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Fdi & Fii in India a Comparative Analysis

Fdi & Fii in India a Comparative Analysis

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1

FDI & FII IN INDIA

A COMPARATIVE ANALYSIS

A PROJECT REPORT

SUBMITTED BY

ARJYA CHAKRABARTI

(Under the guidance of Prof. S.S. SAHA)

IN PARTIAL FULFILMENT FOR THE AWARD OF THE DEGREE

IN

BACHELOR OF COMMERCE (HONOURS)

ST. XAVIER S COLLEGE (AUTONOMOUS)

UNDER THE UNIVERSITY OF CALCUTTA

ACADEMIC YEAR 2010-2011

ROLL NUMBER: 563

ROOM NUMBER: 32

SEMESTER: 6

2

ACKNOWLEDGEMENT

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

DECADE.

Last but not the least I am very much thankful to all the sources which I have approached and

collected data from.

3

Table of contents

Serial no.

TITLE

Pages

1.

Chapter ± I : Introduction

5

1.1

A Brief Summary

6

1.2

Research Problem

7

1.3

Literature Review

8

1.4

Research Methodology

10

1.5

Limitations

10

2.

Chapter ± II : FDI & FII An Overview

11

2.1

Foreign Direct Investment

12

2.2

Foreign Institutional Investment

22

3.

Chapter ± III : FDI vs FII, Comparative Analysis

29

4.

Chapter ± IV : Conclusion

39

4.1

Areas Of Further Research

40

4.2

References & Bibliography

41

4

List of Tables

Serial no.

TITLE

Pages

1.

Sectors attracting highest FDI

17

2.

SEBI Registered FIIs

27

3.

Net Foreign Institutional Investment (FII) in the last 10 Years

30

4.

Foreign Direct Investment in India in the last 10 Years 31

5.

A Comparison between the Net FII, FDI & the Sensex

33

6.

A Comparison between the GDP, Net FII & FDI of the last 10 Years

35

7.

Foreign Exchange Rate, Net FII & FDI Inflow of last 10 Years

37

5

List of Charts

Serial no.

TITLE

Pages

1.

FDI Across Various Sectors

19

2.

Pictorial Representation of Registered FIIs

29

3.

Net Investments shown graphically

31

4.

Graphical Representation of FDI

32

5.

FDI & FII Inflows in the last 10 Years - A Comparison

33

6.

Diagram showing comparison between FDI Inflow & Sensex

34

7.

Diagram showing comparison between net FII & Sensex

35

8.

Diagram showing comparison between GDP & FDI

36

9.

Diagram showing comparison between GDP & Net FII

37

10.

Graphical representation of Net FII & the Foreign Exchange Rate

38

11.

Graphical representation of FDI & the Foreign Exchange Rate

39

6

CHAPTER ± I

INTRODUCTION

7

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

investors.1

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

1

Hari Sud. Paper no. 1208; South Asia Analysis Group

2

Foreign Portfolio Investment: Entry of funds into a country where foreigners make purchases in the country¶s stock and

bond markets, sometimes for speculation.

8

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.

RESEARCH PROBLEM

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.

9

LITERATURE REVIEW

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

emerging markets.

- 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

10

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

REVIEW GAP

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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