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FDI & FII IN INDIA
A COMPARATIVE ANALYSIS
A PROJECT REPORT
(Under the guidance of Prof. S.S. SAHA)
IN PARTIAL FULFILMENT FOR THE AWARD OF THE DEGREE
BACHELOR OF COMMERCE (HONOURS)
ST. XAVIER S COLLEGE (AUTONOMOUS)
UNDER THE UNIVERSITY OF CALCUTTA
ACADEMIC YEAR 2010-2011
ROLL NUMBER: 563
ROOM NUMBER: 32
A project cannot be completed alone. It requires the effort of many individuals. I take this
opportunity to thank all those people who helped me to complete this project.
I express my sincere and deep gratitude to Father Dominic Savio, Vice Principal (St. Xavier¶s
College, Kolkata) for giving me the privilege of being part of the µProject¶ in partial
fulfillment of the requirement in regard to B.com 3rd
year degree course.
I express my sincere gratitude to Prof. S.S. SAHA for giving us the opportunity to undergo
this project. I further thank him for lending a helping hand when it came to solving my
problems related to this project. This project would not have been possible without his
valuable time and support.
This project is an attempt to talk about the SCENARIO OF FDI & FII IN INDIA IN THE LAST
Last but not the least I am very much thankful to all the sources which I have approached and
collected data from.
Table of contents
Chapter ± I : Introduction
A Brief Summary
Chapter ± II : FDI & FII An Overview
Foreign Direct Investment
Foreign Institutional Investment
Chapter ± III : FDI vs FII, Comparative Analysis
Chapter ± IV : Conclusion
Areas Of Further Research
References & Bibliography
List of Tables
Sectors attracting highest FDI
SEBI Registered FIIs
Net Foreign Institutional Investment (FII) in the last 10 Years
Foreign Direct Investment in India in the last 10 Years 31
A Comparison between the Net FII, FDI & the Sensex
A Comparison between the GDP, Net FII & FDI of the last 10 Years
Foreign Exchange Rate, Net FII & FDI Inflow of last 10 Years
List of Charts
FDI Across Various Sectors
Pictorial Representation of Registered FIIs
Net Investments shown graphically
Graphical Representation of FDI
FDI & FII Inflows in the last 10 Years - A Comparison
Diagram showing comparison between FDI Inflow & Sensex
Diagram showing comparison between net FII & Sensex
Diagram showing comparison between GDP & FDI
Diagram showing comparison between GDP & Net FII
Graphical representation of Net FII & the Foreign Exchange Rate
Graphical representation of FDI & the Foreign Exchange Rate
CHAPTER ± I
A BRIEF SUMMARY
The Government of India has recognized the key role of the foreign direct investment (FDI) and foreign
institutional investment (FII) in its process of economic development, not only as an addition to its own
domestic capital but also as an important source of technology and other global trade practices. In order to
attract the required amount of FDI and FII, it has bought about a number of changes in its economic policies and
has put in its practice a liberal and more transparent FDI and FII policy with a view to attract more foreign direct
institutional investment inflows into its economy. These changes have heralded the liberalization era of the
foreign investment policy regime into India and have brought about a structural breakthrough in the volume of
FDI and FII inflows in the economy.
Growth of Indian economy is playing hide and seek with the double digit growth (Gross Domestic Product)
mark. The latter is a key index, which the foreign investors check before committing large sums of money for
investment. Of its own, the Indian economy will find it difficult to reach this target, except for an occasional
burst of activity; like the one in 2003. To sustain it, outside help is needed and domestic house is to be placed
under strict discipline.
Democracy is a great buzzword, if it translates into order and political stability. Labor unrest, political
opportunism and corporate irregularities are a few issues, which tarnish democracy and discourage outside
But the current government in both its terms has opened up the economy to welcome foreign
investment to keep up with the strong domestic demand for quality goods and services.
This has attracted unprecedented amount of foreign investment in the last decade, but of the two forms of
foreign investment ± foreign portfolio investment (FPI)2
and foreign direct investment (FDI), the former has
reached our shores much more than the latter.
As FPI essentially interacts with the real economy via the stock market, the effect of stock market on the
country¶s economic development will also be examined. Research shows that the perceived benefits of foreign
portfolio investment have not been realized in India. It can be seen that the mainstream argument that the entry
of foreign portfolio investors will boost a country's stock market and consequently the economy, does not seem
be working in India. The influx of FIIs has indeed influenced the secondary market segment of the Indian stock
market. But the supposed linkage effects with the real economy have not worked in the way the mainstream
model predicts. Instead there has been an increased uncertainty and skepticism about the stock market in this
country. On the other hand, the surge in foreign portfolio investment in the Indian economy has introduced some
serious problems of macroeconomic management for the policymakers like inflation, currency appreciation etc.
On the other hand FDI is what the government really needs to attract in various sectors like infrastructure,
education etc. it is much more stable than the foreign institutional investment which comes via the stock market
route, and has more accountability and brings fundamental and tangible benefits to the economy.
The dependence on FPI is pushing many developing countries, including India, towards a more stock market
oriented financial system. This makes it imperative to evaluate the relative merits and demerits of a stock market
Hari Sud. Paper no. 1208; South Asia Analysis Group
Foreign Portfolio Investment: Entry of funds into a country where foreigners make purchases in the country¶s stock and
bond markets, sometimes for speculation.
based financial system in a developing country as compared to the Chinese model where conditions are
conducive to foreign investment in the real sector. The global recession in 2008 proved how volatile the money
pumped in by the FIIs into the secondary segment of the financial market is, leading to huge losses for the
domestic investors who had to bear the brunt even though the economy as such was insulated from the adverse
effects of the recession. Whereas the sectors where there was FDI didn¶t experience such knee-jerk reactions.
In this context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and
foreign institutional investment (FII) flows into India during the post liberalization period.
The opening up of the Indian economy served as a great boon for our country as the foreign investors saw vast
opportunities in it and started investing through the various routes allowed by the government of India. It is
important to keep record of all such inflows to form strict regulatory procedures, search for areas or sectors that
needs more investment etc, which is what this research proposes to do i.e. collect data regarding inflow of
foreign direct investment and foreign institutional investment from credible sources for a specified timeline and
tabulate such data to perform trend analysis of these investments to understand whether these investments
fluctuate rapidly or move in a fixed pattern and also what provides impetus to these investments or what are the
parameters that trigger a massive pull-out of them. As it is seen that FII is a volatile investment as compared to
FDI the factors affecting the inflow of both types of investment are explored and their investment annually is
compared on the basis of certain common parameters.
1. Institutional investors have grown in importance in the mature economies in recent years and come to
supplant banks as the primary custodians of people's savings.
- T .T Ram Mohan,
Economic and Political Weekly, Vol. 40, No. 24 (Jun. 11-17, 2005), pp. 2395-2399
2. It is time to realize that in spite of the impression given by the financial media, the movements on the
stock markets and the Sensex do not necessarily imply any fundamental changes in the economy and
these movements affect a very small minority of the country's population.
- Parthapratim Pal
Economic and Political Weekly, Vol. 40, No. 8 (Feb. 19-25, 2005), pp. 765-772
3. The main emerging feature of India's equity market is its gradual integration with the global market
and its consequent problems due to the hot money movement by Foreign Institutional Investors (FIIs).
- Kishore C. Samal
Economic and Political Weekly, Vol. 32, No. 42 (Oct. 18-24, 1997), pp. 2729-2732
4. One must prevent the inflow/outflow of speculative 'hot money'. That can be achieved partially (though
very successfully) by a reasonably high 'capital gains' tax.
- Arun Ghosh
Economic and Political Weekly, Vol. 30, No. 21 (May 27, 1995), pp. 1235-1237
5. The combination of trading driven substantially by conditions in other markets and large price
pressures from the trading of foreigners raises the possibility that foreign trading can be destabilizing in
- Anthony Richards
The Journal of Financial and Quantitative Analysis, Vol. 40, (Mar 2005), pp. 1-27
6. Thus the impact of the reforms in India on the policy environment for Foreign Direct Investment
presents a mixed picture. The industrial reforms have gone far, though they need to be supplemented
by more infrastructure reforms, which are a critical missing link.
- Kulwinder Singh
Centre for Civil Society, New Delhi
Research Internship Programme, 2005
7. If at all, it would seem that foreign firms have greater credibility amongst consumers for offering
quality products and providing customer satisfaction.
- S. Ganesh
Economic and Political Weekly, Vol. 32, No. 22 (May 31 - Jun. 6, 1997), pp. 1265-1274
8. For a country that quarantined its economy from the rest of the world for much of the last 60 years,
India has increasingly relied on foreign investment in recent years. It has helped bridge the gap
between domestic savings and the growing capital needs of the private sector and the government,
which is borrowing money to pay for welfare programs and subsidies.
- Vikas Bajaj
The New York Times; India Finds Itself Awash in Foreign Investment
It is seen that that eminent scholars have greatly established the ill effects of µspeculative¶3
money or µhot¶
money and suggested ways to put forth stricter norms and procedures to control the flow of such money and
protect the financial markets from getting artificially inflated and create a bubble which could explode at the
slightest provocation. Also it can be gathered from previous studies that there is a clamour for easing of policy
restrictions to allow more foreign direct investment. Policies regarding FDI have not moved with the same pace
as the policies regarding FII i.e. the former¶s policies are still considered conservative by the foreign investors.
Therefore this study makes a humble effort to get an overview of both types investments first then study their
trends and make a comparative analysis between the two to see which factors are they most sensitive to, whether
the two types of investment are equally sensitive to the same factors, which is more stable and also which type
of investment direct or portfolio is preferred by an emerging economy like India.
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