y and trade mar# licenses in order

for a forei!n company to do anythin! in India. 8estrictin! forei!n investment is a rec"rrin!

theme thro"!ho"t the ( amendments to the 3ompanies 0ct. 0dditionally$ the new ?"idelines

of the 2inistry of Ind"stry effectively p"t the Indian companies in a position to dictate terms to

their >oint vent"re partners and licensors of technolo!y and trademar#s 4Viswanathan$ +,,,5.


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levied y individ"al states and so these taxes vary from state to state. This complex sales tax

str"ct"re can sometimes e a deterrent to forei!n investors. 3oca 3ola 3ompany fo"nd that

car onated soft drin#s face an excise tax of i$ +,,(5.

A. Ha or Haws/ India is ran#ed very hi!hly in the ?lo al 3ompetitive report for a "ndant and

s#illed la or$ "t very low on flexi ility. This inflexi ility is em edded mainly in the laws and

re!"lation relatin! to disp"tes in chan!e of service conditions. One of the i!!est impediments to

privati9ation in India is the lac# of an exit policy$ that is$ a policy to !overn the dismissal of

red"ndant wor#ers 48amam"rthi$ +,,,5. The present Indian la or laws for id layoffs of wor#ers

for any reason 4Jripalani$ ( -5. These laws protect the wor#ers and thwart le!itimate attempts

to restr"ct"re "siness. To retrench "nnecessary wor#ers$ firms re&"ire approval from oth

employees and state !overnments'approval that is rarely !iven 4Jripalani$ +,,,5. 2ilitant "nions

extort h"!e s"ms from companies thro"!h over'!enero"s vol"ntary retirement schemes.

Tread!old 4( -5 o serves that Lattempt to tap the cheap and often hi!hly s#illed la or of India

can in itself e a trap and anyone thin#in! of investin! directly into the Indian mar#et m"st ta#e

care when dealin! with these la or laws. Once wor#ers are employed$ it is virt"ally impossi le to

dismiss themL. The pharmace"tical company Par#e' Davis$ India was recently reported to have

paid G7.7 million to retire >"st ;,, wor#ers$ a o"t fo"r times the "s"al rate 4Tread!old$ ( -5.

7. 3orr"ption/ The word )corr"ption6 does not s"rprise the Indians eca"se they are expected to

ri e everyone$ from the traffic cop to the top officer in the civil service. It is common#nowled!e in India that corr"ption is the norm$ not an exception. India is afflicted with what

some refer to as a crisis in !overnance$ with corr"ption in nearly every p" lic service$ from

defense to distri "tion of s" sidi9ed food to the poor people$ to the !eneration and

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transmission of electric power. Politicians in their honest moments admit that the system is

thoro"!hly corr"pt. The complex approval proced"res confrontin! the forei!n investors are

also very often intimidatin!. 0s Tread!old 4( -5 states$ forei!n investors find it diffic"lt to c"t a

path thro"!h the paper wor# of overlappin! !overnment a!encies. The h"mon!o"s "rea"craticstr"ct"re has created a fertile !ro"nd for corr"ption. Transparency International 4+,,,5 recently

ran#ed India close to the ottom of its list corr"pt co"ntries. J"mar 4+,,,5

o serves that a com ination of le!al h"rdles$ lac# of instit"tional reforms$ "rea"cratic decision'

ma#in! and the alle!ations of corr"ption at the top have t"rned forei!n investors away from

India. 2ost forei!n investors have ecome leery of the co"ntryMs history of discrimination

a!ainst forei!n companies and its rep"tation as a slow$ diffic"lt$ "rea"cracy ridden

environment to do "siness 4Teisch and *toever$ ( 5. 0ccordin! to Hane 4( -5$ the most

tellin! evidence of the cost of delayin! the reforms is the sheer effort forei!n investors have to

p"t in to cope with the la yrinthine "rea"cratic tan!le. Vittal 4+,,(5 states that corr"ption$ the

mis"se of p" lic office for private !ain$ is capa le of paraly9in! a co"ntry’s development and

divertin! its precio"s reso"rces from p" lic needs of the entire nation. 3orr"ption is

anti'poor eca"se it snatches away food from the mo"ths of the poor. 3orr"ption is anti'

development. 0ccordin! to the Knited 1ations Development Pro>ect report for *o"th 0sia in

( $ if corr"ption levels in

India come down to those of *candinavian co"ntries$ India’s ?DP !rowth wo"ld increase y (.A

per cent and FDI will !row y (+ per cent 4Vittal$ +,,(5.

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Chapter +: India,s *on% nco"forta le

/istor! #ith FDI

LThe ever increasin! state controls were carried on to s"ch a point where$ after nearly fo"r

decades of !overnmental intervention$ the nation had ecome virt"ally an#r"pt in almost every

sphere ' economic$ political and commercial.L

By the early ( ,s it was clear that a chan!e of co"rse was the only way forward and "nder Prime 2inister 1arasimha 8ao the !overnment e!an to li erali9e the Indian economy little y

little. FDI started tric#lin! in. By way of comparison$ 3hina $ "nder Den! Niaopin! had e!"n

introd"cin! somethin! a#in to modest amo"nts of free mar#et reform in the ( -,s as a way o"t

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of a similarly r"ino"s and failed socialist economy. owever$ comparisons of FDI flows

etween India and 3hina do not flatter India. In ( ,$ at the dawn of 8aoMs reforms$ FDI into

India stood at an extremely modest K*G(7+ million and it too# "ntil ( - for FDI flows to pass

the G; illion mar#. 3hina hit G;.< illion in ( , and y ( - was seein! FDI of G


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these pro lems is the political insta ility at the central !overnment arisin! o"t of the m"ltiplicity

of re!ional political parties and the need to form sha#y coalition !overnments.L

It is hard to ima!ine any potential investor readin! that and thin#in!$ L*o what L. If there is one

thin! "siness hates a ove all else$ it is political ris#. Politics is a realm where anythin! can

happen and pro a ly will$ as far as "siness is concerned. The pro lems with the e"ro9one are$

in essence$ p"rely political$ as are the sol"tions$ which is why the E"ro9one crisis loo#s set to r"n

for a decade or so yet. IndiaMs Lcacophono"sL politics loo# set to r"n for a !ood deal lon!er than a

mere decade ' which loo#s li#e inhi itin! what sho"ld e stron! FDI flows into the dim and

distant f"t"re.

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Chapter : Forei%n Direct In$est"ent FDI 3

A 4ecessit! In India 55

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There are ar!"ments and co"nter'ar!"ments on FDI or Forei!n Direct Investment in India in theParliament$ in election rallies$ in TV'de ates$ in newspaper articles$ in !eneral stri#es in the

co"ntry or Bharat Bandhs… There are o vio"s fears y the farmers$ retailers$ small'scale

man"fact"rers$ and the common man on the effect of FDI in India. *ome say that FDI in India

will rin! ma>or 2"lti 1ational 3ompanies 4213s5 in India which will a olish small'scale

retailers and "sinessman. There are ar!"ments sayin! that the 213s will have a monopoly in

the mar#et res"ltin! in a sharp rise in price of items in India. F"rther$ there is also a fear that the

co"ntry’s sec"rity oth internal and external$ will e at sta#e d"e to the involvement of 213s

in Telecom$ Internet$ 0viation$ Infrastr"ct"re$ 8etail$ ealthcare$ Ins"rance$ etc.

1ot that all the a ove ar!"ments a!ainst FDI are invalid. owever$ with a positive mindset$ we

can certainly overcome s"ch apprehensions. This can certainly e done y rin!in! reforms in

o"r "dicial system$ and y resettin! a stron!er re!"lator li#e the 3ompetition 3ommission in the

line of Election 3ommission of India or 0"ditor ?eneral of India. 2oreover$ Vi!ilance

3ommission has to e more responsive and a!!ressive in its activities. 0lon! with these$ the

concept of Lokpal needs to e operational in India and the nat"re of f"nctionin! of the 3entral

B"rea" of Investi!ation 43BI5 needs to e completely a"tonomo"s in this re!ard. 0nd of co"rse$

the p" lic 4cons"mers5 m"st e aware$ prompt and p"rs"ant with re!ard to iss"es and their

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sol"tions Q %ith a proper check-and-balance policy implemented$ we can certainly reap enefits

from FDI in India. In the c"rrent economic scenario stiff rise in corr"ption$ lac# of

acco"nta ility and transparency FDI seems to e the ri!ht answer and is a dire necessity in

India.

ere are some reasons favo"rin! FDI in IndiaR

It is really s"rprisin! to #now that only +';= Indians pay Income tax. Does this fi!"re say that

the income of :' -= Indians are less than the taxa le limit 4I18 + Ha#hCyear5 0 serio"s

do" t. There are many reasons to it. The first and foremost is the lac# of transparency and lac# of acco"nta ility in o"r financial transactions e it in income or expendit"re. People prefer cash

transaction over card or che&"e while "yin! any item in India. *tartin! from a kirana shop

4local !eneral store5 to a >ewellery shop , every ody prefers cash transaction and !ivin! and

ta#in! a ill Creceipt is mostly disco"ra!ed. *ome feel it is a ta oo to as# for a ill$ and some

thin# @why to pay tax and ta#e a ill’ B"t have yo" ever wondered that in not as#in! for a ill

Creceipt$ who is !ettin! enefited the c"stomers or the aamjunta Q @1o’ they are the losers

only QQQ

%ith direct and or!ani9ed mar#etin! which will mainly res"lt o"t of FDI$ the financial

transactions will e mostly transparent and will e acco"nted for. Payments will e mostly in

online mode. This will not only improve the tax scenario in India "t also c"rtail h"!e corr"ption

in India. Poor c"stomers will not e cheatedR and even if they are cheated$ with a valid ill

Creceipt$ necessary complaints can e conveniently filed in the 3ons"mer 3o"rt. The

investi!ation process will also ecome easy and &"ic# as everythin! wo"ld e d"ly acco"nted.

In India$ we have the wide concept of )2iddle'2an6 or )0!ent6 or )Bro#er6$ who always

demands hisCher share in every dealS sometimes even more than the act"al cost of the prod"ct or

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service$ witho"t act"ally doin! any thin! or addin! any val"e to it. The concept of direct

mar#etin! is hardly availa le in India$ especially in 0!ric"lt"re$ 2edicine$ ?rocery and

o"sehold items$ etc. *"rprisin!ly$ there are many middle'men involved in the process from

the farmer to the cons"mer$ from the factory'wor#er to the c"stomer$ from the la oratory'technician to the patient$ and from the poor man"fact"rer 4wor#men5 to the avera!e cons"mers.

This not only increases the price of the items "t also enco"ra!es hoardin!$ corr"ption$ "nethical

practices in "siness$ "nfair trade dealin!s$ and a ove all the i! "! i.e. inflation.

0s per a st"dy commissioned y the %orld Ban#$ farmers in India hardly !et anythin! more than

(+'(A= of the price cons"mers pay at the retail o"tlet for 0!ric"lt"ral prod"cts. The reasons ein! ' 4i5 lac# of ed"cation or awareness 4ii5 poor infrastr"ct"re 4machinery5 4iii5 poor stora!e

system 4more than +A= food'!rains are wasted in India today d"e to poor stora!e system5 4iv5

poor transport 4e.!. non'"r ani9ed roads leadin! from the a!ric"lt"ral fields to the towns5 4v5

middle'man 4mar#et'domination5. %ith direct mar#etin! as expected eca"se of FDI in

a!ric"lt"re$ the involvement of middle'man will e minimi9ed in the process. Both the farmer

and the cons"mer will e enefited lar!ely &"antitatively and &"alitatively. Direct sell y the

farmers to or!ani9ed retailers can render them a profit a o"t 7,= hi!her than that via @ mandi @ 4a

i! "n'or!ani9ed wholesale Cretail mar#et in India5 or the middle'man Q This will also chec#

inflation of food items. 2oreover$ FDI will also ens"re ade&"ate stora!e facilities for food items$

improve infrastr"ct"re scientifically and transportation facilities.

Hi#e 0!ric"lt"re$ 8etailin! in India also re&"ires FDI and or!ani9ed mar#etin!. The &"ality of

the prod"cts will e improved and at the same time the price of the retail items will red"ce

severely. 2oreover$ it will also !enerate employment in India. %ith India’s traditional family

system$ c"lt"re$ pop"lation and needs$ the small retailers will also remain f"lly f"nctionalR "twith enhanced acco"nta ility in services and prod"cts. It will create a healthy atmosphere for a

s"stained competitive mar#et.

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Other than 0!ric"lt"re and 8etail$ FDI will also enefit India to improve its Telecom penetration$

Internet afforda ility$ etc. 0t present$ Broad and *ervices are mainly availa le in cities only.

%ith etter infrastr"ct"re and technolo!y$ it can e expanded to villa!es or r"ral areas at a lesser

cost. ?rowth of Telecom and Internet in India will lead to etter ?overnance$ ealthcare$Ins"rance$ Ed"cation$ etc. This will ens"re more and more participation of the common man in

day'to'day services or the P" lic *ervices of the !overnment. 0ll services can e improved and a

etter lifestyle can e provided to the common man.

%ith FDI in ealthcare and Ins"rance$ etter care facilities can e provided at a lesser cost in the

villa!es and expert advices can also e effectively delivered thro"!h e'health pro!rams. 3ost of

2edicines will also come down drastically$ if the system of !eneric medicines is adopted in

India. In any case$ with no middle'man involved$ the prices of medicines can e ro"!ht down at

least y (A'+,=. 0wareness for ins"rance schemes e it life ins"rance or crop ins"rance or

health ins"rance will also !reatly enefit the people in !eneral.

%hat we need is very simple accountable and transparent services at a better price with

growth-oriented policies; create more jobs and provide better services. Political parties r"lin!

or opposition m"st explore mat"rity levels in "nderstandin! the vario"s iss"es y disc"ssin!

and de atin! these in the Parliament$ and not on the streets and election rallies Q 1ation'wide or

state'level stri#es m"st e disco"ra!ed o"tri!htly as these activities often spread the wron!

messa!e to the "naware fol#s. Parliament can introd"ce or chan!e Haws and Instit"tions s"ch

that thin!s can e improved to a lar!er extent in the interest of the common man.

2any may differ re!ardin! the implementation$ policy and the limits of FDI in vario"s sectors.

B"t if FDI rin!s or%ani6ed mar#et$ with accounta ilit! and transparenc! $ then it sho"ld e

definitely welcomed in India$ witho"t any politics.

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24


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Chapter 7: #al"art In India- Case &tud!

o"rs after the Indian ?overnment approved FDI in m"lti' rand retailS there was an o"tcry from

vario"s sections of the society$ media and political parties a o"t the vial a ility of the decision.

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The most disc"ssed part of this decision has een whether openin! of store li#e %al'2art in

India is !oin! to improve or dist"r the retail environment. Before we can analytically answer

this &"estion$ let "s have a loo# at the profileS the pros and cons of %al'2art in !eneral. %al'

2art is one of the lar!est employers in the worldS it employs more than (.A million peopleworldwide. Its ann"al reven"e is more than G


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een adoptin! state of art technolo!y and always stays a step ahead of its competitors. It

connected its entire store with comp"ter networ# as early as in ( :,$ %al'2art also owns the

lar!est private satellite networ#S it also introd"ced the revol"tionary ar codes and advanced E8P

for inventory mana!ement. Its sheer si9e and vol"me allows it to order in "l# and ar!ain for avery low cost. 0 ove all %al'2arts operation cost and la o"r prod"ctivity are #nown to e one

of the lowest.

There is also a mixed feelin! whether %al'2art will red"ce or increase the n"m er of >o s$ will

the #irana shops and the !eneral retail o"tlet lose its charm. %ell$ the !eneral retail shops and

!rocery have already started to lose foot$ with me!a malls sprawlin! the len!th and readth of

the co"ntry. There already has een red"ction of sales and profits for the !eneral stores. %al'

2art will do the same to these malls$ well this is the r"le of the !ame and its all fair. Its all a o"t

caterin! and satisfyin! the needs of the c"stomers and no one in the world #nows the retail

c"stomer etter than %al'2art. %al'2art has often een acc"sed of "sin! predatory pricin!$ie..

*ellin! !oods at an exceptional cheap price$ to capt"re the mar#et share and force other o"tlet to

sh"t. Finally monopolisin! the mar#et and drive the price at a more comforta le level for

themselves. The introd"ction of %al'2art in the Indian mar#et will definitely see other

competitors losin! mar#et share$ dippin! profit and even e forced to close. 0 %al'2art store on

an avera!e employs A,, employees$ "t that does not necessarily mean creation of A,, more

>o s. 0s mentioned efore that %al'2art forces other retailer to close$ th"s it a sor s these wor#

force. Their state of art inventory also means that they can sell the same st"ffs with a lower

n"m er of employees. Th"s it is a very de ata le topic if there is a net increase in employment

d"e to %al'2art at a micro level. owever at a macro level there will e h"!e amo"nt of

"nemployment d"e to clos"re of independent stores "t a h"!e amo"nt of employment

opport"nity will also e created y %al'2art indirectly$ an estimated (.A million >o s will e

created in India d"e to lo!istics alone. %al'2art is often in the news for payin! its employs very

low$ "t on the "pside employees at %al'2art dont need a very hi!h level ed"cational&"alification. %al'2art heart lies in the core of western and so"thern K* were the people are not

very well off. Th"s its operation in low wa!e area le!itimates its low payment it ma#es to its

employees. B"t with not a very demandin! wa!e wor# force availa le in India that sho"ld not e

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a pro lem. 0nalyst however have showed that overall avera!e wa!es in the retail sector does !o

down y +';=$ "t that is !enerally d"e to the low demand of employees that %al'2art

artificially creates for the mar#et d"e to close down of some retailers.

%al'2art promoted small local man"fact"res who can man"fact"re !oods at a low cost$ %al'2art acts as a rand for these locally prod"ced !oods and if a !ood is availa le on a %al'2art

shelf it has a h"!e mar#et ase for s"re and that too$ witho"t advertisement. Th"s if mandated

well we will see a oom in the small and medi"m man"fact"rin! sector$ creatin! a very healthy

economic environment and creatin! employment. %al'2art will also drive away the middle man

and deal directly with prod"cers$ this will sharply drop the price of !rocery and rin! the food

inflation lower 4momentarily5$ the people will !et what they wanted' cheaper !oods$ "t it will

cost >o s of the middle man contractors.

0 tiny little thin! to worry a o"t is the inade&"ate infrastr"ct"re$ thin# of a %al'2art store even

at the o"ts#irts the city the vol"me of traffic it will e rin! in$ will ca"se a lot of traffic >ams in

already very con!ested Indian streets.

%al'2art will chan!e the face of the Indian retail sector$ it will move from a local concentrated

activity to !lo al phenomenon. It will #ill the local economic activity li#e contractin!$ "t

s" se&"ently create new economic opport"nity. There is an o vio"s fear that farmers and the

s"ppliers are not !oin! to enefit from %al'2art in the lon! term. %al'2art all to!ether will

rin! in forei!n investment and stren!then Indias economic position !lo ally and also help !et

!ood !rades from the ratin! a!encies. B"t it will definitely e a tric#y tas# for %al'2art to

explore the already price o sessed nation.

Het "s !o head to head.

(5 %ith the si9e of the Indian pop"lation and the demand in the retail sector$ %al'2art will

prod"ce a o"t - million >o opport"nity in retail and lo!istics com ined. On the down side India

will see many >o s c"t which may e as lar!e as < million.

+5 There will e a chan!e in the economic environment of the co"ntry$ it will have to adaptto a more !lo al condition and chan!e and chan!e &"ic#.

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Chapter 8: Conclusions And

'eco""endations

3"


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Even tho"!h India is a democracy$ it has !one thro"!h a series of sha#y coalition !overnments

witho"t m"ch sta ility and with no steady policies toward forei!n investors. Even tho"!h 3hina

is a comm"nist co"ntry$ the !overnment’s firm and "n&"estioned control over the policies acted

as a !reat advanta!e in providin! sta ility of policies$ which made the forei!n investors feel

sec"re in investin! in 3hina. 3ontrary to the pathetic sit"ation in India$ there is no la or "nion

pro lem in 3hina. 0s with India$ 3hina also has a loated "rea"cracy$ which is ridden with

corr"ption. B"t$ the 3hinese !overnment has een wor#in! hard to root o"t the corr"ption with

severe p"nishment$ incl"din! the death penalty. It seems it is irrelevant to !lo al investors as to

whether the host co"ntries are democracies with r"le of law or comm"nist co"ntries with ri!id

controls. These investors’ main interest is access to emer!in! mar#ets of the developin!

co"ntries$ a safe and sec"re ret"rn on their investment and the sta ility of the host co"ntry’s

political environment. India is a co"ntry with enormo"s potential for development. India needs to

wa#e "p to the realities of the !lo al investment mar#ets$ and start to notice the preferences of

the forei!n investors. India has to rin! in sweepin! reforms to completely li erali9e its

economy$ a andon the inefficient protectionist policies re!ardin! its inefficient domestic

ind"stry$ c"r the cancer of corr"ption and offer the appropriate tax incentives to the forei!n

investors. If the Indian !overnment hesitates to rin! in the m"ch'needed economic reforms

soon$ India may face a tale of lost opport"nity.

'eco""endation

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FDI since ( ( has proved to e !ame chan!er for wide se!ments of Indian ind"stry. FDI has

chan!e &"ality$ prod"ctivity$ and prod"ction in areas where it has een allowed. FDI has led to

the creation of new activities s"ch as IT'BPO$ which was initiated y select forei!n companies.

India needs h"!e investment in the (+th Plan period$ it is callin! for investments to the t"ne of G(trillion in the infrastr"ct"re sector alone. %e need amon! many other infrastr"ct"re facilities

infrastr"ct"re in retail as well as those for food perisha le prod"cts. Openin! of FDI in retail

wo"ld have led to the creation of s"ch farm infrastr"ct"re. This apart minin! and man"fact"rin!

sectors also re&"ire h"!e investments and FDI can s"pplement domestic efforts si!nificantly.

There is also an "r!ent need for India to a"!ment the investment a sorption capacity. 2oreover

it has to e "nderstood that India is competin! for forei!n investments with other emer!in!

economies and so far a comparative analysis s"!!est that India has not een a lar!e recipient of

FDI. Therefore we wo"ld li#e to propose a few s"!!estions to the policyma#ers for their

consideration/

B"rea"cratic delays and vario"s !overnmental approvals and clearances involvin! different

ministries need to e fastened so as to increase the a sorption rate of FDI into the co"ntry.

8estrictions on sector caps and entry ro"te to sectors other than those of national importance

need to e li erali9ed f"rther and constant reviewin! of policies m"st e done.

?overnment m"st ens"re consistency of policy so as to improve the "siness and investor

confidence. It is in the interest of the ind"stry at lar!e if a mechanism co"ld e developed which

facilitates a cons"ltation etween 3entre and *tate !overnments efore a policy rollo"t so that

once the decision is ta#en its implementation does not !et affected.

?overnment m"st reco!nise that !ood re!"lations and efficient processes are #ey catalysts for

FDI. 0ccessi le and relia le information and efficient and predicta le actions y p" lic

instit"tions help create a "siness environment cond"cive to investment.

Time o"nd$ non'discretionary$ simplified and less n"m er of proced"res and approvals wo"ld

also help in "pliftin! the international investor’s confidence and help foster more investment intoIndia.

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Chapter : Facts And Fi%ures

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%hat is the f"ll form of FDI /

The f"ll form of FDI is Forei!n Direct Investment.

%hat is the meanin! of FDI

The Forei!n Direct Investment means )cross order investment made y a resident in one

economy in an enterprise in another economy$ with the o >ective of esta lishin! a lastin!

interest in the investee economy. FDI is also descri ed as )investment into the "siness of a

co"ntry y a company in another co"ntry6. 2ostly the investment is into prod"ction y either

"yin! a company in the tar!et co"ntry or y expandin! operations of an existin! "siness in that

co"ntry6. *"ch investments can ta#e place for many reasons$ incl"din! to ta#e advanta!e of

cheaper wa!es$ special investment privile!es 4e.!. tax exemptions5 offered y the co"ntry.

%hy 3o"ntries *ee# FDI 4a5 Domestic capital is inade&"ate for p"rpose of economic !rowthS

4 5 Forei!n capital is "s"ally essential$ at least as a temporary meas"re$ d"rin! the period when

the capital mar#et is in the process of developmentS

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4c5 Forei!n capital "s"ally rin!s it with other scarce prod"ctive factors li#e technical #now

how$ "siness expertise and #nowled!e

%hat are the ma>or enefits of FDI /4a5 Improves forex position of the co"ntryS

4 5 Employment !eneration and increase in prod"ction S

4c5 elp in capital formation y rin!in! fresh capitalS

4d5 elps in transfer of new technolo!ies$ mana!ement s#ills$ intellect"al property

4e5 Increases competition within the local mar#et and this rin!s hi!her efficiencies

4f5 elps in increasin! exportsS

4!5 Increases tax reven"es

%hy FDI is Opposed y Hocal People or Disadvanta!es of FDI /

4a5 Domestic companies fear that they may lose their ownership to overseas company

4 5 *mall enterprises fear that they may not e a le to compete with world class lar!e

companies and may "ltimately e ed!ed o"t of "sinessS

4c5 Har!e !iants of the world try to monopolise and ta#e over the hi!hly profita le sectorsS

4d5 *"ch forei!n companies invest more in machinery and intellect"al property than in wa!es of

the local peopleS

4e5 ?overnment has less control over the f"nctionin! of s"ch companies as they "s"ally wor#

as wholly owned s" sidiary of an overseas companyS

Brief Hatest Developments on FDI 4all sectors incl"din! retail5/'

+,(+ Octo er/ In the second ro"nd of economic reforms$ the !overnment cleared amendments

to raise the FDI cap4a5 in the ins"rance sector from +7= to < =S

4 5 in the pension sector it approved a +7 percent FDIS

1ow$ Indian Parliament will have to !ive its approval for the final shape$L

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+,(+ ' *eptem er / The !overnment approved the

4a5 0llowed A(= forei!n investment in m"lti' rand retail$

4 5 8elaxed FDI norms for civil aviation and roadcastin! sectors. FDI cap in Broadcastin!

was raised to :


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• Information Technolo!y

• Pharma

• 0"to parts

• ewelry

• 3hemicals

In last few years$ certainly forei!n investments have shown "pward trends "t the strict FDI

policies have p"t h"rdles in the !rowth in this sector. India is however set to ecome one of the

ma>or recipients of FDI in the 0sia'Pacific re!ion eca"se of the economic reforms for increasin! forei!n investment and the dere!"lation of this important sector. India has technical

expertise and s#illed mana!ers and a !rowin! middle class mar#et of more than ;,, million and

this represents an attractive mar#et.

Bac;%round and 'ecent De$elop"ents for FDI in 'etail &ector which has raised lot of

contro$ersies in political circles :

0s part of the economic li erali9ation process set in place y the Ind"strial Policy of ( ($ the

Indian !overnment has opened the retail sector to FDI slowly thro"!h a series of steps/

( A / %orld Trade Or!anisation’s 4%TO5 ?eneral 0!reement on Trade in *ervices$ which

incl"des oth wholesale and retailin! services$ came into effect

( : / FDI in cash and carry 4wholesale5 with (,,= ri!hts allowed "nder the !overnment

approval ro"teS

+,,7 / FDI in cash and carry 4wholesale5 was ro"!ht "nder a"tomatic approval ro"teS KptoA(= investment in sin!le rand retail o"tlet permitted$ s" >ect to Press 1ote ; 4+,,7 series5

+,(( / (,,= FDI in *in!le Brand 8etail allowed’

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+,(+ / On *ept. (;$ ?overnment approved the allowance of A( percent forei!n investment in

m"lti' rand retail$ It also relaxed FDI norms for civil aviation and roadcastin! sectorsU’

The sectors where FDI is 1OT allowed in India$ oth "nder the 0"tomatic 8o"te as well as"nder the ?overnment 8o"te

FDI is prohi ited "nder the ?overnment 8o"te as well as the 0"tomatic 8o"te in the followin!

sectors/

i5 0tomic Ener!y

ii5 Hottery B"siness

iii5 ?am lin! and Bettin!

iv5 B"siness of 3hit F"nd

v5 1idhi 3ompany

vi5 0!ric"lt"ral 4excl"din! Floric"lt"re$ ortic"lt"re$ Development of seeds$ 0nimal "s andry$

Piscic"lt"re and c"ltivation of ve!eta les$ m"shrooms$ etc. "nder controlled conditions and

services related to a!ro and allied sectors5 and Plantations activities 4other than Tea Plantations5

vii5 o"sin! and 8eal Estate "siness 4except development of townships$ constr"ction of

residen tialCcommercial premises$ roads or rid!es to the extent specified in notification

viii5 Tradin! in Transfera le Development 8i!hts 4TD8s5.

ix5 2an"fact"re of ci!ars $ cheroots$ ci!arillos and ci!arettes $ of to acco or of to acco

s" stit"tes.

The a"thorities Dealin! %ith Forei!n Investment/

4a5 Forei!n Investment Promotion Board 4pop"larly #nown as FIPB5 / The Board is responsi le

for expeditio"s clearance of FDI proposals and review of the implementation of cleared

proposals. It also "nderta#e investment promotion activities and iss"e and review !eneral andsectoral policy !"idelinesS

4 5 *ecretariat for Ind"strial 0ssistance 4*I05 / It acts as a !ateway to ind"strial investment in

India and assists the entreprene"rs and investors in settin! "p pro>ects. *I0 also liaison with

other !overnment odies to ens"re necessary clearancesS

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4c5 Forei!n Investment Implementation 0"thority 4FII05 / The a"thority wor#s for &"ic#

implementation of FDI approvals and resol"tion of operational diffic"ltieis faced y forei!n

investorsS

4d5 Investment 3ommission4e5 Pro>ect 0pproval Board

4f5 8eserve Ban# of India

%hat are the instr"ments for receivin! Forei!n Direct Investment in an Indian company

Forei!n investment is rec#oned as FDI only if the investment is made in e&"ity shares $ f"lly and

mandatorily converti le preference shares and f"lly and mandatorily converti le de ent"res with

the pricin! ein! decided "pfront as a fi!"re or ased on the form"la that is decided "pfront. 0ny

forei!n investment into an instr"ment iss"ed y an Indian company which/ !ives an option to the

investor to convert or not to convert it into e&"ity or does not involve "pfront pricin! of the

instr"ments a date wo"ld e rec#oned as E3B and wo"ld have to comply with the E3B

!"idelines.

The FDI policy provides that the priceC conversion form"la of converti le capital instr"ments

sho"ld e determined "pfront at the time of iss"e of the instr"ments. The price at the time of conversion sho"ld not in any case e lower than the fair val"e wor#ed o"t$ at the time of iss"ance

of s"ch instr"ments$ in accordance with the extant FE20 re!"lations the D3F method of

val"ation for the "nlisted companies and val"ation in terms of *EBI 4I3D85 8e!"lations$ for the

listed companiesU.

%hat are the Total Inflows of FDI in India /

a. For the F +,(+'(; 4for the month of "ly$ +,(+5 was K*G (.


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c. 3"m"lative amo"nt of FDI 4from 0pril +,,, to "ly +,(+5 into India stood at K*G (:7.:7

illion

#hich countr! tops in inflow of FDI Top Countries for FDI :

Countr!Iinflow in < a%e

ter"s

Inflows in a solute Ter"s "illion &

dollars

=auritius +2< 017+

&in%apore 9 1128

&A 8 91+

> 71

4etherlands + +97

=a?orit! of the forei%n direct in$est"ent co"es throu%h =auritius as it en?o!s se$eral ta@

ad$anta%es which wor;s well for the international in$estors.

'ecent De$elop"ent

Farmers have reiterated their s"pport for 3a inet’s decision to allow FDI in 2"lti'Brand 8etail.

In a meetin! with the 2inister of 3ommerce$ Ind"stry and Textiles *hri 0nand *harma$

*ecretary ?eneral of 3onsorti"m of Indian Farmers 0ssociations 43IF05$ *hri P. 3hen!al 8eddy

conveyed the desire of vario"s farmers’ ody to implement the decision as soon as possi le.

)FDI in retail will free farmers from the middleman and will !et the rem"nerative price for the

prod"ce to the farmer6 said *hri 8eddy after the meetin!. *hri 8eddy also informed a o"t the

3IF0’s efforts to en!a!e state !overnments on the iss"e of FDI in retail. )2any states are

reconsiderin! their opinion as we have explained to them vario"s details eca"se of which FDIwill help the small farmers in the lon! r"n as it "ilds competitiveness6 informed *hri 8eddy.

4"


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.

BIB*I( 'A /

• 0charya 4( -5. )The Open temple6. Director$ Vol"me Fifty'Two$ 1"m er Five$Decem er ( -$ :(':(.

• Badale 4( -5. )P"ttin! India on the 2ap.6 0cross the Board$ Vol"me Thirty'Five$ 1"m er Three$ 2arch ( -$ ;-.

• Bala#rishnan 4+,,,5. )On 8eport.6 2ana!ement 0cco"ntin!$ Vol"me *eventy'Ei!ht$ 1"m er *ix$ "ne +,,,$ +


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• Das!"pta 4+,,,5. )8ed Tape 3"t for FIIs.6 0sia 2oney$ Vol"me Eleven$ 1"m er Fo"r$ 2ay +,,,$ 7

foreign direct investment in india and political instability in business

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