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CHAPTER-1:
INTRODUCTION
The last two decade of the 20th century witnessed a dramatic world-wide
increase in foreign direct investment (FDI), accompanied by a marked
change in the attitude of most developing countries towards inward FDI. As
against a highly suspicious attitude of these countries towards inward FDI in
the past, most countries now regard FDI as beneficial for their development
efforts and compete with each other to attract it. Such shift in attitude lies in
the changes in political and economic systems that have occurred during the
closing years of the last century.
The wave of liberalisation and globalization sweeping across the world has
opened many national markets for international business. Global private
investment, in most part, is now made by multinational corporations
(MNCs). Clearly these corporations play a major role in world trade and
investments because of their demonstrated management skills, technology,
financial resources and related advantages. Recent developments in global
markets are indicative of the rapidly growing international business. The end
of the 20th century has already marked a tremendous growth in international
investments, trade and financial transactions along with the integration and
openness of international markets.
FDI is a subject of topical interest. Countries of the world, particularly
developing economies, are vying with each other to attract foreign capital to
Foreign Direct Investment in India
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and
among
affiliated
enterprises,
both
incorporated
and
unincorporated.
As is evident from the above definitions, there is a large degree of
commonality between the IMF, UNCTAD and OECD definitions of FDI.
The IMF definition is followed internationally.
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essentially
means
that
geographically
dispersed
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Viewed industrially, for any given country, FDI generally comes from less
than four or five out of twenty or so major industry groups and inflows into
those same industries in the receptor country.
General attribute of FDI is that it has evoked by type over time. Prior to First
World War, a crude but valid generalization would that a large part of FDI
was in service sector of the host economy (particularly transportation,
power, communication and trading) while most of the rest was of the
backward vertical integration type. During the inter-war period, most of
the currently largest manufacturing multinational corporations (MNCs)
made their initial foreign investments, but these horizontal or market
extension types of investments have now become major category.
The fourth recognized characteristic of manufacturing FDI is that it
originates in industries that are technologically intensive, skill oriented or
progressive. In addition, the FDI prone industries are typically more
concentrated, have higher advertising outlays per unit of sales and exhibit
above average export propensities. Industries from which FDI tends to
originate display many characteristics associated with oligopoly.
Another universal property of FDI is that it is really a package of
complementary inputs, a collective flow of both tangible and intangible
assets & services.
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countrys
economic
performance
and
international
competitiveness.
After the debt-crisis that hit the developing world in early 1980s, the
conventional wisdom quickly became that it had been unwise for countries
to borrow so heavily from international banks or international bond markets.
Rather countries should try to attract non-debt-creating private inflows
(DFI). The financial advantage is that such capital inflows need not be
repaid and that outflow of funds (remittance of profits) would fluctuate with
the cycle of the economy. It has also been widely observed that the structural
adjustment efforts of the 1980s failed to lead to new patterns of sustained
growth in developing countries. In particular, structural adjustment programs
failed to restore private investment to desirable levels. Again it is hoped that
FDI could play an important role; the World Bank observes that FDI can be
an important complement to the adjustment effort, especially in countries
having difficulty in increasing domestic savings.
Against this background of balance of payments problems and low level of
private investment, it is probably not surprising that attitudes in developing
countries towards FDI have shifted. In the 1960s and 1970s many countries
maintained a rather cautious, and sometimes an outright negative position
with respect to FDI. In the 1980s, however the attitudes shifted radically
Foreign Direct Investment in India
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Project Office
Branch Office
Such offices can undertake activities permitted under the Foreign Exchange
Management Regulations, 2000.
Foreign Direct Investment in India
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firm
or
proprietary
concern
is
not
engaged
in
any
NRIs/PIOs
may
invest
in
sole
proprietorship
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Currency
Convertible
Bonds
(FCCB):
Foreign
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The dividend rate would not exceed the limit prescribed by the
Ministry of Finance.
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CHAPTER-8:
SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA
Hotel & Tourism Sector
100% FDI is permissible in the sector on the automatic route.
The term hotels include restaurants, beach resorts, and other tourist
complexes providing accommodation and/or catering and food facilities to
tourists. Tourism related industry include travel agencies, tour operating
agencies and tourist transport operating agencies, units providing facilities
for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement,
sports, and health units for tourists and Convention/Seminar units and
organizations.
For foreign technology agreements, automatic approval is granted if
1. Up to 3% of the capital cost of the project is proposed to be paid for
technical and consultancy services including fees for architects, design,
supervision, etc.
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to
3%
of net
turnover
is
payable
for
franchising
and
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5.
Joint Venture operating NBFC's that have 75% or less than 75%
foreign investment will also be allowed to set up subsidiaries for
undertaking other NBFC activities, subject to the subsidiaries also
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procurement and sale of goods and services among the companies of the
same
group
and
not
for
third
party
use
or
onward
transfer/distribution/sales.
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2008-09
(from
AprilMarch,
2009)
Cumulative % with
(From April total
2000 to April (inflows
2009)
in terms
of
rupees)
2005-06
2006-07
2007-08
Mauritius
11441
(2570)
28759
(6363)
44483
(11096)
50794
(11208)
168485
(38305)
44%
USA
2210
(502)
3861
(856)
4377
(1089)
8002
(1802)
28303
(6404)
7%
UK
1164
(266)
8389
(1878)
4690
(1176)
3840
(864)
23002
(5246)
6%
Singapore
1218
(275)
2662
(578)
12319
(3073)
15727
(3454)
34467
(7934)
9%
Netherlands
340
(76)
2905
(644)
2780
(695)
3922
(883)
15957
(3611)
4%
Japan
925
(208)
382
(85)
3336
(815)
1889
(405)
12041
(2694)
3%
Germany
1345
(303)
540
(120)
2075
(514)
2750
(629)
9580
(2191)
3%
France
82
(18)
528
(117)
583
(145)
2098
(467)
5489
(1229)
1%
Cyprus
310
(70)
266
(58)
3385
(834)
5983
(1287)
11140
(2491)
3%
UAE
219
(49)
1174
(260)
1039
(258)
1133
(257)
4146
(948)
1%
24613
(5546)
70630
(15726)
98664
(24579)
122919
(27309)
404728
(92158)
Total FDI
inflows*
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The average FDI inflows per year during the 9th Plan were $ 3.2 billion and
during the 10th Plan it increased manifold to stand at $ 16.33 billion the
annual average being $ 6.16 billion. The top five sectors attracting FDI in
fiscal 2007-08 included Services sector; Housing and Real Estate;
Construction
activities;
Computer
Software
&
hardware;
and
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SECTOR
Services (Financial
& non-financial)
2005-06 2006-07
2007-08
Cumulat
2008-09
ive
% of
(April- (Apr.200
total
Jan '09) 0- Jan inflows*
2009)
2399
(543)
21047
(4664)
26589
(6615)
23045
(5061)
11786
(2614)
5623
(1410)
6944
(1599)
39111
(8876)
11%
Telecommunications
2776
(624)
2155
(478)
5103
(1261)
10797
(2374)
27544
(6216)
8%
Construction
667
(151)
4424
(985)
6989
(1743)
6224
(1483)
19606
(4646)
6%
Automobile
630
(143)
1254
(276)
2697
(675)
1792
(441)
11648
(2678)
4%
171
(38)
2121
(467)
8749
(2179)
10632
(2408)
21794
(5119)
6%
Power
386
(87)
713
(157)
3875
(967)
4079
(924)
13709
(3130)
4%
Metallurgical
6540
(147)
7866
(173)
4686
(1177)
3608
(850)
10956
(2613)
3%
Chemicals (Other
than fertilizers)
1731
(390)
930
(205)
920
(229)
2561
(579)
9442
(2244)
2%
Petroleum &
Natural Gas
64
(14)
401
(89)
5729
(1427)
1196
(263)
8509
(2043)
3%
78742
(181189)
22%
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Equity
Fiscal Year
(AprilMarch)
YOY
growth
(%)
FIPB
Equity capital
Route/
of
RBI's
unincorporated
Automatic
bodies#
Route
1991(Aug)2000 (Mar)
15483
15483
2000-01
2339
61
1350
279
4029
2001-02
3904
191
1645
390
6130
(+) 52
2002-03
2574
190
1833
438
5035
(-) 18
2003-04
2197
32
1460
633
4322
(-) 14
2004-05
3250
528
1904
369
6051
(+) 40
2005-06
5540
435
2760
226
8961
(+) 48
2006-07
15585
896
5828
517
22826
(+) 146
2007-08
24575
2292
7168
327
34362
(+) 51
2008-09
(April-Dec)
23885
334
3004
203
27426
Cumulative
Total
(From Aug
1991-Jan
2009)
99332
4959
26952
3382
134625
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No. of FTA
USA
1772
22.31
Germany
1106
13.93
Japan
868
10.93
UK
860
10.83
Italy
484
6.09
Other countries
2851
35.91
All Countries
7941
100.00
No. Technical
Collaborations
approved
% of total Technical
Collaborations
approved
Electrical Equipments
(Incl. computer
software & electronics)
1255
15.80
886
11.16
Industrial Machinery
869
10.94
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Transportation
Industry
742
9.34
Misc. Mach.
Engineering Industry
442
5.57
Other sectors
3747
47.19
7941
100.00
CHAPTER-11:
CONCLUSION
Economic reforms in India have deregulated the economy and stimulated
domestic and foreign investment, taking India firmly into the forefront of
investment destinations. The Government, keen to promote FDI in the
country, has radically simplified and rationalized policies, procedures and
regulatory aspects. Foreign direct investment is welcome in almost all
sectors; expect those strategic concerns (defence and atomic energy).
Since the initiation of the economic liberalisation process in 1991, sectors
such as automobiles, chemicals, food processing, oil and natural gas, petrochemicals, power, services, and telecommunications have attracted
considerable investments. Today, in the changed investment climate, India
offers exciting business opportunities in virtually every sector of the
economy. Telecom, electrical equipment (including computer software),
energy and transportation sector have attracted the highest FDI.
Foreign Direct Investment in India
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Despite its market size and potential, India has yet to convert considerable
favourable investor sentiment into substantial net flows of FDI. Overall,
India remains high on corporate investor radar screens, and is widely
perceived to offer ample opportunities for investment. The market size and
potential give India a definite advantage over most other comparable
investment destinations.
Indias investment profile, however, is also conditioned by factors that affect
the flow of FDI, which are bureaucratic delays, wide spread corruption, poor
infrastructure facilities pro-labour laws, political risk and weak intellectual
property regime.
A perceived slowdown in the process of reforms generates doubts about the
markets long-term potential. To capitalize on its potential for FDI, would
seem that India needs to accelerate efforts to institutionalize government
efficiency and advance the implementation of promised reforms. Other
strategic efforts should include focusing the market on Indias relatively
higher rates of return on existing investments and long-term potential,
addressing the issue of transforming the country into a viable export
platform and encouraging strategic alliances with foreign investors. In short,
this means accelerating Indias integration with the global economy.
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