“Foreign investment vs.

Industrialization:
Key for global recovery”

SUBMITTED BYMinaketan dash MBA, Research scholar, DRIEMS-B school. Cuttack, Orissa. e-mail:dashminaketan2@gmail.com Ph-9777122126

Foreign investment vs Industrialization: Key for global recovery

Abstract
As the term sub-prime refers to not prime or secondary, the meaning of the phrase is the Crisis which is caused due to the subprime causes. Due to the adoption of subprime policy this Crisis is happening. Subprime lending evolved with the realization of a demand in the Marketplace for loans to high-risk borrowers with imperfect credit.. So this global meltdown is a challenge for India to catch its opportunity that is economic development through rapid industrialization. In this present study the author has demystified about the impact of foreign investment on Indian industry and how it is an injection for the Management problem and recovery of global meltdown as well as for the economic development..This is a burning economic the author has tried to offer a bird’s eye view about the FII, FDI. MNCs and their contribution to Indian economy. As industrialization is an emerging Challenge and opportunity for 21st century, foreign investment is playing a vital role for funds Inflows. Here the author has tried to discuss about the norms, condition and policy of FDI,FII, and there contribution volume by taking 2005 to 2008 statistics into consideration. Through Regression analysis here we find the relationship between domestic productivity and amount of FDI. After the calculation we suggest that domestic firms can reap rich dividends if the FDI inflows are evenly distributed across the regions, particularly concentrating the efforts on attracting FDI into non-industrial states. So if there is this type of opportunity for development so government should concentrate on it to achieve this goal.

Keywords- Subprime crisis, industrialization, FII, FDI, MNCs, Regression analysis, domestic productivity.

INTRODUCTION
The word sub prime crisis refers to a broad concept. Here it is treated as the global financial crisis which has started from US. If we will treat the crisis as the effect which is occurring at present than there are so many causes. It is not the effect of a short term decision. It is the effect of yester causes, which may be high inflation rate which bailed out in a galloping manner. Here the author is concentrating towards business cycle. At the second stage inflation which is the main cause, because in this stage the economy of a country will rise rapidly. But if the inflation rate will rise more than comparison to the level of nations GDP growth, than un-doubtly there must be depression.

The sub prime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became pervasive weaknesses in financial industry apparent in 2007 and has exposed regulation and the global financial system.

Approximately 80% of U.S. mortgages issued in recent years to sub prime borrowers were adjustable-rate mortgages. When U.S. house price began to decline in 2006-07, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world. The crisis began with the bursting of the United States housing bubble which peaked in approximately 2005–2006. High default rates on "sub prime" and adjustable rate mortgages (ARM) began to increase quickly thereafter. Lax regulation, deregulation of government policies and investment from the private sector had greatly increased Wall Street's involvement In higher-risk lending. Sub prime mortgages increased 292%, from 2003 to 2007. No doubt India is suffering also from this crisis.So many steps have been taken by different

department to get the recovery. Here the author has demystified the role of industrialization for the recovery, and the role of FDI towards industrialization. As the phrase economic development refers to a broader concept, because so many factors are related to this process. According to economy growth calculated by the economists from agriculture is already reached its ridge line. So now the time for industrialization which has coming as an emerging trend from 1991 economic policy. In this economic policy the term Liberalization, Privatization, Globalization has introduced. All these terms are playing vital role for the economic development process. Generally there are two types of trade related investment, one is foreign investment, another one is portfolio investment.This term portfolio investment is totally abstract then the term direct investment. But both have the effect on globalization. Direct investment implies that investment which is controlled by an ownership share of at least 10 or 25 percent otherwise it is considered as portfolio investment. But inspite of this devoidance of control ,it is an influencing factor of exchange rate.

CONCEPT AND MEANING

As per IMF investment that is made to acquire at lasting interest on an enterprise operating in an economy other than that of the investor. Simply we can say investment in a foreign country by an investor that involves some degree of control and participation in management. Also its literal meaning suggests that investment done by an outsider directly in a foreign country. Foreign Direct Investment (FDI) is now recognized as an important driver of growth in the country. Government is , therefore, making all efforts to attract and facilitate FDI and investment from NonResident (NRIs) including Overseas Corporate Bodies (OCBs), that are predominantly owned by them, to complement and supplement domestic investment. To make the investment in India attractive, investment and returns on them are freely repatriable, except

where the approval is subject to specific conditions such as lock -in period on original investment, dividend cap, foreign exchange neutrality, etc. as per the notified sectoral policy. Foreign direct investment is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.FDI for virtually all items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB). Merits of FDI• • • • • • • Sales expansion. Resource acquisition. Diversification. Risk minimization. Technology acquisition. Employment creation. Advancement of expertise.

OBJECTIVE OF STUDY
1. To find out a solution for the economic development. 2. To get an overall preview of FDI, foreign investment and how these tools are one type of injection of economic upliftment. 3. Policy and procedure of FDI. 4. To know about the contribution of foreign investment and its positive impact on our economy.

METHODOLOGY
This present paper enlightens about one suggested step towards the recovery and how these steps are injection for the economic development. This research is an exploratory as well as descriptive research as some foreign investment theory is taken into consideration. Here the data collected are from secondary sources like: news papers, books, websites, magazine and journal. The policy and procedure for getting license is taken here in to consideration from all sorts of secondary data published by FDI manual. The impact of foreign investment is also discussed here.

FOREIGN INVESTMET GROWTH IN INDIA-

Foreign investment is generally done in different categories such as foreign portfolio investment, foreign venture capital, private equity and foreign direct investment. In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated economic growth of the country, Government of India initiated a slow of economic and financial reforms in 1991. India is now ushering in the second generation reforms aimed at further and faster integration of Indian economy with the global economy. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all the economic activities under the automatic route. Over the years, FDI inflow in the country is increasing. However, India has tremendous potential for absorbing greater flow of FDI in the coming years. Serious efforts are being made to attract greater inflow of FDI in the country by taking several actions both on policy and implementation front. Since the last publication of the Manual in November 2002, Foreign Investment Promotion Board has been shifted to Department of Economic Affairs, Ministry of Finance and Company Affairs. However, the subject relating to FDI Policy and its promotion and facilitation as also promotion and facilitation of investment by Non- Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) will continue to be handled by this Department. Further, application form required for Carry on Business (COB) License has been revised. These Changes have been incorporated in

this issue of the Manual. An essential requirement of the foreign investing community in making their investment decision is availability of timely and reliable information about the policies and procedures governing FDI in India. This publication is a part of our endeavor to apprise the investing community of our policy measures and the opportunities available for investment in India. IMPACT OF FDI ON INDIAFDI constitutes both positive and negative impact. Especially it has most positive impact on the host country economy. Like as  Management know-how and expertise  New products  New technology  Skilled labour force  Diversification  Employment creation  Stimulating competition

No doubt all these benefits are challenges for a country, but with challenges how opportunity can be derived. ROLE OF FII FOR INVESTMENT(FII) investments in trade and industrial segments have particularly increased. FIIs are entities who are established or incorporated outside India and invest in India. They invest mostly in secondary markets and government securities. There has been a consistent upsurge in foreign institutional investment since 2002-2003. These FIIs have started playing a significant role in the Indian capital market and India has become an attractive destination for FIIs, as it has immense potentiality for overseas investment. Their contribution is immense and has to be seen from different angles and their role also would need to be monitored,

The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) crossed the 1,000 mark. The total number of FIIs having their offices in India has now increased to 1,030. In the beginning of calendar year 2006. The net investment made by the institutions during 2006 was $9,185.90 million against $9,521.80 million in 2005.

ROLE OF MNCs TOWARDS INVESTMENTRecognizing India’s commercial potential, many Corporate and MNCs are investing funds in India’s real estate. Where all the major metro cities have turned into the international trade and commerce hubs, soothsayers of the industry are anticipating even more rapid establishment of new MNCs and Corporates in the near future. As the world entered the 21st century, Indian government took oath to revolutionize the Indian economy. There are so many factors attracting the investor to invest in India. Now a day’s pharmacy sector, electronics sector, fertilizer sector are becoming emerging area for investment. So there contribution will enhance the velocity of currency in side of our country which can help the country from liquidity crunch hazard. INDIAS CURRENT PROBLEM REGARDING INDUSTRIALISATIONAfter evaluating important indicators for industrialisation and giving a summary of industrialisation since independence, we will now take a more detailed look at some specific areas for future industrial development in India.  Infrastructure Perhaps the biggest problem for doing business in India is the woeful state of its infrastructure. Consider this: it takes four days for a truck to travel the 900 miles between India’s national capital New Delhi and its commercial capital Bombay. It takes months to get connected to the power supply in any Indian city, and several years to get a telephone connection in large cities. Poor infrastructure is acting as a drag on the Indian economy, and the Indian government is now attracting private domestic and foreign investment to build the backbone of a modern economy.

A recent report estimated that investment in infrastructure would rise from 5.5% of GDP in 1997, to about 7% in 2000/01. This includes massive improvements in telecommunications, power, energy, and transport. India has recognised the vital role telecommunications play in the growth of the economy. The Indian telecom sector was wholly under government ownership and control until recently and was characterised by under-investment and outdated equipment. There is vast potential for extending these services in India, which has one of the world’s smallest telephone densities of 1.3 per 100 people, compared with the world average of 10 per 100. Advanced communication services such as fax, data transmission, and leased circuits are becoming increasingly common. Foreign collaboration is also being encouraged in cellular phones and paging systems. In the telecommunications sector, As part of India’s liberalization efforts, the transportation sector has been opened to private investment. The government is offering incentives to invest $4.7 billion to construct and operate bypass roads, highways, bridges, railways, and ports.  Health and Education HIV/AIDS is a newly emerging threat to India’s public health. About 3 million people in India may be affected. Malnutrition also continues to impede India’s development. Prejudices against women and girls are reflected in the demographic ratio of 929 females for every 1,000 males.. Amartya Sen reckons that India could enrol all its children in primary school by spending an additional 0.5-1% of GDP. Providing basic health and education is not expensive where labour is cheap. But health and education indicators, while showing some progress, still remain among the world’s lowest.  Public sector Another big problem is India’s notoriously bloated and inefficient public sector. The World Bank has turned down applications for power loans worth $750 million for projects in some states because of mismanagement in their government. Many electricity boards have become insolvent as a result of providing electricity at extremely subsidised rates and ignoring large-scale thefts of

electricity. State governments have been unable or unwilling to take the politically unpalatable decisions needed to make their electricity boards viable.  Corruption An immediate threat to India’s governance is not the tottering coalition governments or the BJP, but corruption. The combination of a state-run economy and weak political institutions created all too many opportunities for crooked politicians and bureaucrats.. The influx of foreign companies is already unleashing a new wave of even greater corruption. A survey of 183 US firms conducted by the US embassy in 1995 revealed that US investors rated corruption in India as the third worst problem they faced after red tape and a lack of electric power.  Tax Problems Tax reforms have been seeking to transform India’s tax system from one with high differential tax rates falling on a narrow base, into one with tax rates at moderate levels falling on a broad base. The 1995 fiscal budget reduced taxes on corporate income, and a major reform of excise taxes has been implemented to make it resemble a value-added tax more closely.  Labour market India needs greater labour market flexibility to make its companies more competitive and its economy more productive. Politically powerful labour unions have stifled most efforts at serious reform or privatization of India’s largest public sector enterprises, including most banks, all insurance companies, and many major industries, even though privatization would probably cost the jobs of no more than 1.1% of the urban labour market. India’s labour laws hinder efficiency and growth.  Financial sector India’s financial sector still cannot effectively mobilise and mediate capital to respond to economic changes. The resulting high cost of capital makes Indian industry and exports less competitive. In spite of recent improvements, India’s equity markets are still too thin and volatile

to inspire great confidence on the part of domestic or foreign investors. Bond markets are practically non-existent. Liberalisation of the insurance industry, which would greatly improve the investing of India’s substantial savings, now 26% of GDP, has been stymied. India’s banking system remains flawed, with the dominant state-owned banks still carrying bad loans amounting to 15 to 25% of their total. In spite of these problems towards industrialization still there is opportunity for development as foreign investment is playing a vital role as remedies for solution.

FDI FLOWS TO INDIAThe foreign direct investment (FDI) inflows during 2008-09 (from April 2008 to March 2009) stood at approx. US$ 27.3 billion, according to the latest data released by Department of Policy and Promotion (DIPP). FDI inflows for the last quarter alone of 2008-09 stood at approx. US$ 6.2 billion. Mauritius was the highest contributor to FDI inflows for the fiscal year 2008-09 totaling almost US$ 11.2 billion, while services sector including financial and non-financial services attracted the maximum amount of US$ 6.1 billion during the same period. In India, currently after the policy changes in February 2009, many sectors in manufacturing are open to 100 per cent FDI under the automatic route. FDI is allowed up to 100 per cent in all these industries except defence production where it is capped at 26 per cent. FDI is not allowed in a few services including retail trading (except single brand), lottery business and gambling. In the permitted services, foreign equity is allowed below 50 per cent. FDI is currently allowed only up to 49 per cent in scheduled air transport services or domestic passenger airlines. Broadcasting services also have similar rules. Unlinking of nonnews television channels is the only broadcasting service permitted to have 100 per cent FDI after clearance by the Foreign Investment Promotion Board (FIPB). Majority foreign equity is not allowed in cable television networks and direct-to-home (DTH) operations. FDI is allowed only up to 26 per cent in print media. FDI is allowed up to 74 per cent in financial services such as private banks. Insurance, however, can get FDI only up to 26 per cent. Minority foreign equity up to 49 per cent is

permitted in asset reconstruction companies (ARCs), stock exchanges, depositories, clearing corporations and commodity. Except for ARCs, the FDI space is capped at 26 per cent for these sectors. In telecommunication services—both basic and cellular—although FDI up to 74 per cent is allowed, only 49 per cent is allowed. FDI INFLOWS FROM 2005 TO 2008 INANCIALYEAR(APRILTO MARCH) 2004 to 2005 2005 to 2006 2006 to 2007 2007 to 2008 2004 GDP INDICATORS
GDP (US$bn) (current prices) GDP PPP (US$bn) (d): GDP per capita (US$): GDP per capita PPP (US$) Real GDP growth (% change yoy) 669.4 2,096.1 597 1,869 7.9 784.3 2,357.8 689 2,071 874.8 2,672.7 757 2,312

AMOUNT IN RS (CRORE) IN US $ ) (excluding advance) 17,138 24,613 2,972 xxxx 2005 2006 2007
1,102.4 2,999.7 940 2,557 1,209.7 3,288.3 1,016 2,762

(excluding advance) 3,755 mn 5,549 mn 661 mn 15 bn 2008

9.2

9.8

9.4

7.3

(Fact sheet by information and research section)( PPP is purchasing power parity;) From this above information if we will take both variables in to consideration than easily we can found both coefficient degree and there regression line out of which the degree of dependency can found. Here also from the table we can found the volume of FDI contribution and the real GDP growth is increasing simultaneously and falling also from 2007 to onwards.

SECTOR ATTRACTING FDI INVESTOR-

% with Sector 2003-04 (AprilMarch) FDI

age

Inflow 2004-05 (AprilMarch) 20052006 (Aprilmarch) 6,499 (1,451) 3,023 (680) 983 (222) 2,565 (581) 416 (94) 1,979 (447) 183 (42) 760 (172) 1,970 254 (56) 1,344 (299) 205 (46) 303 (67) 168 (37) 32 (7) 2 (1) 2 9.76 9.46 8.04 6.22 3.39 3.11 2.33 11.32 17.30 s 2006-07 (April 06)

1.

Electrical Equipments

2,449

3,281 (721) 588 (129) 815 (179) 2,106 (469) 759 (166) 909 (198) 174 (38) 1,343 (292) 1

(including computer software (532) 2. & electronics) Telecommunications 532

(radio paging, cellular mobile, (116) 3. 4. 5. 6. 7. 8. 9. basic telephone services) Transportation Industry Services Sector 1,417 (308) 1,235

(financial & non-financial) (269) Fuels (Power + Oil Refinery) 521 Chemicals (other than fertilizers) Food Processing Industries Drugs & Pharmaceuticals Cement and (113) 94 (20) 511 (111) 502

(109) Gypsum 44

10 .

Products Metallurgical Industries

(10) 146 (32)

(0) 881 (192)

(452) 681 (153)

(1) 84 (19)

2.09

GUIDE LINES FOR INVESTING IN DIFFERENT SECTOR BANKING SECTOR In terms of the Press Note no. 4 (2001 series) dated May 21, 2001 issued By Ministry of Commerce & Industry, Government of India, FDI up to 49% from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.  PETROLIOUM FDI is permitted up to 26% in case of public sector units (PSUs).PSUs will hold 26% and balance.  TELICOMMUNICATION In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements.  AIRPORTS Up to 100% with FDI, beyond 74% requiring Government approval.  INCURANCE FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)  AGRICULTURE No FDI/NRI/OCB investment is permitted other than Tea sector, where (including plantation) FDI permitted up to 100% in Tea sector, including tea with prior government approval and subject to following conditions: Compulsory divestment of 26% equity in favour of Indian partner/Indian public within a period of five years, and Prior State government approval required in case of any future change. CONCLUSION & FINDINGS

After the study regarding here the author has find out some sorts of problem regarding the obstacle of industrialization in Indian context of view. So as there is the positive impact of FDI, FII, MNCs on Indian GDP than their contribution may be treated as one type of injection for India. The second solution is how this industrialization will helpful as a step for recovery. Their contribution volume will leads towards the solution of liquidity crunch so indirectly it is a key for recovery. Also as we have suggested at the introduction step that India is now in the situation to move towards industry as the contribution of primary sector is already reached its ridge line. So now is the time for industrialization which needs heavy investment which can be possible through foreign investment as globalization is tempting the economy to follow this policy. The next issue is global recovery. By the foreign investment only one country will not invest in other country, it will occur In a integrated manner which can leads each country indulged in this policy towards development simultaneously.

BIBLIOGRAPHY Journal/Magazine/News Paper: • • • • THE ANALYST, Volume XV, Issue- 03, March 2009, pp-19, 74-76. FRONTLINE, Volume- 26, Issue- 05, 13 March 2009, pp-33-34. THE ECONOMICS TIMES, Kolkata, 6th August 09, pp 1. BUSINESS TODAY, February 2009.

Articles: • • Mukopadhya D., (2008). “US SUBPRIME LENDING CRISIS & WARNING FOR INDIA”, The Management Accountant, August, pp. 568-570. RBI’s Bulletin June 2006 (Table No. 46 – FOREIGN INVESTMENT INFLOWS).

• • •

Fact Sheet on Foreign Direct Investment (FDI) August 1991 to April 2006. Fact sheet on Indian GDP by IMF and ABS,(PDF FILE). FDI policy and procedure may 2003 by “department industrial policy & promotion”

Websites: • • • • • • 1. 2. 3. 4. 5. 6. www.yahooanswer.com www.wikipedia.com www.rediffmail.com www.abalert.com www.sharetermpaper.com. www. Statisticsindia.com

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