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FDI APPROACH IN INDIA

* ADITH VENUGOPAL

Abstract
With the onset of reforms to liberalize the Indian economy in July of 1991, a new
chapter has dawned for India and her billion plus population. This period of
economic transition has had a tremendous impact on the overall economic
development of almost all major sectors of the economy especially the services
sector. Besides, it also marks the advent of the real integration of the Indian economy
into the global economy. India has been attracting foreign direct investment
especially during post reforms period. The sectors like telecommunication,
construction activities and computer software and hardware have been the major
sectors for FDI inflows in India. The Indian economy as a whole, we find that FDI
stocks and output are Co-integrated in the long run. FDI is unlikely to work wonders
if only remaining regulations were relaxed and still more industries opened up to
FDI. Our present focus is on the FDI trends and consequences during the last decade
in India. We also study the effects of FDI investment across various sectors during
the same period.
Index Terms- Economy, FDI, FII, Reforms, Services.

*MBA student, SNGCE, Kolenchery

INTRODUCTION
Indian economy had experienced major policy changes in early 1990s. The new
economic reform, popularly known as, Liberalization, Privatization and
Globalization (LPG model) aimed at making the Indian economy as fastest growing
economy and globally competitive. The series of reforms undertaken with respect to
industrial sector, trade as well as financial sector aimed at making the economy more
efficient. With the onset of reforms to liberalize the Indian economy in July of 1991,
a new chapter has dawned for India and her billion plus population. This period of
economic transition has had a tremendous impact on the overall economic
development of almost all major sectors of the economy especially the services
sector. Besides, it also marks the advent of the real integration of the Indian economy
into the global economy. Indian has been attracting foreign direct investment
especially during post reforms period. The sectors like telecommunication,
construction activities and computer software and hardware have been the major
sectors for Foreign Direct Investment (FDI) inflows in India.

ELABORATIONS
Major sectors attracting FDI:
The major sectors attracting FDI inflows in India have been Services and
Electrical & Electronics amounting to US$ 30,421millions or 32 % of total FDI.
Service sector tops the chart of FDI inflows in 2008 with India emerged as a top
destination for FDI in services sector.
FDI within India:
The two major cities in India, are pointed by FDI
Mumbai (US$ 26899.57 million)
Delhi (US$ 12683.24 million).
Bangalore, Ahmadabad and Chennai are also receiving significant amount of FDI
inflows. These five cities together account for 69 per cent of total FDI inflows to
India. Mumbai and Delhi together received 50 per cent of total FDI inflows to India
during 2000 to 2008.

Analysis on FDI in India


Services, telecommunication, construction activities, computer software and
hardware were attracted higher inflows. Mauritius, Singapore, the US and the UK
were among the leading sources of FDI.
FDI in India to rise 66% to $80 billion in two years: A leading global investment
bank has forecast a 66.6 per cent jump in foreign direct investment (FDI) in India.
Though India still does not rank highly as an FDI destination, the country is likely
to receive FDI of $80 billion in the next 12-24 month as compared with $48 billion
in the last two-year period. Morgan Stanley noted that 20 per cent of the firms
covered in the survey have plans to invest in India over the coming 12-24 months.

India attractiveness survey 2014


2014 India attractiveness survey finds that India remains one of the top global
destinations for foreign investment, despite recent headwinds. The main drivers are
its solid domestic market, an educated workforce and competitive labor. More than
half of international business leaders surveyed plan to enter or expand their existing
operations in the country over the next year. The infrastructure, consumer products,
industrials, technology, media and telecom (TMT), and life-sciences sectors are set
to drive Indias growth over the next two years. Investors are considering India for
both their services and manufacturing supply chain. With the services sector forming
the backbone of Indias economy, the Indian Government is placing more weight on
strengthening the countrys manufacturing ecosystem. Our research shows that
global investors are starting to recognize relevant efforts, with the vast majority
expecting India to be a leading manufacturing hub by 2020. But for that to happen,
the environment must be more enabling and measures on other competitive issues,
including currency stability and ease of doing business, must be implemented.
Current Foreign Direct Investments:
US-based Nike has made a proposal to the Department of Industrial Policy and
Promotion (DIPP) to set up fully-owned stores in India. Nike is one of the world's
largest suppliers of athletic shoes and apparel globally, with a market capitalization
of US$ 68 billion.
US-based Milacron Llc plans to invest US$ 30 million in the next three years in its
India operations Ferromatik Milacron India Pvt Ltd (FMI), as per president and
CEO, Mr Thomas Goeke. FMI manufactures plastic moulding machines at its plants
in Ahmedabad in Gujarat and Coimbatore in Tamil Nadu.

Bengal looks set for one of its biggest foreign investments. A large private equity
firm which has exposure in social infrastructure and agriculture plans to invest over
Rs 300 crore (US$ 49.02 million) in the proposed Dankuni food park promoted by
Keventer Group.
The Foreign Investment Promotion Board (FIPB) has approved a proposal from
InterGlobe Aviation, the company that runs IndiGo, to reclassify shareholding of
promoter Rakesh Gangwal as Non-Resident Indian (NRI) from FDI at present. This
move enables the airline to have access to fresh FDI.
Norway's Telenor Group plans to invest an additional Rs 780 crore (US$ 127.47
million) to increase its ownership in Indian subsidiary Uninor to 100 per cent;
Telenor currently owns a 74 per cent stake in Uninor.
Chinese telecom equipment maker ZTE Corporation plans to establish a Global
Network Operating Centre (GNOC) in India. The centre will seek to manage the
networks of multiple telecom carriers in Asia and Africa.
Japan's Suzuki Motor Corporation (SMC), the parent company of Maruti Suzuki,
will spend Rs 18,500 crore (US$ 3.02 billion) to establish a new factory in Gujarat.
SMC plans to establish a 100 per cent subsidiary, Suzuki Motor Gujarat (SMG), to
manufacture cars on a strictly no-loss, no-profit basis for Maruti Suzuki.
US-based Leapfrog Investment has bought a minority stake in Chennai-based
financial services provider IFMR Capital Finance for US$ 29 million. This marks
Leapfrog's third investment in India, after having earlier backed insurance
distribution firm Mahindra Insurance Brokers and Shriram CCL.
Market Conditions:
FDI Inflows to India
Table 2: Equity FDI Inflows to India
(Percent)
Sectors

2006-07 2007-08 2008-09 2009-10

2010-11

Sectoral shares (Percent)


Manufactures

17.6

19.2

21.0

22.9

32.1

Services

56.9

41.2

45.1

32.8

30.1

Construction, Real estate and mining

15.5

22.4

18.6

26.6

17.6

9.9

17.2

15.2

17.7

20.1

100.0

100.0

100.0

100.0

100.0

Others
Total

Equity Inflows (US$ billion)


Manufactures

1.6

3.7

4.8

5.1

4.8

Services

5.3

8.0

10.2

7.4

4.5

Construction, Real estate and mining

1.4

4.3

4.2

6.0

2.6

Others

0.9

3.3

3.4

4.0

3.0

Total Equity FDI

9.3

19.4

22.7

22.5

14.9

Source - http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513
From a sectoral perspective, FDI in India mainly flowed into services sector (with
an average share of 41 per cent in the past five years) followed by manufacturing
(around 23 per cent) and mainly routed through Mauritius (with an average share of
43 per cent in the past five years) followed by Singapore (around 11 per cent).
However, the share of services declined over the years from almost 57 per cent in
2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing, and
others largely comprising electricity and other power generation increased over
the same period. Sectoral information on the recent trends in FDI flows to India show
that the moderation in gross equity FDI flows during 2010-11 has been mainly
driven by sectors such as construction, real estate and mining and services such as
business and financial services. Manufacturing, which has been the largest
recipient of FDI in India, has also witnessed some moderation
Affect of global crisis on Indian operations & Future outlook:
2008 financial crisis created huge uncertainty all over the world. The western
countries suffer the maximum impact of the crisis. Even emerging market economies
like India faces a small percentage points cut down from its growth rate. As per this
effect Indian economy slow down there economic growth in 2009. Most of the
investors said that they had to face a decline in demand, profitability and sales.
Changed perception about India after the Crisis. A mixed response was received with
respect to the change in perception about India as an investment destination post
crisis.
FDI by sector and industry:
FDI inflows and outflows slumped in all three sectors (primary, manufacturing
and services)

We can extract from the table 1.1 that services sector, Telecom, software, Housing
and Real estate and construction have witnessed more than 5% increment of FDI
during 2000 and 2012. Remaining all the sectors have achieved less than 5%
increment of FDI. It is observed that the sectors who have given support by the
government have got good share of FDI inflow.
Sector Specific Limits of Foreign Investment in India
Table 3: Sector Specific Limits of Foreign Investment in India
Sector

FDI Cap/Equity

A. Agriculture
1. Floriculture, Horticulture, Development
of Seeds, Animal Husbandry, Pisciculture, 100%
Aquaculture, Cultivation of vegetables &
mushrooms and services related to agro and
allied sectors.
2. Tea sector, including plantation

100%

Entry Route

Automatic

FIPB

(FDI is not allowed in any other agricultural sector /activity)


B. Industry
1. Mining covering exploration and mining
of diamonds & precious stones; gold, silver 100%
and minerals.

Automatic

2. Coal and lignite mining for captive


consumption by power projects, and iron & 100%
steel, cement production.

Automatic

3. Mining and mineral separation of titanium


100%
bearing minerals

FIPB

C. Manufacturing
1. Alcohol- Distillation & Brewing

Automatic

2. Coffee &
Warehousing.

Rubber

processing

100%
&

100%

Automatic

3. Defence production

26%

FIPB

4. Hazardous chemicals and isocyanates

100%

Automatic

5. Industrial explosives Manufacture

100%

Automatic

6. Drugs and Pharmaceuticals

100%

Automatic

7. Power including generation (except


Atomic energy); transmission, distribution 100%
and power trading.

Automatic

Other
Conditions

(FDI is not permitted for generation, transmission & distribution of electricity


produced in atomic power plant/atomic energy since private investment in this
activity is prohibited and reserved for public sector.)
D.
Services
1. Civilaviation (Greenfield projects and
100%
Existing projects)

Automatic

2. Asset Reconstruction companies

49%

FIPB

3. Banking (private) sector

74% (FDI+FII).
FII not to exceed
49%

Automatic

4. NBFCs : underwriting, portfolio


management services, investment advisory
services, financial consultancy, stock
broking, asset management, venture capital, 100%
custodian, factoring, leasing and finance,
housing finance, forex broking, etc.
5. Broadcasting
a. FM Radio
b. Cable network; c. Direct to home; d.
20%
Hardware facilities such as up-linking,
49% (FDI+FII)
HUB.
e. Up-linking a news and current affairs TV 100%
Channel

Automatic

FIPB

6. Commodity Exchanges

49% (FDI+FII) (FDI


FIPB
26 % FII 23%)

7. Insurance

26%

Automatic

8. Petroleum and natural gas :


a. Refining

49% (PSUs).
100% (Pvt.
Companies)

FIPB (for
PSUs).
Automatic
(Pvt.)

9. Print Media
26%
a. Publishing of newspaper and periodicals
dealing with news and current affairs
b. Publishing of scientific magazines /
100%
speciality journals/periodicals
10. Telecommunications
a. Basic and cellular, unified access
services, national / international longdistance, V-SAT, public mobile radio
trunked services (PMRTS), global mobile

74% (including FDI,


FII, NRI, FCCBs,
ADRs/GDRs,
convertible
preference shares,
etc.

s.t.minimum
capitalisation
norms

FIPB

FIPB
Automatic up
to 49% and
FIPB beyond
49%.

Clearance from
IRDA

S.t.guidelines by
Ministry of
Information &
broadcasting

personal communication services (GMPCS)


and others.

Source - http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513
FINDINGS
The study finds that there is a high positive relationship between foreign direct
investment and economic growth.
Construction, Real estate and mining sectors FDI is decline during 2010-11
Service sectors FDI is also decline phase during 2010-11
Manufacturing sector FDI boosted during 2010-11 periods.
CONCLUSIONS
India is the 3rd largest in terms of ppp(purchasing power parity).
Indias record GDP growth throughout the last decade has lifted millions out of
poverty and made the country a favored destination for foreign direct investment.
However, the sharp downturn in Europe and the United States, coupled with
significant domestic challenges, has slowed this trend and stands to disrupt future
growth. Manufacturing sector FDI increases to 32.1% on 2010-11 from 22.9% of
2009-10 periods. During this period manufacturing sectors FDI increases because the
major key FDIs are implemented on those period.
Japans FDI in India 1359.69 us $
Usa FDI in India 838.70 us $
Service sector FDI is decline considerably from 2006 to 2011.becouse of inadequate
infrastructure. Construction, real estate mining sectors goes on a standard basis.
Major reasons for declines in FDI inflows in the sector constriction real estate and
mines because of the over influence of economic as well as political factors.
Suggestions/Recommendations
The issues of geographical disparities of FDI in India need to address on priority.
India is a federal country consisting of states & union territories. States are also
partners in the economic reforms. To attract foreign investors to states, many of them
offering packages in the form of tax rebates, capital & interest subsides, reduced
power tariff etc.
If we have to build up our service sector we should improve our infrastructure
facilities.

Source
http://www.ey.com/IN/en/Issues/Business-environment/EY-Indiaattractiveness-survey
http://www.sonecon.com/docs/studies/FDI_IP_and_the_Pharmaceutical_Sec
tor_in_India-Shapiro-Mathur-Final-January2014.pdf
http://www.who.int/chp/working_paper_growth%20model29may.pdf
http://nbr.org/research/activity.aspx?id=204

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