Introduction

Greenfield Investment: Direct investment in new facilities or the

expansion of existing facilities. Greenfield investments are the primary
target of a host nations promotional efforts because they create new
production capacity and jobs, transfer technology and know-how, and can
lead to linkages to the global marketplace. However, it often does this by
crowding out local industry; multinationals are able to produce goods
more cheaply (because of advanced technology and efficient processes)
and uses up resources (labor, intermediate goods, etc). Another downside
of greenfield investment is that profits from production do not feed back
into the local economy, but instead to the multinational's home economy.
This is in contrast to local industries whose profits flow back into the
domestic economy to promote growth.

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 Post liberalization period of India has witnessed a rapid expansion and

enrichment of various industrial activities. After the independence India
followed a socialist-inspired approach for most of its independent
history,

with

strict

government

control

over

private

sector

participation, foreign trade, and foreign direct investment. However,

since the early 1990s, India has gradually opened up its markets
through economic reforms by reducing government controls on foreign
trade and investment. The privatization of publicly owned industries
and the opening up of certain sectors to private and foreign interests
has proceeded slowly amid political debate.
Foreign Investment refers to investments made by residents of a
country in financial assets and production process of another country.
After the opening up of the borders for

capital movement these

investments have grown in leaps and bounds. But it had varied effects
across the countries. In developing countries there was a great need
of foreign capital, not only to increase their productivity of labor but
also helps to build the foreign exchange reserves to meet the trade
deficit. Foreign investment provides

a channel through which these

countries can have access to foreign capital. It can come in two forms:
foreign direct investment (FDI) and foreign portfolio investment (FPI).
Foreign direct investment involves in the direct production activity and
also of medium to

long-term nature. But the foreign portfolio

investment is a short-term investment mostly in the financial markets

and it consists of Foreign Institutional Investment (FII). The present
study examines the determinants of foreign portfolio investment in the
Indian context as the country after experiencing the foreign exchange
crisis opened up the economy for foreign capital. India, being a capital
scarce country, has taken lot of measures to attract foreign investment
since the beginning of reforms in 1991. Till the end of January 2003 it
could attract a total foreign investment of around US$ 48 billions out
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of which US$ 23 billions is in the form of FPI. FII consists of around

US$ 12 billions in the total foreign investments.

This shows the

importance of FII in the overall foreign investment programme. As India

is in the process of liberalizing the capital account, it would have
significant impact on the foreign investments and particularly on the
FII, as this would affect short-term stability in the financial markets.
Hence, there is a need to determine the push and pull factors behind
any change in the FII, so that we can frame our policies to influence
the variables which drive-in foreign investment. Also FII has been
subject of intense discussion, as it is held responsible for intensifying
currency crisis in 1990s elsewhere. The present study would examine
the determinants of FII in Indian context. Here we make an attempt to
analyze the effect of return, risk and inflation, which are treated to be
major determinants in the literature, on FII. The proposed relation
(discussed in detail later) is that inflation and risk in domestic country
and return in foreign country would adversely affect the FII flowing to
domestic country, whereas inflation and risk in foreign country and
return in domestic country would have favorable affect on the same. In
the

next section we would briefly discuss the existing studies. In

section 3, we discuss the theoretical model.

There was a strong growth in Foreign Direct Investment (FDI) flows with
three quarters of such flows in the form of equity. As per the economic
survey, the growth rate was 27.4 per cent in 2008-09, which was
followed by 98.4 per cent in April-September 2006. At US$ 4.2 billion
during the first six months of this fiscal, FDI was almost twice its level
in April-September, 2005. Capital flows into India remained strong on
an overall basis even after gross outflows under FDI with domestic
corporate entities seeking a global presence to harness scale,
technology and market access advantages through acquisitions
overseas.

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 Total FDI inflows for April-December 2006 stood at US$ 9.3 billion, as
compared to US$ 3.5 billion in the corresponding period last fiscal.
According to certain estimates, India is likely to receive US$ 12 billion
of FDI during the current financial year as compared to US$ 5.5 billion
in the previous fiscal.
In the past two years, FDI has jumped 100 per cent, from US$ 3.75
billion in 2004-05 to US$ 7.231 billion till November 2006. However,
these figures may be an underestimation, say Finance Ministry officials,
since these numbers do not include the amount that is reinvested by
foreign companies operating in the country. The figure for 2009-2010 is
likely to be close to US$ 10 billion if one takes into account profits
reinvested by foreign players in Indian operations.
The number of foreign institutional investors (FIIs) registered with the
Securities and Exchange Board of India (Sebi) has now increased to
1,030. In the beginning of calendar year 2006, the figure was 813. As
many as 217 new FIIs opened their offices in India during 2006. This is
the highest number of registrations by FIIs in a year till date. The
previous highest was 209 in 2005. The net investments made by the
institutions during 2006 was US$ 9,185.90 million against US$
9,521.80 million in 2005.
Some investment highlights of FII
Billionaire investor George Soros-owned fund Dacecroft and New York-based
investment firm Blue Ridge are picking 21 per cent equity stake in Anil
Dhirubhai Ambani Group's Reliance Asset Reconstruction Company (Reliance
ARC).
Role of Government initiatives
The Government is looking at reviewing regulation involving foreign
investments into the country. Aimed at simplifying the investment process,

4 | Page

the revised policy will treat foreign direct investment (FDI) and investment
from foreign institutional investors (FII) in the same light.
At present, investments by GE Capital, for instance, are termed as FII, while
funds from GE are bracketed as FDI. This, despite the fact that GE Capital
could be a subsidiary of GE. And in sectors which have a cap on investments,
matters are even more complicated. In such a situation, treating all foreign
investments, irrespective of FDI or FII, as the same in terms of investment
limits and conditions, can be a more workable solution. Once the changes are
in place, the policy will be more in tune with investments in developed
countries where the distinctions between FDI and FII are fast disappearing.
The sectors that will be affected by the revision include asset reconstruction
companies, direct-to-home distribution of broadcast signals and real estate,
where separate sub-ceilings or conditions apply at present for FDI, leaving FII
investments outside their ambit.
In a move to bolster investments in the aviation sector, the Reserve Bank of
India has said that FIIs can pick up stake in domestic airlines beyond the
sectoral FDI cap of 49 per cent through secondary market purchases.
Meanwhile, FDI into India is on the verge of surpassing FII for the first time,
the Prime Minister's Economic Advisory Council (EAC) has said. According to
the EAC, net FDI for 2009-2010 would be around US$ 9 billion, up from US$
4.7 billion last year while FII or portfolio inflows are likely to be US$ 7 billion.

Advantages of FII

5 | Page

The advantages of having FII investments can be broadly classified under

the following categories.
A. Enhanced flows of equity capital
FIIs are well known for a greater appetite for equity than debt in their asset
structure. For example, pension funds in the United Kingdom and United
States had 68 per cent and 64 per cent, respectively, of their portfolios in
equity in 1998. Thus, opening

up the economy to FIIs is in line with the

accepted preference for non-debt creating foreign inflows over foreign debt.
Furthermore, because of this preference for equities over bonds, FIIs can help
in compressing the yield-differential between equity and bonds and improve
corporate capital structures..
B. Managing uncertainty and controlling risks
Institutional investors promote financial innovation and development of
hedging instruments. Institutions, for example, because of their interest in
hedging risks, are known to have contributed to the development of zerocoupon bonds and index futures.

FIIs, as professional bodies of asset

managers and financial analysts, not only enhance competition in financial

markets, but also improve the alignment of asset prices to fundamentals.
39.

Institutions in general and FIIs in particular are known to have good

information

and low transaction costs. By aligning asset prices closer to

fundamentals, they stabilize

markets. Fundamentals are known to be

sluggish in their movements. Thus, if prices are aligned to fundamentals,

they should be as stable as the fundamentals themselves.

Furthermore, a

variety of FIIs with a variety of risk-return preferences also help in

dampening volatility.
C. Improving capital markets

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FIIs as professional bodies of asset managers and financial analysts

enhance competition and efficiency of financial markets. Equity market

development aids economic development. By increasing the availability of
riskier long term capital for projects, and increasing firms incentives to
supply more information about themselves, the FIIs can help in the process
of economic development.

D. Improved corporate governance

Good corporate governance is

essential to overcome the principal-agent problem between share-holders

and management. Information asymmetries and incomplete contracts
between share-holders and management are at the root of the agency costs.
Dividend payment, for example, is discretionary. Bad corporate governance
makes

equity finance a costly option. With boards often captured by

managers or passive, ensuring the rights of shareholders is a problem that

needs to be addressed efficiently in any economy.

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PATTERN OF FDI IN INDIA

INTRODUCTION:
India's post-independence economic policy combined a vigorous
private sector with state planning and control, treating foreign investment as
a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian
market only if they possessed technology unavailable in India. Almost every
aspect of production and marketing was tightly controlled, and many of the
foreign companies that came to India eventually abandoned their projects.
The industrial policy announced in July 1991 was vastly simpler, more liberal
and more transparent than its predecessors, and it actively promoted foreign
investment as indispensable to India's international competitiveness. The
new policy permits automatic approval for foreign equity investments of up
to 51 percent, so long as these investments are made in any of

"high

priority" industries that account for the lion's share of industrial activity.
Identifying the growth-augmenting role of foreign capital flows has
assumed critical importance in India in recent years. The overall shift in the
policy stance in India from export pessimism and foreign exchange
conservation to one that assigns an important role to export of goods and
services in the growth process has primarily been guided by the perception
that an open trade regime could offer a dynamic vehicle for attaining higher
economic growth. The absence of any strong and unanimous empirical
evidence justifying the universal relevance of an export led growth strategy
as also the continued reliance and targets for sustainable current accounts
has motivated grater focus on the growth augmenting capacity of foreign
capital in the 1990s.

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Structural reforms and external financial liberalization measures

introduced in the 1990s in India brought in their wake surges un capital flows
as well as episodes of volatility associated with the capital account dictating
the balance of payment outcome. Large capital inflows enables an easing of
resource constraints and an acceleration of growth in the mid-1990s. in the
second half, the foreign exchange market development as well as the rapid
transmission of international sell offs facilitated by cross border integration of
equity markets via capital flows have as a level provoked a reassessment of
the benefits and costs of employing capital flows as a level of growth.
Throughout the 1990s, the role assigned to foreign capital in India has been
guided by the consistent with the absorptive capacity of the economy. In the
aftermath

of

South-East-Asia

crisis,

however,

the

need

for

further

strengthening the capacity to withstand vulnerabilities has necessitated a

shift in policy that assigns greater weight age to stability in view of the
growing importance of capital flows in relation to trade flows in influencing
the course of the exchange rate and the potentially large volatility and self
fulfilling expectations that often characterize capital flows, reserve adequacy
has also emerged as an additional requirement for ensuring stable growth in
the context of capital flows. Given the trade off between growth and
instability associated with capital flows, the emphasis of the debate relating
to capital flows in India has centered around sustainability a country specific
approach to liberalization of the capital account a desirable composition and
maturity profit of capital flows, and appropriate reserve management and
exchange rate policies in the context of capital flows, with only occasional
reference to the growth enhancing role of foreign capital in India.
Determinants of FDI:
Is India capable of attracting much larger volumes of FDI than she does at present? Should
India throw all doors wide open to FDI as advocated by the Harvard economists? Is China's
experience a role model for India? The literature on FDI sheds some light on these issues.

9 | Page

Why do firms go abroad? Why do they choose to invest in specific locations? The origins of
the theoretical literature on determinants of FDI are to be found in Stephen Hymers doctoral
dissertation (1978). His thesis briefly put is that firms go abroad to exploit the rents inherent in
the monopoly over advantages they possess and FDI is their preferred mode of operations. The
advantages firms possess include patented technology, team specific managerial skills, marketing
skills and brand names. All other methods of exploiting these advantages in external markets
such as licensing agreements and exports are inferior to FDI because the market for knowledge
or advantages possessed by firms tends to be imperfect. In other words, they do not permit firms
to exercise control over operations essential for retaining and fully exploiting the advantages
they own. Hymer's insights form the basis for other explanations such as the transactions costs
and internalisation theories ( Buckley and Casson, 1991), most of which in essence argue that
firms internalise operations, forge backward and forward linkages in order to by-pass the market
with all its imperfections. Dunning (1973) neatly synthesises these and other explanations in the
well-known eclectic paradigm or the OLI explanation of FDI. For a firm to successfully invest
abroad it must possess advantages which no other firm possess (O), the country it wishes to
invest in should offer location advantages (L), and it must be capable of internalising operations
(I). Internalisation is synonymous with the ability of firms to exercise control over operations .
And such control is essential for the exploitation of the advantages which firms possess and the
location advantages which host countries offer.
It is the location advantages emphasised by Dunning, which forms the core of much of the
discussion on the determinants of FDI in developing countries. The two other attributes
necessary for FDI are taken as given from the perspective of developing countries. Dunning
(1973) set the ball rolling on econometric studies with a statistical analysis of survey evidence on
the determinants of FDI. His study identified three main determinants of FDI in a particular
location; market forces (including market size and growth, as determined by the national income
of the recipient country), cost factors (such as labour cost and availability and the domestic
inflation situation) and the investment climate (as determined by such considerations as the
extent of foreign indebtedness and the state of the balance of payments).
During (1973, 1981) analysis proved influential and were pursued further by others (Agarwal
1980, Root and Ahmed (1979), Levis, 1979, Balasubramanyam and Salisu, 1991) Although the
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empirical literature continues to grow unabated both in size and econometric sophistication, its
overall message can be briefly summarised in the form of the following propositions.
1. Host countries with sizeable domestic markets, measured by GDP per
capita and sustained growth of these markets, measured by growth
rates of GDP, attract relatively large volumes of FDI
2. Resource endowments of host countries including natural resources
and human resources are a factor of importance in the investment
decision process of foreign firms.
3. Infrastructure facilities including transportation and communication net
works are an important determinant of FDI.
4. Macro economic stability, signified by stable exchange rates and low
rates of inflation is a significant factor in attracting foreign investors.
5. Political stability in the host countries is an important factor in the
investment decision process of foreign firms.
6. A stable and transparent policy framework towards FDI is attractive to
potential investors.
7. Foreign firms place a premium on a distortion free economic and
business environment. An allied proposition here is that a distortion
free foreign trade regime, which is neutral in terms of the incentives it
provides for import substituting (IS) and export industries (EP), attracts
relatively large volumes of FDI than either an IS or an EP regime.
8. Fiscal and monetary incentives in the form of tax concessions do play a
role in attracting FDI, but these are of little significance in the absence
of a stable economic environment.

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How does India fare on these attributes? She does possess a large domestic market, she has
achieved growth rates of around 8.5 to 9 percent per annum in recent years, her overall record on
macroeconomic stability, save for the crisis years of the late eighties, is superior to that of most
other developing countries. And judged by he criterion of the stability of policies she has
displayed a relatively high degree of political stability. It is, however, Indias trade and FDI
regimes which are seen as major impediments to increased inflows of FDI. The product and
factor market distortions generated by the inward looking import substitution industrial policies
India pursued until recently have been widely discussed. So too her complex and cumbersome
FDI regime in place until the nineties.

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Foreign Investment in India recent tends:

After a sharp set back in 1998-99 foreign investment inflows made a smart recovery in 2004-05
and the position was broadly maintained in 2004-05. total foreign investment comprising direct
and portfolio which average about US$. 39 billion during the four year ended 1997-98 fell
sharply to US $ 2.40 billion in 1998-99 as a fall out of the Asian Crisis in 2004-05, with the total
inflow of US$ .10 billion. During the first eight months of 2004-05 total foreign investment
inflows have risen by about 47 percent of US $ 3.68 billion form US $ 2.51 billion in the
corresponding period in 2004-05 due mainly to about 61 percent increase in foreign direct
investment (FDI). The trends in foreign investment flows in 2004-05 and 2004-05 augur well
when seen against the background of private capital flows (net) to emerging market economics
being only marginal in 2000 and negative in2001.

(i) Foreign Direct Investment :

Foreign direct investment (FDI) flows after reaching a peek of US $ 3.56 billion in 1997-98
receded gradually to US 2.16 billon in 2004-05. FDI inflows rose only marginally to US $ 2.34
billion in 2004-05. FDI inflows during the current financial year (2004-05) o far have been
encouraging. During April-November 2001 they show an increase of 61 percent to US $ 2.37
billion for US $ 1.47 billion during April-November 2000,. The source and direction of FDI
remained by and large unchanged during the 1990s. companies registered in Mauritius and the
US were the principal source of FDI was channeled into computer hardware and software,
engineering industries, service, electronic and electrical equipment chemical and allied products
and food and dairy products.

FDI is seen as means to supplement domestic investment for achieving a higher level of
economic growth and development. FDI benefits domestic industry as well as the Indian
consumer by providing opportunities for technological up-gradation access to global managerial
skills and practice optimal utilization of human and nature resources making Indian industry
internationally competitive opening up export markets providing backward and forward linkages
and access to international quality goods and services. Towards this end, the FDI policy has been

13 | P a g e

constantly received and necessary steps have been taken to make Indian a most favorable
destination for FDI.
ii) Portfolio Investment:
Fresh inflows for portfolio investment by foreign institution investors (FIIs) during 2004-05 were
US$ 1.85 billion slightly lower than the inflows of US $ 2.14 billion in the previous year. During
the first eight months of 2004-05 such inflows amounted to US $ 799 million and increase of US
$532 million over the inflows amounted to US $ 799 million and increase of US $ 532 million
over the inflows during the corresponding period in 2004-05. the policy in regard to portfolio
investment by FIIs in reviewed constantly and major initiative are taken when necessary. In the
Budge for 2004-05 it was proposed to rises the limit for portfolio investment by FIIs from the
normal level of 24 percent of the paid up capital of the Company have been permitted to raise the
aggregate ceiling for portfolio investment by FIIs through secondary market form the normal
level of 24 percent up to the applicable sector cap level of the issued and paid up capital of the
company subject to compliance company to the enhances limit beyond 24 percent and (b) a
special resolution pass by the general body of the company approving the enhanced limit
beyond 24 percent.

Funds raised through issue of ADRs/GDRs amounted in US $831 million in 2004-05 compared
with US $ 768 million in 2000-01. During the current financial year up to November 2001 US $
477 million has been raised through this route. The government has been liberalizing the
guidelines for issue of GDRs/ADRs in a phased manner. The initiative taken in 2004-05 include
(a) As a follows up of the announcement in the budget for 2004-05 Indian companies
have been permitted to list in foreign stock exchange by sponsoring ADR/GDR
issues with overseas depositor against share held by its shareholders subject to
prescribed conditions
(b) All companies that have made an ADR/GDR issue earlier and list abroad have
been permitted the facility of overseas business acquisition through ADR/GDR
stock swap under the automatic route subject to conditions that include adherence
to FDI policy and the value limit for the transaction not toe exceed US $100
million of 10 times the export earning during the processing financial year Indian
ADRs/GDRs announced by the Financial Minister in the Union Budge 2004-05
are under finalization in consultation with they RBI and the SEBI.

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Foreign investment in billions

FDI
FPI

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

iii) Non Resident Indian Deposit:

Fresh accrual to non resident deposit including accrued interest rose by over 50 percent to US
$2.30 billion in 2004-05, on top of an increase of over 60 percent in 2004-05. during the first
eight months of the current financial year 2004-05, accrual to NRI deposit were about US $1.98
billion higher than the US $1.52 billion in the same period last year. The outstanding balances
under non resident deposit schemes continued their increasing trend, reflecting the overall
confidence of non-resident Indian in the strength of the economy. Outstanding balance under all
the non-0resident deposit schemes amounted to US$ 24.64 billion at the end of November 2001,
up from US $ 23.07 billion at the end March 2001 and Dus$.68 billion at end March 2000 raised
through IMD amounted to US $3.81 billion in 2004-05, compared with the gross disbursement of
US $ 3.19 billion in 2004-05. The increase in disbursements in 2004-05 was mainly on account
of the refinancing of prepayment of more expensive loans with relatively softer terms. The
prepayment of loans was also reflects in significant increase in amortization payments form US $
1.50 billion in 2004-05 to US $5.31 billion in 2004-05. as a result disbursements, net of
amortization payments in 2004-05 turned negative at US$ 1.50 billion compared with the net
inflow of US $0.31 billion in the previous year. The negative flows in 2004-05 were more made
up by the funds raised through Indian Millennium Deposits of US $5.51 billion resulting in net
overall inflows of US $4.01 billion under external commercial borrowing.
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The external commercial borrowing policy continues to provide flexibility in borrowing by

Indian corporate and public sector undertaking (PSUs) while at the same time maintaining safe
limits for total external borrowings consistent with prudent debt management. The guiding
principles for ECB policy are to keep maturities long, costs low, and encourage infrastructure
and export sector financing which are crucial for overall growth of the economy. The status of
approvals given to the corporate under normal windows during the last three financial years.
The idea of India is changing. This is best proved by the increasing number of countries showing
interest to invest in India. Another encouraging factor is that India is considered a stable country
for investing in by corporate overseas. This is evident from the fact that not a single corporate
has approached the World Bank Group's Multilateral Investment Guarantee Agency (Mega) for
non-commercial risk cover for making investments into the country.
India has displaced US as the second-most favored destination for foreign direct investment
(FDI) in the world after China according to an AT Kearney's FDI Confidence Index that tracked
investor confidence among global executives to determine their order of preferences. The United
Nations Conference on Trade and Development (Unclad) has said that India is among the
"dominant host countries" for FDI in Asia and the Pacific (APAC). It is evident. The investment
scenario in India has changed. And the figures say that it is for the better.
India attracted more than three times foreign investment at US$ 7.96 billion during the first half
of 2008-09 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05. For
the first six months of this fiscal, the country drew US$ 2.86 billion of FDI and US$ 5.10 billion
of portfolio investment through GDRs, ADRs, FIIs, offshore funds and others. In a bid to
stimulate the sector further, the government is working on a series of ambitious economic
reforms.
The Centre has divested some of its own powers of approving foreign investments that it
exercised through the Foreign Investment Promotion Board (FIPB) and has handed them over to
the general permission route under the RBI.
The FDI cap for aviation has been hiked from 40 to 49 per cent through the automatic route. It
has set up an Investment Commission that will garner investments in the infrastructure sector
among others, and plans to increase the limit for investment in the infrastructure sector. The
Government approved sweeping reforms in FDI with a first step towards partially opening retail
markets to foreign investors. It will now allow 51 per cent FDI in single brand products in the
retail sector. Besides retail, other sector are being opened:

100 per cent allowed in new sectors such as power trading, processing and warehousing
of coffee and rubber.

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FDI limit raised to 100 percent under automatic route in mining of diamonds and
precious stones, development of new airports, cash and carry wholesale trading and
export trading, laying of natural gas pipelines, petroleum infrastructure, captive mining of
coal and lignite.

Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of
potable alcohol, industrial explosives and hazardous chemicals.

Indian investor allowed to transfer shares in an existing company to foreign investors.

Limit for telecoms services firms raised to 74 per cent from 49 per cent.

Investment in Indian market:

India, among the European investors, is believed to be a good investment despite political
uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India
presents a vast potential for overseas investment and is actively encouraging the entrance of
foreign players into the market. No company, of any size, aspiring to be a global player can, for
long ignore this country which is expected to become one of the top three emerging economies.
Market potential:
India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom,
and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second
largest among emerging nations. (These indicators are based on purchasing power parity.) India
is also one of the few markets in the world which offers high prospects for growth and earning
potential in practically all areas of business.Yet, despite the practically unlimited possibilities in
India for overseas businesses, the world's most populous democracy has, until fairly recently,
failed to get the kind of enthusiastic attention generated by other emerging economies such as
China.
Capital Flows:
Capital flows to India remained strong during , led by foreign investment flows. Foreign direct
investment (FDI) inflows into India at US $ 5.8 billion during 2008-09 (April-January) were 31
per cent higher than in the corresponding period of the previous year, on the back of sustained
growth in activity and positive investment climate. FDI was channeled mainly into
manufacturing, business and computer services. Mauritius, the US and the UK continued to
remain the dominant sources of FDI to India. Foreign institutional investors (FIIs) after
remaining subdued during April-May 2005 made large purchases in the Indian stock markets in
the subsequent months. Cumulative FII inflows during April-February 2008-09 amounted to US
$ 8.2 billion, 19 per cent higher than a year ago. The number of FIIs registered with the SEBI
increased from 685 at end-March 2005 to 882 by end-March 2006. Capital inflows through the
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issuances of American depository receipts (ADRs)/global depository receipts (GDRs) were also
substantially higher as booming stock markets offered corporate

(US $ million)

Table 3.1 capital flows

Item

Period

2007-08

2008-09

Foreign Direct Investment into India

April-January

4,478

5,843

FIIs (net)

April-February 6,858

8,176

ADRs/GDRs

April-January

2,141

External Assistance (net)

April-December 673

442

External Commercial Borrowings (Medium andApril-December 2,857

long-term) (net)

914
-1,555
(3,945*)

Short-term Trade Credits (net)

April-December 2,963

1,697
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NRI Deposits (net)

April-January

-771

1,666

* : Excluding the IMD redemption.

the opportunity to issue equities abroad. Reflecting the increased domestic investment activity,
demand for external commercial borrowings (ECBs), including foreign currency convertible
bonds (FCCBs), remained high. Non-Resident Indian deposit accounts recorded inflows during
April-January 2008-09 in contrast to net outflows in the previous year (Table 53).
Lack of enthusiasm among investors:
The reason being, after independence from Britain 50 years ago, India developed a highly
protected, semi-socialist autarkic economy. Structural and bureaucratic impediments were
vigorously fostered, along with a distrust of foreign business. Even as today the climate in India
has seen a sea change, smashing barriers and actively seeking foreign investment, many
companies still see it as a difficult market. India is rightfully quoted to be an incomparable
country and is both frustrating and challenging at the same time. Foreign investors should be
prepared to take India as it is with all of its difficulties, contradictions and challenges.
Developing
a
basic
understanding
or
potential
of
the
Indian
market
The Indian middle class is large and growing; wages are low; many workers are well educated
and speak English; investors are optimistic and local stocks are up; despite political turmoil, the
country presses on with economic reforms. But there is still cause for worriesInfrastructural hassles:
The rapid economic growth of the last few years has put heavy stress on India's infrastructural
facilities. The projections of further expansion in key areas could snap the already strained lines
of transportation unless massive programs of expansion and modernization are put in place.
Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions
(only half of the country's roads are surfaced), low telephone penetration (1.4% of population).
Indian Bureaucracy:
Although the Indian government is well aware of the need for reform and is pushing ahead in
this area, business still has to deal with an inefficient and sometimes still slow-moving
bureaucracy.
Diverse Market:

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The Indian market is widely diverse. The country has 17 official languages, 6 major religions,
and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among
sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian market and overall
economy before taking the plunge. Research firms in India can provide the information to
determine how, when and where to enter the market. There are also companies which can guide
the foreign firm through the entry process from beginning to end --performing the requisite
research, assisting with configuration of the project, helping develop Indian partners and
financing, finding the land or ready premises, and pushing through the paperwork required.

Developing up-front takes:

Market StudyIs there a need for the products/services/technology? What is the probable market for the
product/service? Where is the market located? Which mix of products and services will find the
most acceptability and be the most likely to generate sales? What distribution and sales channels
are available? What costs will be involved? Who is the competitor.
Check on Economic Policies:
The general economic direction in India is toward liberalization and globalization. But the
process is slow. Before jumping into the market, it is necessary to discover whether government
policies exist relating to the particular area of business and if there are political concerns which
should be taken into account.
Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

Forbidden Territories:
FDI is not permitted in the following industrial sectors:
20 | P a g e

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign
Investment
through
GDRs
(Euro
Foreign Investment through GDRs is treated as Foreign Direct Investment :

Issues)

Indian companies are allowed to raise equity capital in the international market through the issue
of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any
ceilings on investment. An applicant company seeking Government's approval in this regard
should have consistent track record for good performance (financial or otherwise) for a minimum
period of 3 years. This condition would be relaxed for infrastructure projects such as power
generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB:
There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year . A company engaged in the manufacture of items covered under
Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro
issue is likely to exceed 51% or which is implementing a project not contained in Annex-III,
would need to obtain prior FIPB clearance before seeking final approval from Ministry of
Finance.
Use of GDRs:
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure
including domestic purchase/installation of plant, equipment and building and investment in
software development, prepayment or scheduled repayment of earlier external borrowings, and
equity investment in JV/WOSs in India.
Restrictions:
However, investment in stock markets and real estate will not be permitted. Companies may
retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for
approved end uses. Any investment from a foreign firm into India requires the prior approval of
the Government of India.

21 | P a g e

Investment
in
India
Foreign
Direct
Investment
Foreign direct investments in India are approved through two routes:

Approval

Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of two weeks (provided
certain parameters are met) to all proposals involving:

foreign equity up to 50% in 3 categories relating to mining activities (List 2).

Foreign equity up to 51% in 48 specified industries (List 3).

Foreign equity up to 74% in 9 categories (List 4).

Where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies.
Investments in high-priority industries or for trading companies primarily engaged in exporting
are given almost automatic approval by the RBI.
Opening an office in India:
Opening an office in India for the aforesaid incorporates assessing the commercial opportunity
for self, planning business, obtaining legal, financial, official, environmental, and tax advice as
needed, choosing legal and capital structure, selecting a location, obtaining personnel,
developing a product marketing strategy and more.
The FIPB Route:
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its
approach is liberal for all sectors and all types of proposals, and rejections are few. It is not
necessary for foreign investors to have a local partner, even when the foreign investor wishes to
hold less than the entire equity of the company. The portion of the equity not proposed to be held
by the foreign investor can be offered to the public.
Foreign Direct Investment Recent Trend:
India. India replaces the United States as the 2nd most attractive FDI location, up from 3rd place
in 2004 and reaching its highest ranking ever. While India's IT and software industry has made it
the darling in the global business community over the past few years, global investor interest in
other areas is just now catching up.

22 | P a g e

Indian government has been trying to attract foreign direct investment (FDI) and it seems be
paying off. India is still way behind in terms of attracting FDI but India is improving. Forbes
reported:
The economy drew in a record 2.9 bin used in foreign direct investment (FDI) in the first four
months of the fiscal year ending next March, nearly double last year's amount, the Press Trust of
India news agency reported.
'FDI inflows in April-July 2009-2010 increased by 92 pct to 2.9 bin used from 1.5 bin used in the
same period of the last fiscal year,' the news agency quoted Commerce Minister Kamal Nath as
telling reporters.
The Indian government is reforming the Foreign Investment Promotion Board, and has
established the Indian Investment Commission to act as a one-stop shop between the investor and
the bureaucracy. Also, India has raised FDI caps in the telecom, aviation, banking, petroleum and
media sectors. 'India is set to receive 12 bln usd this year as against 8.3 bln USD in 2008-09,'
Nath was quoted as saying. $12 billion is an impressive figure. There is no doubt that India is
attracting more FDI and India will perhaps continue to do for the foreseeable future. However,
the bad part is that the growth in Indian economy and FDI are not creating enough jobs in India.
This is what India needs at this moment. So, I hope that Indian government will try to focus on
this area more.
Indian government is trying very aggressively to attract foreign direct investment (FDI) and FDI
is coming into India these days in a satisfactory way. The interesting thing is that Indian
companies have become matured and strong enough to expand their business outside of India. In
other words, Indian companies have started to invest in foreign countries in large scale. "No
wonder, foreign direct investment (FDI) outflows from India now exceed inflows. June alone
saw the closure of 10 cross-border big time deals with a combined transaction value of $1.5
billion. Around 76 deals worth $5.2 billion were cut in six months between January and June this
year. In comparison, the whole of 2005 saw 136 deals at a value of $4.7 billion. This could well
be the beginning of a global presence for Indian companies. In Unctads outward FDI
performance index rankings covering 132 economies, India improved its rank from 80 in 1990 to
54 in 2004."Indian companies may have started to go abroad on a large scale but the reality is
that they have still some catching up to do compared to companies of China, Korea, Japan and
even Malaysia. So, the next challenge is to catch up the big companies of Asia in terms of global
presence
India requires $150 billion worth of investments to upgrade the country's weak infrastructure
over the next 10 years. The government is considering sweeping liberalization to expedite the
FDI project review process and eliminate FDI restrictions across a broad range of sectors,
including airports, oil, gas and natural resources.

23 | P a g e

Although more investors view India as an attractive destination, bureaucracy, perceived

corruption and a poor infrastructure may cloud efforts to attract FDI. Among the most recent
troubles: Telecom Malaysia and Singapore Technologies' bid to buy Idea Cellular was abandoned
when it ran into regulatory problems. Singapore's Changi airport withdrew its bid for the Delhi
and Mumbai airports because of constraints on foreign investors.
Financial services investors upgrade India from 4th to 2nd most attractive FDI location. The
emergence of local players, ICICI Bank and HDFC Bank, along with foreign investors, has
helped restructure India's underdeveloped financial sector and spur competition. Deutsche Bank
(Germany) is launching a range of savings, investment and loan products as well as investment
and financial planning services in seven major Indian cities.
Telecom and utilities investors rank India their 3rd most attractive destination. One reason for the
interest is the relaxation of ownership restrictions. In October 2005, the Indian government
raised foreign ownership levels to 74 percent (from 49 percent), a move that will add fuel to
India's booming IT and software industry. According to NASSCOM, the Indian IT software and
services exports have grown from $5.3 billion in 2000 to $16.5 billion in 2005.
Also, estimates suggest that India has the world's fastest-growing mobile phone market, growing
at 35 percent per year until 2006. Immediately following the relaxation of restrictions, Vodafone
Group (U.K.) acquired a 10 percent stake in Bharti Tele-Ventures, India's largest mobile phone
operator.
Investors in the heavy and light manufacturing sectors are optimistic about India. The country's
largest FDI commitment was won when Pohang Iron & Steel (South Korea) confirmed a $12
billion deal to build a steel plant and develop iron ore in Orissa. The success of this deal will be a
test case for future large-scale, long-term foreign investment in India. The government has
established special economic zones to encourage a competitive, export-oriented manufacturing
sector. In 2004, India had the fastest growing large-passenger-car market in the world, which will
likely continue to expand given the country's low loan rates, rising incomes and flourishing
middle class.
MNCs are happy operating in India, India received record foreign direct investment (FDI) in
2006, with equity inflows expected to top 11 billion dollars, more than double the 5.5 billion
dollars
of
inflows
last
year.
"A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors
operating in India was satisfactory, with 69 per cent reporting profits or break-even. And around
83% of the respondents have expansion plans on the cards. Despite the overall conditions of
slowdown, over 71 per cent respondents reported a capacity utilization of 50-75 per cent. As
many as 74 per cent of the respondents find the handling of approvals and applications at the
Centre to be good to average.
24 | P a g e

Around 62 percent find the overall policy framework to be good to average. "The apparent
increase in the FDI inflow shows that the improved policy environment is having a positive
impact," says a senior official at FICCI. FDI this year(2006) has reached to US$ 20243 Mn as
compared to US$ 133 Mn corresponding period 1991-1992.Largest investors in India as per the
data provided by Business Today Dec 2009. is as follow:

Table no 3.2
Largest investors in India
Country

2008-09

2009-2010

Total

Apr March

Apr- July

Aug91-Jul206

Mauritius

11,411

6,789

57,192

38.49

USA

2,210

1187

21862

14.71

Japan

925

133

9063

6.1

Netherlands

340

349

8845

5.95

UK

1164

358

8629

5.81

Germany

1345

126

6647

4.47

Singapore

1218

1946

6334

4.26

France

82

164

3440

2.31

South Korea

269

89

3001

2.02

Switzerland

426

86

2780

1.82

13055

174466

Total
Inflow

FDI 24613

% of
Inflow

Total

25 | P a g e

% of total inflow
Mauritius
USA
France; 2.31; 3% South Korea; 2.02; 2%
Singapore; 4.26; 5%
Germany; 4.47; 5%
Mauritius; 38.49; 45%
UK; 5.81; 7%

Japan
Switzerland; 1.82; 2%
Netherlands

Netherlands; 5.95; 7%

Germany
Singapore
France

Japan; 6.1; 7%

South Korea
Switzerland

USA; 14.71; 17%

All figures are in crore

UK

Source: Business Today December 31,2009

Above table indicates that Mauritius was the largest investor in India contributing 38.49% of
total FDI inflow. This was followed by USA with 14.71 and Japan by 6.1% of total FDI. Other
countries like Netherland and UK contributed 5.95% and 5.81% respectively. Germany and
Singapore account for 4.47and 4.26% only . France South Korea and Switzerland contribution of
FDI accounts for 2.31% 2.02% ad 1.82% respectively.
Table no 3.3
Statement of country wise FDI inflow

Sl No

Country

Amount
Inflow

of

FDI % age with FDI

inflow

Netherlands

84851.88

6.51

Germany

64780.32

4.97

France

32567.79

2.50

Italy

20408.55

1.57

Belgium

5851.64

0.45
26 | P a g e

Finland

1726.78

0.13

Luxembourg

1720.31

0.13

Austria

1592.66

0.12

Spain

1422.03

0.11

10

Ireland

804.91

0.06

11

Greece

98.06

0.01

12

Portugal

51.32

0.00

The data presented in the above table indicates that Netherland was the largest investor in India
contributing 6.51% of total FDI inflow. This was followed by Germany with 4.97% France by
2.50 and Italy by 1.57% of total FDI in India. Other countries likeBelgium Finland Luxemberg
Austria Spain and Ireland Netherland account for 0.45 0.13%, 0.12% , 0.11% 0.06% and 0.01%
respectively
Foreign investment is encouraged with performance requirements, employment
generation, transfer of technology, export performance requirements, manufacturing
requirements, training and R&D. The role of FDI is as a means to support domestic investment
for achieving a higher level of economic development, providing opportunities for technological
upgradation, access to global managerial skills and practices, optimal utilisation of human and
natural resources, making Indian industry internationally competitive, opening up export
markets, providing backward and forward linkages and access to international quality goods and
services.
FDI basically complements and supplement domestic investment and to some extent fills
up savings investment gap. India has always emphasised that developing countries need to
retain the ability to screen and channel foreign investment in accordance with their domestic
interest and priorities the year wise FDI in the country from the financial year 1991-1992 to
2009-2010 is presented in the table below.

Table no 3.4
Yearwise FDI Inflows
27 | P a g e

Sl.NO

Year(Apr-March)

Amount of FDI Inflow

In Rupees Crore

In US$ Million

1991-1992

409

167

1992-1993

1094

393

1993-1994

2018

654

1994-1995

4312

1374

1995-1996

6916

2141

1996-1997

9654

2770

1997-1998

13548

3682

1998-1999

12343

3083

1999-2000

10311

2439

10

2000-2001

12645

2908

11

2001-2002

19361

4222

12

2002-2003

14932

3134

13

2003-2004

12117

2634

14

2004-2005

17138

3755

15

2005-2006

24613

4343

16

2006-2007

13055

2896

17

2007-2008

14536

3645

18

2008-2009

13452

3241

19

2009-2010

13764

3524

TOTAL

216218

52208

28 | P a g e

To achieve the objectives of the economic reforms, one of our significant policy responses has
been to focus on enhancing competitiveness of industry by providing the most conducive
investment climate. FDI benefits domestic industry as well as the Indian consumer by providing
opportunities for technological upgradation, access to global managerial skills and practices,
optimal utilisation of human and natural resources, making Indian industry internationally
competitive. Today every sector of Indian economy is trying its best to attract more amount of
FDI in order to meet their future needs and make the sector competitive. The different sector
attracting highest FDI since last four year is presented in the table below:

29 | P a g e

Table no 3.5
Sector Attracting Highest FDI Inflows
Amount rupees in crores
Sector

(AprilMarch)

200708
(AprilJan)

Cumulative
Inflows
(from August
1991 to jan
2006)

% age
with
FDI
inflows

2,449

3,821

3893

21,103

16.20

2,173

1,417

815

948

13,280

10.19

Sector 1,551
&non

1,235

2,106

2,169

12,408

9.52

Rank
1

Electrical Equipments

2004-05

2005-06

2006-07

(AprilMarch)

(AprilMarch)

2,075

(Including
Computer
software & electronics)
2

Transportations
Industry

Service
(financial
financial)

Telecommunications
1,058
(radio paging, cellular
mobile, basic telephone
services)

532

588

905

12,218

9.38

Fuels ( Power + Oil 551

refinery)

521

759

923

11,484

8.81

Chemicals (other than 611

fertilizers)

94

909

1,941

8,542

6.56

Food
Industries

511

174

175

4,694

3.60

Drugs
Pharmaceuticals

502

1,343

67

4,221

3.24

Cement and Gypsum 101

Products

44

1,970

3,231

2.48

10

Metallurgical Industries

146

881

621

2,757

2.12

Processing 177
& 192

222

30 | P a g e

FDI AND ITS IMPACT ON INDIAN ECONOMY

India is emerging as fast growing nation, contributing in world trade by bringing reforms in its
trade practices. The world's largest democracy, India, has emerged as a new player on the
international arena. From 3.5% growth at the time independence till average growth of 9% in
2008, long closed to foreign competition, India has now opened up its market to foreign
companies. The major changes brought in by the Indian government in International trade sweep
away many archaic and burdensome regulations and create a business-friendly environment for
domestic and international business.
The Indian economy
India: The promise of growth:
India is today one of the six fastest growing economies of the world. The country ranked fourth
in terms of Purchasing Power Parity (PPP) in 2001. The business and regulatory environment is
evolving and moving towards constant improvement. A highly talented, skilled and Englishspeaking human resource base forms its backbone.
The Indian economy has transformed into a vibrant, rapidly growing consumer market,
comprising over 300 million strong middle class with increasing purchasing power. India
provides a large market for consumer goods on the one hand and imports capital goods and
technology to modernize its manufacturing base on the other.
An abundant and diversified natural resource base, sound economic, industrial and market
fundamentals and highly skilled and talented human resources, make India a destination for
business and investment opportunities with an assured potential for attractive returns.
Far-reaching measures introduced by the government over the past few years to liberalise the
Indian market and integrate it with the global economy are widely acknowledged.
The tenth five year plan document targets a healthy growth rate of 8% for the Indian economy
during the plan period 2002 07.

Selected Economic Indicators :

31 | P a g e

India remained relatively unscathed from the 1997-98 Asian financial sector crisis and has
maintained a healthy growth rate of over 5 per cent despite recession in major world economies
over the past two years. This demonstrates the size, strength and resilience of the Indian
economy.
Indias GDP for the year 2004-05 was US$ 422 billion. The real GDP growth varied between 6
to 8 per cent per annum (average 6.5 per cent per annum), during the 1990s.
Were it not for the resilience of China and India, the world economy would have been in deep
recession in 2002.
Source: Morgan Stanley Dean Witter report.
The sectoral composition of GDP reflects a transition. While the agricultural and industrial
sectors have continued to grow, the services sector has grown at a significantly higher pace - it
currently contributes nearly half of Indias GDP.
On the external front, cumulative foreign investment inflows have been US$ 50 billion since
1991. This includes over US$ 28 billion of Foreign Direct Investment (FDI) and about US$ 22.6
billion in portfolio investment.
Licensing has been removed from all but six sectors. The Indian government is determined to
remove any remaining road blocks, real or perceived. India has one of the most transparent and
liberal FDI regimes among the emerging developing economies. The Union government has
been continuously opening up new sectors to foreign investment, while enhancing FDI limits in
others. The year 2002 saw the opening up of the defence, print media, housing and real estate
and urban mass transportation sectors. Some of the key aspects of FDI in the country include:
100 per cent FDI is allowed in most sectors except telecommunications (49 per cent), insurance
(26 per cent), banking (49 per cent), aviation (40 per cent) and small scale industries (24 per
cent). FDI in excess of 24% is permitted in SSI sector on 50% export obligation.
FDI inflows grew by 65 per cent over the previous year to reach US$ 3.91 billion during 200405. The growth of 65 per cent is encouraging at a time when global FDI inflows have declined by
40 per cent.
The upward trend in FDI inflows has been sustained with FDI inflows during April-June 2002
being double that of the corresponding period in 2001.
An Economist Intelligence Unit (EIU) report on World investment prospects 2002 projects an
annual average FDI inflow of US$ 5.3 billion into India during 2002-2006.

32 | P a g e

Sectoral overview
Agriculture :
Two thirds of Indias population lives in rural areas. Agriculture and related activities are the
main source of livelihood for them. The performance of the agricultural sector has continuously
been improving (over many decades), helping the country achieve a surplus in food grains
production. This has been facilitated through new agricultural techniques and tools acquired by
Indian farmers, mechanisation, use of high yielding varieties of seeds, increasing use of
fertilizers and irrigation facilities, on-going operational research in the countrys numerous
agricultural universities and colleges, etc. With liberalisation of trade in agricultural
commodities, India enjoys a competitive advantage in a number of agricultural and processed
food products exports.
While the share of agriculture in GDP (26.6 per cent in 2004-05) is declining because of faster
growth of the services sector, production in absolute terms has been steadily rising. Agriculture
accounts for 62 per cent of total employment. Some other key highlights include:
India had a buffer stock of foodgrains (wheat and rice) of nearly 50 million tonnes (Dec. 02) as
against the target of 20 million tonnes at any given point in time. This has helped India enter the
foodgrains export market in a significant way.
India is the largest producer and consumer of tea in the world and accounts for 28 per cent of
world production and 15 per cent of world trade.
Agri-exports account for 13-18 per cent of total annual exports of the country. Agri-exports
amounted to over US$ 6 billion in 2004-05.
The value of agricultural imports of inputs like fertilizers, etc. are approximately one-fourth the
value of exports.
Manufacturing :
India has moved from an agrarian to a manufacturing and services led economy. The
manufacturing sector contributes around one-fourth of the total GDP. The country has built a
diversified industrial base comprising traditional handicrafts, small, medium and large
manufacturing companies and high technology-oriented products. The industrial output has
grown to approx US$ 65 billion.
The country has emerged as an important global manufacturing hub - many multinational
corporations (MNCs) like Pepsi, General Electric (GE), General Motors (GM), Ford, Suzuki,
Hyundai, Gillette, LG, etc. have followed Indias economic liberalisation process from close
33 | P a g e

quarters and set up successful operations in the country in recent years. They have been able to
leverage cost advantages while adhering to global manufacturing facilities.
Companies in the manufacturing sector have consolidated around their area of core competence
by tying up with foreign companies to acquire new technologies, management expertise and
access to foreign markets. The cost benefits associated with manufacturing in India, have
positioned India as a preferred destination for manufacturing and sourcing for global markets.
Services :
The services sector currently accounts for almost half of the countrys GDP. Expanding at a rate
of 8-10 per cent per annum, services is the fastest growing sector in the Indian economy. In fact,
the growth in Indias GDP, despite the global slowdown, is attributed largely to its strong
performance.
Availability of highly skilled workers has encouraged many international companies to carry out
their research and development activities in India. IT, biotech, tourism, health, financial services
and education hold the promise of sustainable high growth. To give a perspective:
The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1 billion in 200405. Domestic software has grown at 46 per cent while software exports have grown at 62 per
cent over the last 5 years.
The last decade has seen the Indian entertainment industry grow exponentially. The key drivers
for this have been technology and the governments recognition of the importance of the sector.
The industry is expected to grow at a compound annual growth rate (CAGR) of 27 per cent.
Revenues are projected to increase from US$ 3 billion in 2002 to US$ 10 billion in 2005.
Information Technology enabled Services (ITeS) with elements like call centres, back office
processing, content development and medical transcription are key to rapid growth. The sector
has an employment potential of 1.1 million by 2008.
Infrastructure :
The infrastructure sector in India, traditionally reserved for the government, is progressively
being opened up for private sector participation.
Ports :
The country has a 7500 km long coastline dotted with numerous major and minor ports. The
areas that have been identified for participation and investment by the private sector include
leasing out existing assets of the ports, construction of additional assets such as container
terminals, cargo berths, handling equipment, repair facility, captive power plants and captive
facilities for port based industries. Foreign investment up to 100 per cent equity participation is
34 | P a g e

permitted in ports through the automatic route for construction and maintenance of ports and
harbours.
A number of private companies have already set up port facilities in the country. Two greenfield
ports i.e. Pipavav and Mundra in Gujarat have been set up through private participation and these
have been able to compete with existing major ports. Many multinational and domestic players
have taken over existing port facilities and are operating them. Recently the container terminal at
Chennai port has been taken over by an Australian port major.
Roads :
India has the second largest road network in the world, spanning 3.3 million kilometres. Most of
the private investment in this sector has traditionally been through the build-operate-transfer
schemes. However, now many new projects are being bid out on toll collection mechanism.
Currently, the National Highways Authority of India (NHAI) is implementing the National
Highways Development Project (NHDP). NHDP is the largest ever highway development project
to be undertaken in the country. The project involves widening of over 13,000 km of highways in
the country. The investment for this project is estimated at US$ 13.2 billion at 1999 prices. The
project has been broken up into a large number of smaller segments, many of which have been
commissioned. Currently work has been completed on 1976 kilometers and another 5222
kilometers of length is under construction.
Airports :
India has 122 airports, controlled by the Airports Authority of India (AAI). The total passenger
traffic handled by these airports in 2004-05 was over 40 million, while the cargo traffic handled
was around 854,000 tonnes. The government is in the process of leasing out the four major
international airports at Delhi, Mumbai, Chennai and Kolkata to private operators.
Power :
Power Sector, hitherto, had been funded mainly through budgetary support and external
borrowings. But given the budgetary support limitation due to growing demands from other
sectors, particularly social sector and the severe borrowing constraints, a new financing strategy
was enunciated in 1991 allowing private enterprise a larger role in the power sector.
The all India installed capacity of electric power generating stations under utilities was 104917
MW as on March 2002 consisting of 26261 MW hydro, 74428 MW thermal, 2720 MW nuclear
and 1507 MW wind. A capacity addition target of 4764 MW consisting of 1536 MW of Hydro
and 3228 MW of thermal was envisaged for the year 2004-05 of which 3115 MW consisting of
1106 MW of hydro and 2009 MW of thermal was achieved.

35 | P a g e

Presently, restructuring and regulatory reforms include bringing about reforms in the State
Electricity Boards (SEBs) through establishment of the State Electricity Regulatory
Commissions. Reforms are progressing steadily in the sector and privatisation of SEBs have
already begun. The government is also planning a massive restructuring of the finances of SEBs
and is looking at a one-time settlement of dues of SEBs. In effect, a large amount of liquidity
will be injected in the sector.
The Ministry of Power has also formulated a Blue Print to provide reliable, affordable and
quality power to all users in the country i.e. power on demand by 2012. This requires huge
increase in generation capacity, upgradation of existing generation facilities and also the
transmission and distribution network.
Telecommunications :
Indias telecommunications network ranks among the top ten countries in the world. One of the
worlds largest and fastest growing telecom markets, the country has an investment potential
estimated at US$ 39 billion by 2005 and US$ 69 billion by 2010.
Despite a strong base of a billion people, the country has a low telephone density of
approximately 5 per cent, estimated to grow to 7 per cent by 2005 and 15 per cent by 2010. The
government had allowed private participation in cellular services in 1992. The sector witnessed
partial de-regulation between 1994 and 1999. The government announced the New Telecom
Policy (NTP) in 1999 to further de-regulate the sector with respect to services like basic,
international long distance (ILD), national long distance (NLD) and Wireless in Local Loop
(WLL) among others.
Financial sector :
The Indian financial sector reforms aim at improving the productivity and efficiency of the
economy. It remained stable, even when other markets in the Asian region were facing a crisis.
The opening of the Indian financial market to foreign and private Indian players, has resulted in
increased competition and better product offerings to consumers.
The financial sector has kept pace with the growing needs of corporates and other borrowers.
Banks, capital market participants and insurers have developed a wide range of products and
services to suit varied customer requirements. A trend towards mergers and acquisitions is
expected in the near future due to the compulsions of size and limitations of growth of business
on its own vis--vis growth through acquisitions. The recent favourable government policies for
enhancing limits of foreign investments in the banking sector have generated interest from global
banking majors.
The Reserve Bank of India (RBI) has ushered in a regime where interest rates are more in line
with market forces. This has increased the credit disbursements in the economy which, in turn,
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will boost industry. Banks and trade financiers have also played an important role in promoting
foreign trade of the country.
The potential of the sector is evident from existing and projected estimates:
Presently the total asset size of the Indian banking sector is US$ 270 billion while the total
deposits amount to US$ 220 billion in a banking network of over 66,000 branches across the
country.
The size of the insurance market with only 20 per cent of the insurable population currently
insured, presents an immense opportunity to new players. Foreign insurance majors have entered
the country in a big way and started joint ventures in both life and non-life areas.
Disinvestment :
The government over the past decade has been increasingly redefining its role from being a
provider of goods and services to that of a policy maker and facilitator. Towards this objective,
the government has been consistently divesting its stake in various public sector undertakings
(PSUs).
Between 1991 and 2002, the government divestment process had yielded US$ 6.3 billion to the
national exchequer.
Policy Initiatives :
There has been a paradigm shift in the governments approach to selling its stake since 31
March, 2000. From selling minority stakes, the government has started divesting majority
holdings and transferring management control to strategic investors in profitable undertakings.
The government had set up a separate ministry in late 1999 to facilitate the divestment process.
It has also set up a cabinet committee and an inter-ministerial group to consider and facilitate
specific divestment proposals.
Some of the key highlights of the disinvestment policy are:
The 1991-92 budget considered divestment of 20 per cent government equity in select PSUs in
favour of public sector institutional investors, mutual funds and workers.
The Disinvestment Commission (1997-99) made specific recommendations on 58 specific
PSUs with respect to disinvestment feasibility and the methodology to be adopted.
The second phase of disinvestment started in 1998-99. Each year since 1999, the government is
pushing ahead with reforms and disinvestments. The government has now declared its
willingness to reduce its stake below 26 per cent in non-strategic PSUs.

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Opportunities :
The successfully privatised projects during 2002-03 include the long-distance international
telecom carrier Videsh Sanchar Nigam Limited (VSNL); petroleum marketing company IBP;
petrochemical company Indian Petrochemicals Limited (IPCL); metal manufacturing
companies Hindustan Zinc Limited and Bharat Aluminium Company; hotels belonging to India
Tourism Development Corporation (ITDC) and the countrys largest small and medium car
manufacturing company Maruti.
The government is now considering disinvestments of the Shipping Corporation of India and two
state trading corporations (STC and MMTC) among others. One of the biggest privatisation
projects that the government has initiated is the leasing of international airports at the four
metropolitan cities of Delhi, Mumbai, Chennai and Kolkata. The privatisation mandates will
provide a good opportunity to both domestic and foreign investors to pick up stakes in wellperforming assets.

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Conclusion

India, among the European investors, is believed to be a good investment despite political
uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies.
India presents a vast potential for overseas investment and is actively encouraging the
entrance of foreign players into the market. No company, of any size, aspiring to be a
global player can, for long ignore this country which is expected to become one of the top
three emerging economies.
Success in India will depend on the correct estimation of the country's potential,
underestimation of its complexity or overestimation of its possibilities can lead to failure.
While calculating, due consideration should be given to the factor of the inherent
difficulties and uncertainties of functioning in the Indian system. Entering India's
marketplace requires a well-designed plan backed by serious thought and careful
research.
India has emerged as one of the potential Market and is ranked as the fifth largest
economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and
has the third largest GDP in the entire continent of Asia. It is also the second largest
among emerging nations. (These indicators are based on purchasing power parity.) India
is also one of the few markets in the world which offers high prospects for growth and
earning potential in practically all areas of business. Yet, despite the practically unlimited
possibilities in India for overseas businesses, the world's most populous democracy has,
until fairly recently, failed to get the kind of enthusiastic attention generated by other
emerging economies such as China.

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