impact of international capital flows on india's economic growth

8/10/2019 Impact of International Capital Flows on India's Economic Growth

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Impact of International Capital Fon India's Economic Growth


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BACKGROUND: INDIA TRANSFORMED

TodayStrong macro economic fu

Encouraging foreign invest

Outsourcing destination

Growing consumerism

Impetus on infrastructure d

Yesterday Slow rate of growth

Bureaucratic

Protected and slow

Small consumer markets

Weak infrastructure


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INTRODUCTION

International capital flows have significant potential benefits foreconomies around the world.

Capital flows are most helpful when the magnitude of those flows and stable.

The international capital flow such as direct and portfolio flows hascontribution to influence the economic behavior of the countries pand negatively.


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FACTORS AFFECTING FOREIGN INVEST

Rate of interest

Speculation

Profitability

Costs of production

Economic condition

Government policies


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SIGNIFICANCES OF FOREIGN INVESTM

Expansion in employment

Consumer benefit

Technological improvement

Import export

Growth in economy

Government benefits

Competition

Global relationship


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LIMITATIONS OF FOREIGN INVESTMEN

Work on the high profit areas rather than priority sector

Technological advancement

Unfavourable effect towards balance of payment

Interferes in the national politics

Unfair & unethical trade practices

Unfavourable for countries economy


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EXPORT AND IMPORT

85,206105152

128888

166162189001

117118908

157056190670

257629

307651

2004-05 2005-06 2006-07 2007-08 2008-09 2

Exports (US$ Mn.) Imports (US$ Mn.)


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FOREIGN INVESTMENTS

Foreign Investment

Direct Investment(FDI)

Wholly OwnedSubsidiary

Joint Venture

Acquisition

InstitutionalInvestment (FII)

Portfolio Investment(FPI)

Investment In

GDRs, ADRs


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FOREIGN DIRECT INVESTMENT (


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MEANING OF FDI

Foreign direct investment is investment of foreign assets into domstructures, equipment, and organizations.


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TYPES OF FDI

1. Wholly owned subsidiary

2. Joint venture

3. Acquisition


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WHY FDI IN INDIA ?

Liberal, Largest Democracy, Political Stability

Second Largest emerging market (US$2.4 trillion)

Skilled & Competitive labors force

Highest rates of return on investment

Growth over the past few years averaging 8% Destination for BPO, KPO, etc.

Second largest English speaking, scientific, technical &executivemanpower

Low costs & Tax exemptions in SEZ


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FACTORS ATTRACT FDI

Qualified, educated/skilled labor pool

Long term market potential

Access to natural resources

Large size of the economy,particularly the large and growingmiddle class

Political & environment stability

Open door policy towards FDI

Large and growing market

Gradual reduction in barriers to trade

Large English speaking popu

Well-established legal systemindependent judiciary

Financial incentives (funds frgovt.)

Fiscal incentives (exemption

import duties) Indirect incentives (provides

other resources)

Availability of natural resour


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SIGNIFICANCE OF FDI

Financial transfer in foreignexchange

Physical resources like machinerytools equipment etc.

Information & database

Worldwide contacts

Research & development

Trade channels

Economic growth

Management expertise

Financial resources for exp

Employment generation

Contribution to exports gr

Access to international ma

Good relation between twcountries

Government earns in the flicenses fees, registration taxes which is spend for puexpenditure


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FOREIGN INSTITUTIONAL INVESTMEN


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FOREIGN INSTITUTIONAL INVESTMENT (F

FIIs are defined under SEBI Regulations as

an institution that is a legal entity established or incorporated outsproposing to make investments in India only in securities.

It includes foreign pension funds, mutual funds,charitable/endowment/university funds etc. as well as asset managecompanies and other money managers operating on their behalf.


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TYPES OF FIIS

1. Portfolio Investment

2. Investment In GDRs, ADRs


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WHY INDIA NEED FII ?

Large unused natural resource

To share technical know-how

To bring in new technology in country

To make good foreign relation


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FII: HOW TO IMPACT INDIAN ECONOM

FII leads to appreciation of the currency

Problems of Inflation

Cant be used for long term

Problems for small investors

Adverse impact on exports: if our Indian currency appreciates just because of FI

inflow in India) there is adverse effect on our export. Our export industry will beuncompetitive due to appreciation of rupees.

FII and stock market: when cap on FII is high then they can bring in lot of funds istock market.

FII and inflation: the huge amount of FII fund flow creates the huge demand for rupees. In that situation RBI print more money in the market. This situation couexcess liquidity thereby leading to inflation.


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ADVANTAGES OF FII

Increase forex reserve

Large availability of capital

Increases domestic saving and investments

FIIS can individually purchase up to 10% and collectively up to 24%paid-up share capital of an Indian company

This limit of 24% can be increased to sectorial cap/ statutory limitapplicable to the Indian company by passing A boardresolution/shareholder resolution

Proprietary funds, foreign individuals and foreign corporates can reas A sub- account and invest through the FII. Separate limits of 10%

available for the sub-accounts


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FDI is prohibited in

Chit funds

Real Estate Business

Arms & Atomic Energy

Railway Transport

Agriculture & Plantation

Gambling and Betting including casinos etc.

Lottery Business including Government/private lottery, online lotteries, etc.

Manufacturing of Cigars, cheroots andcigarettes, of tobacco or of tobaccosubstitutes

FII is prohibited in

Business of chit fund

Agricultural or plantation activi

Trading in Transferable Develop(TDRs)

Real estate business or construhouses (real estate business do

development of townships, conresidential/commercial premisebridges


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REGULATION FOR FDI FORMATION

Automatic Approval By RBI

The RBI allows automatic approval within a period of two weeks (s

to compliance of norms) to all proposals and permits foreign equit24%; 50%; 51%; 74% and 100% is allowed depending on the categoindustries and the sectorial caps applicable.

Investments in high priority industries or for trading companies priengaged in exporting are given almost automatic approval by the


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REGULATION FOR FDI FORMATION

The Foreign Investment Promotion Board (FIPB) Route

FIPB Approves all other cases where the parameters of automatic

are not met. Normal processing time is 4 to 6 weeks.

Its approach is liberal for all sectors and all types of proposals, andrejections are few.

It is not necessary for foreign investors to have a local partner, eventhe foreign investor wishes to hold less than the entire equity of thcompany.

The portion of the equity not proposed to be held by the foreign incan be offered to the public.


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WHAT FIIS CAN DO?

A Foreign Institutional Investor may invest only in the following:-1. Securities in the Primary & Secondary markets including shares,

debentures

2. Commercial paper

3. Security receipts

4. Indian Depository receipts

5. Units of schemes floated by domestic mutual funds including Unof India, whether listed on a recognized stock exchange or not


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DIFFERENTIATION BETWEEN FDI & FII

FDI

It is long-term investment

Investment in physical assets

Aim is to increase enterprise capacity orproductivity or change management control

Leads to technology transfer, access to marketsand management inputs

FDI flows into the primary market

Entry and exit is relatively difficult

FDI is eligible for profits of the company

Direct impact on employment of labour and

wages

FII

It is generally short-term investme

Investment in financial assets

Aim is to increase capital availabili

FII results in only capital inflows

FII flows into the secondary marke

Entry and exist is relatively easy

FII is eligible for capital gain

No direct impact on employment oand wages

Financial Year Wise FDI In Flow From


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GROWTH OF FDI IN INDIA

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-

FDI In Flow 4029 6130 5035 4322 6051 8961 22826 34835 41874 3774

% INCREASE 0 52% -18% -14% 40% 48% 146% 53% 20% -8%

4029

6130 50354322

60518961

22826

34835

41874

3774

0

52%

-18% -14%

40%48%

146%

53%

20%

-

-10000

0

10000

20000

30000

40000

50000

a c a ea se o o2000-2012


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EXPERTS VIEWS ON FDI IN INDIA

Chief Economic Adviser

Raghu ram Rajan

"The safest form of financing is through

FDI, without any doubt because its long

term... If you can make more financingthrough FDI, you are safer and so to the

extent we can open up more to FDI...

There will be efficiency, because there will

be more competition in local economy,"

"We Have To

That We Are NDependent O

Investors That

Environment

External Inves

Fickle


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impact of international capital flows on india's economic growth

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