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Subject: Managerial Economics

Course Code: ECON605


Impact of Foreign Direct Investment on Indian Economy

Made By:
Vinisha Singh
A2424515011
Garima Bhatia
A2424515010
MBA-FM

Table of Contents
Introduction...........................................................................................4
What is Foreign Direct Investment?.........................................................5
Advantages of Foreign Direct Investment................................................6
Disadvantages of Foreign Direct Investment............................................7
Conditions to be fulfilled by foreign countries to enter Indian markets......8
FDI and India.........................................................................................9
Problems for low FDI flow to India.........................................................12
Suggestions for increased flow of FDI in India........................................13
Sectoral Analysis..................................................................................15
Manufacturing Sector........................................................................15
Energy Sector....................................................................................16
Service Sector...................................................................................17
Automobiles Sector............................................................................19
IT Sector...........................................................................................20
FDI inflow to India................................................................................21
Recent policy measures........................................................................23
Incentives............................................................................................23
Central government incentives ..........................................................23
State government incentives .............................................................23
Conclusion...........................................................................................24
References...........................................................................................25

Introduction
Foreign capital plays a constructive role in a countrys economic development.
Sometimes domestically available capital is inadequate for the purpose of various
developmental processes. Foreign capital is seen as a way of filling in gaps between
the domestically available supplies of savings, government revenue, foreign
exchange and the planned investment necessary to achieve developmental targets.
This is very true in case of various developing countries like India.
India is the second fastest growing major economy in the world. Indian economy is
diverse and encompasses agriculture, handicrafts, manufacturing, textile and a
multitude of services. India adopted a socialist inspired approach for most of its
independent history with the strict government control over private sector
participation, foreign trade and foreign direct investment. In 1991, Government of
India initiated a no. of economic reforms. As a result of the various policy initiatives
taken, India has rapidly changing from restrictive regime to a liberal one Kadam
(2012). The various forms of foreign capital flowing into India has helped to bring in
huge amounts of Foreign Direct Investment (FDI) into the country, which in its turn
has given a major boost to the Indian economy.

What is Foreign Direct Investment?


Foreign direct investment (FDI) is an investment in a business by an investor from
another country for which the foreign investor has control over the company
purchased. The Organization of Economic Cooperation and Development (OECD)
defines control as owning 10% or more of the business.
Businesses that make foreign direct investments are often called multinational
corporations (MNCs) or multinational enterprises (MNEs). A MNE may make a direct
investment by creating a new foreign enterprise, which is called a greenfield
investment, or by the acquisition of a foreign firm, either called an acquisition or
brownfield investment.

Greenfield Investment
A form of foreign direct investment where a parent company starts a new venture in
a foreign country by constructing new operational facilities from the ground up. In
addition to building new facilities, most parent companies also create new long-term
jobs in the foreign country by hiring new employees. For example, Volkswagen
acquired Skoda following the latter's string of losses.

Brownfield Investment
When a company or government entity purchases or leases existing production
facilities to launch a new production activity. This is one strategy used in foreigndirect investment. For example, Vodafone Group is a mobile network operator
headquartered in Newbury, Berkshire, England, UK and took over Hutchison Essar in
India.

Advantages of Foreign Direct Investment

Integration into global economy

Developing countries, which invite FDI, can gain access to a wider global and better
platform in the world economy.

Economic growth

This is one of the major sectors, which is enormously benefited from foreign direct
investment. A remarkable inflow of FDI in various industrial units in India has
boosted the economic life of country.

Trade

Foreign Direct Investments have opened a wide spectrum of opportunities in the


trading of goods and services in India both in terms of import and export production.
Products of superior quality are manufactured by various industries in India due to
greater amount of FDI inflows in the country.

Technology diffusion and knowledge transfer

FDI apparently helps in the outsourcing of knowledge from India especially in the
Information Technology sector. Developing countries by inviting FDI can introduce
world-class technology and technical expertise and processes to their existing
working process. Foreign expertise can be an important factor in upgrading the
existing technical processes. For example, the civilian nuclear deal led to transfer of
nuclear energy know-how between the USA and India.

Increased competition

FDI increases the level of competition in the host country. Other companies will also
have to improve on their processes and services in order to stay in the market. FDI
enhanced the quality of products, services and regulates a particular sector.
Linkages and spillover to domestic firms- Various foreign firms are now occupying a
position in the Indian market through Joint Ventures and collaboration concerns. The
maximum amount of the profits gained by the foreign firms through these joint
ventures is spent on the Indian market.

Human Resources Development

Employees of the country which is open to FDI get acquaint with globally valued
skills.

Employment

FDI has also ensured a number of employment opportunities by aiding the setting
up of industrial units in various corners of India.
Disadvantages of Foreign Direct Investment
Although FDI brings with it lot of advantages but it is not free from disadvantages as
well. Following are some of its demerits:

Destruction of small entrepreneurs

The biggest fear from FDI is that it is likely to destroy the small entrepreneurs or
small kirana shops as they will not be able to withstand the tough competition of
big entrepreneurs as these entrepreneurs are going to provide all the goods to
the consumers at much lesser prices.

Shrinking of jobs

Many critics of FDI are of the view that entry of big foreign chains like Wal-Mart,
Carrefour etc. are not going to generate any jobs in reality in India. At best the
jobs will move from unorganized sector to organized sector while their number
will remain the same or lesser but not more.

No real benefit to farmers

Critics of FDI are also of the view that it is a fallacy that the farmers are going to
benefit in any way because of the entry of foreign chains in India rather it will
make the Indian farmers a slave of these big chains & the farmers will entirely be
on their mercy. Thus, FDI is only going to deteriorate the already miserable
conditions of Indian farmers.

Conditions to be fulfilled by foreign countries to enter Indian markets


There are some basic requirements which must be fulfilled by the foreign companies
to enter Indian retail market which are as follows
1) Amount of investment
If any foreign company wants to enter into the Indian market the very first condition
which it has to satisfy is that such foreign company must invest at least 100 million
dollars or more into the Indian market. No foreign company whose investment is
less than 100 million dollars will be allowed to enter Indian retail sector.
2) Places of opening stores
Another condition which these foreign companies have to satisfy is that they can't
open their stores at any place in India where they want rather such companies can
open their stores only in those cities the population of which is 1 million or more.
3) Other conditions
Apart from this there are certain other conditions which must be satisfied by these
foreign companies to enter Indian markets like at least 50 % of their investment
should be in back-end infrastructure like warehouses etc. & they have to take
permission to the concerned state government where they want to establish their
chains.

FDI and India


India has already marked its presence as one of the fastest growing economies of
the world. It has been ranked among the top 3 attractive destinations for inbound
investments. Since 1991, the regulatory environment in terms of foreign investment
has been consistently eased to make it investor-friendly.

Foreign
direct
investment (FDI) has played an important role in the process of globalization during
the past two decades. The rapid expansion in FDI by multinational enterprises since
the mid-eighties may be attributed to significant changes in technologies, greater
liberalization of trade and investment regimes, and deregulation and privatization of
markets in many countries including developing countries like India. Capital
formation is an important determinant of economic growth. While domestic
investments add to the capital stock in an economy, FDI plays a complementary
role in overall capital formation and in filling the gap between domestic savings and
investment. At the macro-level, FDI is a non-debt-creating source of additional
external finances. At the micro-level, FDI is expected to boost output, technology,
skill levels, employment and linkages with other sectors and regions of the host
economy.
In India FDI inflow made its entry during the year 1991-92 with the aim to bring
together the intended investment and the actual savings of the country. To pursue a
growth of around 7 percent in the Gross Domestic Product of India, the net capital
flows should increase by at least 28 to 30 percent on the whole. But the savings of
the country stood only at 24 percent.
The gap formed between intended investment and the actual savings of the country
was lifted up by portfolio investments by Foreign Institutional Investors, loans by
foreign banks and other places, and foreign direct investments. Among these three
forms of financial assistance, India prefers as well as possesses the maximum
amount of Foreign Direct Investments. Hence FDI is considered as a developmental
tool for growth and development of the country. Therefore, this study is undertaken
to analyze the flow of FDI into the country identifying the various set of factors
which determine the flow of FDI.

The below table and chart shows that FDI inflow into India before 1991 was minimal
with the Compounded Annual Growth Rate showing only 25.46 percent. During this

period, foreign investments into India were restricted and allowed moderately in few
sectors. This is mainly because of the kind of policies which the government of India
has adopted over the years which includes, `inward looking strategy'; and
dependence of external borrowings. In turn, the borrowings resulted in foreign debts
which were preferred to the foreign investments to bridge the gap between
domestic savings and the amount of investments required. In 1991, when the
government of India started the economic reforms program, FDI had suddenly
become important for India which was looked upon as a key component of economic
reforms package. The New Industrial Policy of 1991 gave utmost priority in
attracting FDI inflows. In this process, the government started opening up of
domestic sectors to the private and foreign participation which was earlier reserved
only for the public sector. This was followed by slow but with significant relaxation of
regulatory and entry restrictions on FDI inflows. Later substantial increase in the
volume of FDI inflows into India was observed during the Post Liberalization period.

During the initial phase of post liberalization period i.e., from 1991 to 1998, there
was continuous increase in the FDI inflows. The total amount of the FDI inflows
during the period 1991-92 to 1997-98 had amounted to US$10,868 million. The
increase was largely due to the expanded list of industries or sectors which were
opened up for foreign equity participation. This was followed by relaxation of
various rules, regulations and introduction of various policies by the government to
promote the FDI inflows. FDI inflows declined to the level of US$2,462 million in the
year 1998-99 and further to US$2,155 million in 1999-2000. The reasons for the
declining trend of FDI inflows were due to various set of factors. Firstly, the most
important factor was the several restrictions imposed on India by the USA on
account of the nuclear test carried out by India at Pokhran. The second factor was
the slowdown of the Indian economy due to the mild recession in US and global

economy. The third one was about unfavorable external economic factors such as
the financial crisis of South-East Asia. Fourthly, the decline was due to the political
instability and the poor domestic industrial environment.
In 2002-03, FDI inflows were declined to US$ 5035. They were also reduced to US$
4322 during 2003-04. This fall in flow of FDI into the country was due to the Global
economic recession. Then, from 2004-05 onwards, there has been steady increase
in the flow of FDI into the country with highest annual growth rate which has
reached 154.72 percent during 2006-07. Further, the table shows that the
compounded annual growth rate (CAGR) which was 25.46 percent during Pre
liberalization has increased to 34.73 percent during the Post liberalization period.
This shows the openness of the Government in liberalizing and globalizing the
economy to the outside world through relaxation of regulatory and entry restrictions
on FDI inflows. Thus, on analyzing FDI inflows into the country over a period of 30
years it is observed that the compounded annual growth rate (CAGR) is 25.46
percent during 1980-81 to 1990-91 i.e., during the pre liberalization period. On
comparison with the post liberalization period, it is found that the annual
compounded growth rate has excavated to 34.73 percent showing the relaxation of
regulatory and entry restrictions on FDI inflows in the economy. This shows that the
importance of FDI into the country is realized by the Government during the Post
liberalization period. In this period of 19 years, steady increase of FDI inflow was
observed from 1991-92 to 2009-10 except the period from 1998-99 to 1999-00 and
again the period from 2002-03 to 2003-04.

Problems for low FDI flow to India


India, the largest democratic country with the second largest population in the
world, with rule of law and a highly educated English speaking work force, the
country is considered as a safe haven for foreign investors. Yet, India seems to be
suffering from a host of self-imposed restrictions and problems regarding opening its
markets completely too global investors by implementing full scale economic
reforms. Some of the major impediments for Indias poor performance in the area of
FDI are: political instability, poor infrastructure, confusing tax and tariff policies,
Draconian labor laws, well entrenched corruption and governmental regulations.

Lack of adequate infrastructure:

It is cited as a major hurdle for FDI inflows into India. This bottleneck in the form of
poor infrastructure discourages foreign investors in investing in India. Indias age
old and biggest infrastructure problem is the supply of electricity. Power cuts are
considered as a common problem and many industries are forced to close their
business.

Stringent labor laws:

Large firms in India are not allowed to retrench or layoff any workers, or close down
the unit without the permission of the state government. These laws protect the
workers and thwart legitimate attempts to restructure business. To retrench
unnecessary workers, firms require approval from both employees and state
governments-approval that is rarely given. Further, Trade Unions extort huge sums
from companies through over-generous voluntary retirement schemes.

Corruption:

Corruption is found in nearly every public service, from defense to distribution of


subsidized food to the poor people, to the generation and transmission of electric
power. Observations in the year 2000 suggest that a combination of legal hurdles,
lack of institutional reforms, bureaucratic decision-making and the allegations of
corruption at the top have turned foreign investors away from India. Another
observation made in the year 2001 states that corruption and misuse of public
office for private gain are capable of paralyzing a countrys development and
diverting its precious resources from public needs of the entire nation. Corruption is
against the poor people because it snatches away food from the mouths of the poor.
If corruption levels in India come down to those of Scandinavian countries, Indias
GDP growth will increase by 1.5 per cent and FDI will grow by 12 per cent.

Lack of decision making authority with the state governments:

The reform process of liberalizing the economy is concentrated mainly in the Centre
and the State Governments are not given much power. In most key infrastructure

areas, the central government remains in control. Brazil, China, and Russia are
examples where regional governments take the lead in pushing reforms and
prompting further actions by the central government.

Limited scale of export processing zones:

Indias export processing zones have lacked dynamism because of several reasons,
such as their relatively limited scale; the Governments general ambivalence about
attracting FDI; the unclear and changing incentive packages attached to the zones;
and the power of the central government in the regulation of the zones. India which
established its first Export Processing Zone (EPZ) in 1965 has failed to develop the
zones when compared to China which took initiative for establishment only in 1980.

High corporate tax rates:

Corporate tax rates in East Asia are generally in the range of 15 to 30 percent,
compared with a rate of 48 percent for foreign companies in India. High corporate
tax rate is definitely a major disincentive to foreign corporate investment in India.

Indecisive government and political instability:

There were too many anomalies on the government side during past two decades
and they are still affecting the direct inflow of FDI in India such as mismanagement
and oppression by the different company, which affect the image of the country and
also deject the prospective investor, who is very much conscious about safety and
constant return on their investment.
Suggestions for increased flow of FDI in India

Flexible labour laws needed:

China gets maximum FDI in the manufacturing sector, which has helped the country
become the manufacturing hub of the world. In India the manufacturing sector can
grow if infrastructure facilities are improved and labour reforms take place. The
country should take initiatives to adopt more flexible labour laws.

Re look at sectoral caps:

Though the Government has hiked the sectoral cap for FDI over the years, it is time
to revisit issues pertaining to limits in such sectors as coal mining, insurance, real
estate, and retail trade, apart from the small-scale sector. Government should allow
more investment into the country under automatic route. Reforms like bringing
more sectors under the automatic route, increasing the FDI cap and simplifying the
procedural delays has to be initiated. There is need to improve SEZs in terms of
their size, road and port connectivity, assured power supply and decentralized
decision-making.

Geographical disparities of FDI should be removed:

The issues of geographical disparities of FDI in India need to address on priority.


Many states are making serious efforts to simplify regulations for setting up and
operating the industrial units. However, efforts by many state governments are still
not encouraging. Even the state like West Bengal which was once called Manchester
of India attracts only 1.2% of FDI inflow in the country. West Bengal, Bihar,
Jharkhand, Chhattisgarh are endowed with rich minerals but due to lack of proper
initiatives by governments of these states, they fail to attract FDI.

Promote greenfield projects:

Indias volume of FDI has increased largely due to Merger and Acquisitions (M&As)
rather than large Greenfields projects. M&As not necessarily imply infusion of new
capital into a country if it is through reinvested earnings and intra company loans.
Business friendly environment must be created on priority to attract large
Greenfields projects. Regulations should be simplified so that realization ratio is
improved (Percentage of FDI approvals to actual flows). To maximize the benefits of
FDI persistently, India should also focus on developing human capital and
technology.

Develop debt market:

India has a well developed equity market but does not have a well developed debt
market. Steps should be taken to improve the depth and liquidity of debt market as
many companies may prefer leveraged investment rather than investing their own
cash. Therefore it is said that countries with well-developed financial markets tend
to benefits significantly from FDI inflows.

Education sector should be opened to FDI:

India has a huge pool of working population. However, due to poor quality primary
education and higher education, there is still an acute shortage of talent. FDI in
Education Sector is lesser than one percent. By giving the status of primary and
higher education in the country, FDI in this sector must be encouraged. However,
appropriate measure must be taken to ensure quality education. The issues of
commercialization of education, regional gap and structural gap have to be
addressed on priority.

Strengthen research and development in the country:

India should consciously work towards attracting greater FDI into R&D as a means of
strengthening the countrys technological prowess and competitiveness.

Sectoral Analysis

Manufacturing Sector:As rising labor costs constrain Chinas manufacturing output, India is well positioned
to become a larger player in the manufacturing game. In an effort to increase
manufacturing investment and output in the country, India instituted the National
Manufacturing Policy. This policy, the first of its kind in India, facilitates Public
Private Partnerships (PPP) as a means to entice investment into the countrys
National Investment and Manufacturing Zones (NIMZs).
The policy has several main objectives:

Facilitate manufacturing growth from 16 to 25 percent of the national GDP by


2022;
Increase the speed of employment in the manufacturing sector to generate
100 million additional jobs by 2022;
Create skilled labor through the establishment of skill development facilities;
Improve international competitiveness of Indian manufacturing through
appropriate strategy support and development of cutting-edge industrial
townships;
Ensure sustainable growth through energy efficiency, optimal utilization of
natural resources and restoration of damaged eco-systems; and
100 percent FDI allowed in Special Economic Zones for manufacturing
projects.

The manufacturing of products reserved for production by micro and small


enterprises (MSE) are subject to special terms, including:

Sectoral regulations, including FDI caps and entry route requirements; and
The necessity for an industrial license if FDI is greater than 24 percent in a
non-MSE enterprise that produces MSE reserved products.

Energy Sector:As the fourth largest energy consumer, India faces many challenges when tasked
with meeting domestic demand. The country currently relies on imports to meet the
majority of its energy needs. Coal consumption is the largest source of energy in
India, followed by oil and natural gas. Many investment opportunities will be
available as India continues down the path of energy market liberalization and
reform in an effort to balance its international energy trade.

Coal
Despite large domestic coal production, India still faces high domestic demand and
must import coal to feed its needs. Furthermore, demand for coal is expected to
grow as Indias population expands. To increase coal production, the Indian
government has set up captive consumption coal blocks to dedicate land and
resources to mining efforts.
The following are some of the vital points for investment in the coal sector:

FDI inflows up to 100 percent are permitted in the coal and lignite mining for
captive consumption in the power generation sector
FDI inflows up to 74 percent are permitted for exploration and mining of
captive consumption coal and lignite
FDI inflows up to 100 percent are permitted for coal processing plants as long
as the processed coal is sold back to the supplying company
Foreign investors holding less than a 50 percent share in coal production
units in India can invest in coal mining or other related activities through the
automatic route, which does not require approval from the Foreign
Investment Promotion Board

Petroleum and Natural Gas


India has seen record growth in its gas sector over the last few years, with refining
and exports leading the charge. Domestic demand for the energy source is also
expected to grow in 2013. India now permits up to 100 percent foreign direct
investment into the petroleum and natural gas sector under the automatic approval
route of the Reserve Bank of India.
The caps on FDI are as follows:

FDI up to 100 percent is permitted via the automatic route on petroleum


product marketing. FDI in this sector is subject to the existing sectoral policy
and regulatory framework in the oil marketing sector
FDI up to 100 percent is allowed on the automatic route in oil exploration in
both small and medium-sized fields, subject to and under the policy of the
government on private participation in: (1) exploration of oil and (2) the
discovered fields of national oil companies
FDI up to 100 percent is permitted via the automatic route for petroleum
product pipelines
FDI up to 100 percent is permitted for natural gas/liquefied natural gas
pipelines with prior government approval
FDI up to 100 percent is permitted in market study and formulation, as well
as setting up infrastructure for marketing in petroleum and natural gas sector

Electricity
Indias electricity capacity is the fifth largest in the world, but further investment is
needed to provide stable electricity to the entire country. Blackouts are common
and rural areas lack access to power supplies. Because of this, FDI policy for
electricity is one of the most liberal of Indias foreign investment schemes.

FDI up to 100 percent for electricity generation, transmission, and distribution


projects
No limit on project cost or minimum FDI contribution

Renewable Energy
The government of India allows 100 percent foreign direct investment in the
renewable energy sector and has put in place policies conducive to attracting
foreign companies to the market. These incentives include:

Governmental partnerships with cost-sharing schemes


Financial subsidies and waived excise and custom duties

Service Sector:

The services sector, with around 52 per cent contribution to the Gross
Domestic Product (GDP) in 2014-15, has made rapid strides in the past
decade and a half to emerge as the largest and one of the fastest-growing
sectors of the economy.
The services sector is not only the dominant sector in Indias GDP, but has
also attracted significant foreign investment flows, contributed significantly to
exports as well as provided large-scale employment.
Indias services sector covers a wide variety of activities such as trade, hotel
and restaurants, transport, storage and communication, financing, insurance,
real estate, business services, community, social and personal services, and
services associated with construction.

The Indian services sector has attracted the highest amount of FDI equity inflows in
the period April 2000-May 2015, amounting to about US$ 43.35 billion which is
about 16.8 per cent of the total foreign inflows, according to the Department of
Industrial Policy and Promotion (DIPP).
Some of the developments and major investments by companies in the services
sector in the recent past are as follows:

The Indian facilities management market is expected to grow at 17 per cent


CAGR between 2015 and 2020 and surpass the $19 billion mark supported by
booming real estate, retail, and hospitality sectors.
Fairfax India will look to acquire controlling stake in collateral management
and weather advisory firm National Collateral Management Services (NCML)
where the deal size could be $150-180 million.

Amazon, the world's largest online retailer, plans to invest Rs 31,700 crore
(US$ 5 billion) in India in addition to the US$ 2 billion investment it committed
two years ago, in expanding its network of warehouses, data centers and
increasing its online marketplace, besides launching an instant video and
subscription-based ecommerce services for high-end buyers, called Amazon
Prime, later this year.

The private security services industry in India is expected to register a growth


of over 20 per cent over the next few years, doubling its market size to Rs
80,000 crore (US$ 12.94 billion) by 2020.
The Government of India has awarded a contract worth Rs 1,370 crore (US$
221.63 million) to Ricoh India Ltd and Telecommunications Consultants India
Ltd (TCIL) to modernise 129,000 post offices through automation.
Taxi service aggregator Ola plans to double operations to 200 cities in current
fiscal year. The company, which is looking at small towns for growth, also
plans to invest in driver eco-system, such as training centers and technology
upgrade, besides adding 1,500 to 2,000 women drivers as part of its pink cab
service by women for women.
JP Morgan Asset Management (UK) Ltd, JP Morgan Investment Management
Inc and JP Morgan Chase Bank NA, have together acquired 4.11 per cent
stake in Mahindra & Mahindra Financial Services Ltd for Rs 113.75 crore (US$
18.13 million).
The Nikkei Services PMI for India stood at 51.8 in August 2015 a reading
above 50 signals expansion.
Government Initiatives
The Government of India recognises the importance of promoting growth in
services sectors and provides several incentives in wide variety of sectors
such as health care, tourism, education, engineering, communications,
transportation, information technology, banking, finance, management,
among others.
The Government of India has adopted a few initiatives in the recent past.
Some of these are as follows:
The Central Government is considering a two-rate structure for the goods and
service tax(GST), under which key services will be taxed at a lower rate
compared to the standard rate, which will help to minimize the impact on
consumers due to increase in service tax.
By December 2016, the Government of India plans to take mobile network to
nearly 10 per cent of Indian villages that are still unconnected.
The Government of India has proposed provide tax benefits for transactions
made electronically through credit/debit cards, mobile wallets, net banking
and other means, as part of broader strategy to reduce use of cash and
thereby constrain the parallel economy operating outside legitimate financial
system.
The Reserve Bank of India (RBI) has allowed third-party white label
automated teller machines (ATM) to accept international cards, including
international prepaid cards, and has also allowed white label ATMs to tie up
with any commercial bank for cash supply.

Automobiles Sector

Seventh-largest producer in the world with an average annual production of


17.5 Million vehicles.

4th largest automotive market by volume, by 2015.


4 large auto manufacturing hubs across the country.
7% of the countrys GDP by volume.
6 Million-plus vehicles to be sold annually, by 2020.
100% FDI is allowed under the automatic route in the auto sector, subject to
all the applicable regulations and laws.

The anticipated reasons to invest in the automobiles sector in India are mainly:

By 2015, India is expected to be the fourth largest automotive market by


volume in the world.
Over the next 20 years, India will be a part of the big global automotive
triumvirate.
Tractor sales in the country are expected to grow at CAGR of 8-9% in the next
five years, upping Indias market potential for international brands.
Two-wheeler production has grown from 8.5 Million units annually to 15.9
Million units in the last seven years. Significant opportunities exist in rural
markets.
Indias car market has the potential to grow to 6+ Millions units annually by
2020.
The emergence of large automotive clusters in the country: Delhi-GurgaonFaridabad in the north, Mumbai-Pune-Nashik- Aurangabad in the west,
Chennai-Bengaluru-Hosur in the south and Jamshedpur-Kolkata in the east.
Global car majors have been ramping up investments in India to cater to
growing domestic demand. These manufacturers plan to leverage Indias
competitive advantage to set up export-oriented production hubs.
An R&D hub: strong support from the government in the setting up of NATRiP
centres. Private players such as Hyundai, Suzuki, GM are keen to set up an
R&D base in India.
Tata Nano is a sterling example of Indian frugal engineering and is being
positioned as a mobilizer of the young generation.
Electric cars are likely to be a sizeable market segment in the coming decade.

IT Sector

USD 118 Billion expected 2014 revenues.


USD 200 Billion in savings for companies in the last five years.
600 offshore development centres for 78 countries.
USD 225 Billion industry by 2020.
National Policy on Information Technology 2012 aims to increase revenues of
IT and BPM industry to USD 300 Billion by 2020 and expand exports to USD
200 Billion by 2020. The policy also seeks to achieve the twin goals of
bringing the power of information and communication technology (ICT) within
the reach of all its citizens while harnessing the capability and human
resources of the country to enable India to emerge as the Global Hub and
Destination for IT and BPM Services by 2020.

Up to 100% FDI is permitted under the automatic route in data processing,


software development and computer consultancy services, software supply
services, business and management consultancy services, market research
services, technical testing and analysis services.
The setting up of IT services, BPM, software product companies, shared
service centres.
Fast-growing sectors within the BPM domain knowledge services, data
analytics, legal services, Business Process as a Service (BPaaS), cloud-based
services.
IT Services and fast-growing sectors within it such as solutions and services
around SMAC, IS outsourcing, IT consulting, software testing.
Engineering and R&D within which the fastest growing sectors are telecom
& semiconductors.

FDI inflow to India


Sector-wise, the telecommunications sector benefited most from FDI equity flows for
the current fiscal year to November 2014. This sector alone represented 13% of
total FDI, a share almost double the 7% share the sector has attracted on a
cumulative basis from April 2000 onward. With 9.8% of FDI equity, the services
sector, including Financial, Banking, Insurance, Non-Financial/Business, Outsourcing
and R&D, has also been a major beneficiary, reflecting both the increasing
sophistication of the Indian economy and the wide-ranging scope of the sector by
definition. Other key recipients for the current fiscal year to November 2014 are the
automobile industry and the drugs and pharmaceuticals sector.
Conscious that any significant drop in FDI could weigh heavily on the countrys
balance of payments and affect the Indian currencys rate of exchange, the Modi-led
government is taking measures to promote FDI in specific sectors of the economy.
Game-changing reforms are underway in the insurance sector whilst conditions
governing FDI in the medical equipment and railway transportation sectors have

also been announced.

If the latest figures on Indias inbound investment show growing ground for hope,
there is however narrowing room for complacency. Echoing the views conveyed in
the mid-year economic analysis 2014-2015 tabled in Parliament, in terms of FDI too,
a robust recovery has still to take hold.

Indian authorities expect the economy to grow 5-5.5% in the current fiscal year
before accelerating to 6-6.5% in 2015-16 as the impact of the reform measures

unveiled by the Modi-government kick in.

According to the World Bank, by 2016, the Indian economy is forecast to grow at
7%, equaling Chinas pace of 7%. Lower oil prices are creating a window of
opportunity for oil-importing countries like India and it is critical that this window be
used to usher in fiscal and structural reforms that will boost long-term growth and
development says the World Bank.

Recent policy measures

100% FDI allowed in medical devices


FDI cap increased in insurance & sub-activities from 26% to 49%
100% FDI allowed in the telecom sector.
100% FDI in single-brand retail.
FDI in commodity exchanges, stock exchanges & depositories, power
exchanges, petroleum refining by PSUs, courier services under the
government route has now been brought under the automatic route.
Removal of restriction in tea plantation sector.
FDI limit raised to 74% in credit information & 100% in asset reconstruction
companies.
FDI limit of 26% in defence sector raised to 49% under Government approval
route. Foreign Portfolio Investment up to 24% permitted under automatic
route. FDI beyond 49% is also allowed on a case to case basis with the
approval of Cabinet Committee on Security.

Construction, operation and maintenance of specified activities of Railway sector


opened to 100% foreign direct investment under automatic route.
Incentives

Central government incentives :

Investment allowance (additional depreciation) at the rate of 15 percent to


manufacturing companies that invest more than INR 1 billion in plant and
machinery available till to 31.3.2015.
Incentives available to units set-up in SEZ, NIMZ etc. and EOUs.
Exports incentives like duty drawback, duty exemption/remission schemes,
focus products & market schemes etc.
Areas based incentives like unit set-up in north east region, Jammu &
Kashmir, Himachal Pradesh, Uttarakhand.
Sector specific incentives like M-SIPS in electronics.

State government incentives :

Each state government has its own incentive policy, which offers various
types of incentives based on the amount of investments, project location,
employment generation, etc. The incentives differ from state to state and are
generally laid down in each states industrial policy.
The broad categories of state incentives include: stamp duty exemption for
land acquisition, refund or exemption of value added tax, exemption from
payment of electricity duty etc.

Conclusion

Indias Foreign Direct Investment (FDI) policy has been gradually liberalised to make
the market more investor friendly. The results have been encouraging. These days,
the country is consistently ranked among the top three global investment
destinations by all international bodies, including the World Bank, according to a
United Nations (UN) report.
For Indian economy which has tremendous potential, FDI has had a positive impact.
FDI inflow supplements domestic capital, as well as technology and skills of existing
companies. It also helps to establish new companies. All of these contribute to
economic growth of the Indian Economy.

References
http://study.com/academy/lesson/what-is-foreign-direct-investment-definitionadvantages-disadvantages.html
http://www.investopedia.com/terms/
http://www.ibef.org/industry/services.aspx
http://www.makeinindia.com/policy/foreign-direct-investment/