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Foreign Direct Investment in India since 1991: Trends, Challenges and

Prospects

Abstract (With the initiation of new economic policy in 1991 and subsequent reforms process, India
: has
witnessed a change in the flow and direction of foreign direct investment (FDI) into the country. This
is
mainly due to the removal of restrictive and regulated practices. Foreign direct investment in
India
increased from US $ 129 millions in 1991-92 to US $ 40,885 million in March, 2005, an increase of
about
316.9 times. However, the country is far behind in comparison to some of the developing countries
like
China. In so far as growth trend of FDI is concerned, there has been quite impressive growth of FDI
inflow
into the country during this period. However, negative growth rate is noticed during the period 1998-
2000
primarily due to falling share of major investor countries, steep fall of approval by 55.7% in
1998
compared to 1997 and slackening of fresh equity. However, traditional industrial sectors like
food
processing industries, textiles, etc. which were once important sectors attracting larger FDI, have
given
way to modern industrial sectors like electronics and electrical equipments, etc. In this paper analysis
on
the factors affecting potentiality and challenges of FDI in the country is discussed and open a room
for
future
discussion.)

I.
Introduction
Foreign Direct Investment (FDI) is considered as an important agent in the process of
accelerated
economic growth in the developing countries. FDI is more attractive in compare to other forms
of
external finance since it is non-debt creating, non-volatile and the returns depend on
the
performances of the projects financed b y the investors (Planning Commission, 2003). With
the

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introduction of new economic policy in 1991 and subsequent reform process, India has
witnessed
a change in the flow and direction of FDI into the country. This is mainly due to the removal
of
restrictive and regulated practices. Regarding impact of FDI in the economy of
developing
countries economists like Griffin, Singer and Weisskof found a negative impact while,
economists
like Chenery and Strout found favourable effect of foreign capital inflow on the
economic
efficiency and growth towards the developing countries (Mathiyazhagan,
2005).
Despite serious debate o ver the concept of FDI particularly in respect of developing countries,
it
has been getting increasing importance in the developing countries in recent times. The
basic
reasoning behind the advocacy of FDI lies in the fact that these countries are lacking in
domestic
saving and investment, which leads to lower economic growth, lower income, consumption
and
low level of employment. Thus to bridge the gap between investment need of a country and
its
domestic savings, FDI is considered as an important tool. Moreover, FDI can compensate the
need
of investment deficiency complementing local savings and b y supplying more
effective
management, marketing and technolo gy to improve productivity (Moran, 1999). Besides,
FDI
helps transfer and update technology; improv e skills and managerial capabilities; provide
the
competitive ed ge to country’s exports; improve efficiency; provides quality services and
goods
and helps in creating additional
jobs.
The indication for augmented importance of FDI reflected in upward world FDI inflow in
recent
time by 29 percent in 2005 from an amount of $710.8 billion in 2004, showing a significant
increase of FDI inflows in both developed and developing countries (UNCTAD, 2006). FDI
stock
of developing countries increased from $2349348 in 2004 by 17.3 percent in 2005, which
constitutes 27.0 percent of gross domestic product (GDP) of these countries. Among
the
developing economies, China is the forerunner with a share of 21.6 percent of total FDI inflow
to
developing countries in 2005, which is 14.3 percent of GDP. An underdeveloped county
like
Bangladesh has also realized the importance of FDI, where stock of FDI inflow increased by
13.2
percent in 2005 from $ 3098 million in 2004, which was 5.7 percent of their
GDP.
In Indian context, the importance of FDI was realized way back in 1948 when emphasis was
given
on creating domestic base. However, since access to finance was quite limited, the
attitude
towards FDI was receptive (Kumar, 2004). Since then there was a debate over the necessity o f
FDI
and Government of India in the 1980s cautiously went on deregulation of industries.
However,
after the adoption of liberal investment policy under economic reforms in 1991 resulted
in 2

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attraction of more FDI inflow to the country. In recent times, FDI inflow to India increased
by
17.1 percent in 2005, which is 5.8 percent of GDP of the countr
y.
It is evident that FDI stock in India has been increasing and foreign direct investment policy
is
becoming liberal for attracting more fo reign investors (Government of India, 2006). Keeping
in
view the liberal economic and FDI policy along with a set of economic practice and
infrastructure,
the present paper attempts to examine the trends of FDI inflow to India since 1991, analyze
the
distribution of FDI in terms of sectoral and regional context and over viewing challenges
and
future prospects of FDI to
India.
The paper is organized in six sections. Apart from the introduction in section I, section II
describes
trends in FDI inflow to India along with its distribution. Section III discusses on performance
of
India in comparison to China in terms of FDI, which is followed by prospects of FDI inflow
to
India in section IV. While the challenges of FDI inflow to India are outlin ed in section V,
section
VI concludes the
paper.
The stud y is based on secondary data collected from various sources. These include
publications
of various organizations such as Department of Industrial Policy and Promotion (DIPP),
Reserve
Bank of India (RBI) Bulletin, Report of Planning Commission of India, Economic Census as
well
as the website of DIPP, RB I, International Monetary Fund (IMF), World Bank, United
Nations
Conference on Trade and Development (UNCTAD), AT Kearney and Transparency
International.
II. Trends in Foreign Direct Investment Inflow to
India
After the initiation of liberal foreign investment policy b y government of India in 1991,
FDI
inflow has shown an upward trend in stock sense but varied in size over the period of
fourteen
years (1991-92 to 2004-05). FDI inflow in India increased by 318.2 times from $129 million
in
1991-92 to $41050 million in 2005 in cumulative sense or 50.93 percent at Compounded Annual
Growth Rate 1 . The inflow of FDI to the country has witnessed fluctuations during
(CAGR) the
period under consideration. It in creased from $ 129 million in 1991-92 to $3557 million in
1997-
98, which declined to $2155 million in 1999-2000. It increased to a peak of $6130 million
in
2001-02 before declining in the subsequent years in 2002-03 and 2003-04. The inflow
again
increased to $6051 million in 2004-05. The year wise FDI inflow to India along with CAGR
is
shown in table 1. In terms of CAGR, growth rate of FDI inflow to India has declined from
144.2
percent in 1992-93 to 26.1 percent in 1997-98. During this p eriod, the growth rate was
positive 3
though it varied year to year. During the period 1991-2005, growth rate of FDI inflow to India
was
negative for four years (1998-99, 1999-2000, 2002-03 and 2003-04) as shown in the table. The
reasons for this negative growth can be substantiated with the help of various
government
publications in different 2 .
times
Falling share of FDI inflow by key source countries like USA and Mauritius was a main reason
for
the decline of FDI inflow for the period 1998 to 2000. FDI inflows from Mauritius and
USA
declined by 34.5 percent and 34.1 percent respectively in 1998-99 over the previous
year
(Economic Census, 2000). One of the expected reasons for low inflow during the period may
be
the impact of Pokhran Nuclear tests, though there is no evidence at large scale (ENS
Economic
Bureau, 1999). Moreover, Germany, South Korea and Netherlands accounted for a decline of
US$
391.3 million in 1998-99 compared to 1997-98. Similarly, inflows routed through Mauritius
and
USA declined b y 15.1 percent and 21.6 percent in 1999-2000.

Table 1: Year wise actual FDI Inflow and Annual Growth Rate of FDI inflow to
India
Year FDI Inflow (Amount in $ million) * (Percent

CAGR )
1991-1992 129 -

1992-1993 315 144.2


1993-1994 586 86.0

1994-1995 1314 124.2


1995-1996 2,144 63.2

1996-1997 2,821 31.6

1997-1998 3,557 26.1


1998-1999 2,462 -30.8

1999-2000 2,155 -12.5


2000-2001 4,029 87.0

2001-2002 6,130 52.1

2002-2003 5,035 -17.9


2003-2004 4,322 -14.2

2004-2005 6,051 40.0

+
* CAGR Grand
stands Total 41050 50.93
for Compound Annual Growth
rate
+ CAGR for Au gust 1991- March 2005 4
Source: FDI Statistics, , Ministry of Ind ustry and
DIPP Commerce
Besides, FDI inflows from Japan also declined in 1999-00 compar ed to the previous period.
There
was steep fall of approvals in 1998 compared to 1997 (a reduction of 55.7 percent in dollar
terms).
It is worrying to note that India’s share in d evelop ing countries inflows declined from 1.9 per
cent
in 1997 to 1.4 percent in 1998. The reason of the overall decline in 2002-03 was
principally
slackening of fresh equity injected through FDI in the year 2002-03. During the year 2003-04
FDI
inflows has shown a negative growth rate of 7.2 percent. The reduction can be attributed to
a
decline of $ 379 million in fresh equity capital inflows in 2003-04. During the year growth
rate
was (-13.6) percent for equity capital and (-1.9) percent for reinvested
earnings.
II.1 Share of Merger and Acquisition (M&A) in FDI inf lows in
India
The value of cross border 3 , a key mode of global FDI since the late 1980s started to pick
M&A up
in 2004 following three years of decline, while their has been growing since 2002
number
(UNCTAD, 2006). From the perspective of developing host country like India, the
increasing
number of M&A is not beneficial to its economy. Th erefore, it is important to examine
whether
share of M&A has outperformed the share of Greenfield investment. Table 2 depicts the share
of
M&A in FDI inflow during 1997-1999 to ex amine the recent pattern of FDI
inflows.
Table 2: Share of Merger and Acquisitions (M&As) in FDI
inflow
Year FDI ($ Million) M&A Fund M&A as % of
FDI
1997 3200 1300 40.6

1998 2900 1000 34.5

1999 1400 500 35.7

Total (1997-1999) 7100 2800 39.4

Source: Kumar, 2000

Majority o f Greenfield investment dominated the modes of FDI in India in the pre reform
period
(Kumar, 2005). However, FDI inflows in the post reform period take the form of M&A,
which
constituted 39.4 percent for the period 1997-19 99 as shown in table 2. Due to difficulties
in

5
getting data r egardin g M&A funds in time series, sales and purch ase data of M&A are taken
to
examine the recent trend in the mode of FDI inflows which is depicted in table
3.
The recent trend of sales and purchase of M&A as a percentage of FDI inflows in India
clearly
indicates that M&A sales has a dominant share in FDI inflows. It increased from a meager of
5.2
percent in 1990 to 96.7 percent in 2005. However, as in the case of FDI inflow there
are
fluctuations in the share of both sale and purchase of M&A in the FDI inflows for the
given
period. However, the sh are of M&A sale dominated the scenario for the overall period over
M&A
purchase
.
Table 3: FDI Inflows and Sales and Purchase of
M&A
Year M&A Sale M&A Purchase FDI
Inflow
1990 5 (5.2) - 97
1995 276 (13.4) 29 (1.4) 2065.4

2000 1219 (50.2) 910 (37.5) 2428.2


2001 1037 (29.0) 2195 (61.5) 3571.4

2002 1698 (50.5) 270 (8.0) 3361.3

2003 949 (45.6) 1362 (65.5) 2079.1


2004 1760 (54.8) 863 (26.9) 3213.4

2005 4210 (96.7) 2649 (60.8) 4355.2


Total 11154 (52.7) 8278 (39.1) 21171

(Figures in the parentheses indicate M & A as a percentage o f FDI inflow for respective
years)
Source: Statistical Database Online,
UNCTAD
II.2 Country wise FDI Inf lows to
India:
Since 1991, USA has been playing a major role in FDI inflows to India by accounting for
19.31
percent of the total FDI inflows. Mauritius (15.25) and United Kingdom (7.71 percent) are
the
other two major contributors. Out of the total FDI inflow of Rs. 3329948.28 million during
the
period 1991-2005, the share of top ten investor countries was 62 percent. For a better reflection
of
the direction of countr y wise inflow of FDI to India during the period 1991-05, the period is
sub-
divided into two periods 1991-2000 and 2001-2005. This is due to - first to ex amine the trend
, of
emerging investor countries in the st century compared to the 90s secondly data on FDI
21 and ,
have been revised since 2000-01 with expanded coverage to approach international
best
practices, which will reflect a large FDI inflows since reinvested earnings and other 6
capital
components were included. Table 4 shows the share of Top-Ten Investing C ountries in FDI
Inflow
to India during 1991 to 2005.

Table 4 clearly depicts that USA continued as a key source country for the period 1991-2000
with
20.41 percent followed by Mauritius (11.93 percent), U.K. (6.64 percent), Japan (4.03
percent),
and Netherlands (1.90) respectively. The cumulative share of these top five countries in the
total
FDI inflow to India for the period 1991-2000 was 44.91 percent. The share in FDI
inflows
declined for this period for counties like Japan, USA, German y and more noticeably of
South
Korea’s. On the other hand, share of Netherlands and Singapore has increased. The
combined
share of the top ten countries increased from 57.4 percent during 1991-2000 to 75.2 percent
during
2001-05 signifying more importance of the top ten countries in the countr y’s FDI
inflows.
Moreover, during the above-mentioned period share of top five investors countries increased
from
44.91 percent in 1991-2000 to 50.1 percent in 2001-05.

Table 4: Share FDI Inflow of Top-Ten Investing Countries in India during 1991 to
2005
(Amount in Rs.
million)

Position FDI Inflows to India


Country
in
1991-2000 2001-05 1991-2005

1 U.S.A 503794.4 (20.41) 139258.61 (16.2) 643053.01 (19.31)

2 Mauritius 294323.16 (11.93) 213491.11 (24.8) 507814.27 (15.25)

3 U.K. 163879.47 (6.64) 92778.44 (10.8) 256657.91 (7.71)

4 Japan 99352.25 (4.03) 31892.08 (3.7) 131244.33 (3.94)

5 Netherlands 46999.62 (1.90) 82135.2 (9.5) 129134.82 (3.88)

6 German y 84970.24 (3.44) 21253.343 (2.5) 106223.58 (3.19)

7 Korea (South) 97311.8 (3.94) 6256.71 (0.7) 103568.51 (3.11)

8 France 52375.04 (2.12) 21246.9 (2.5) 73621.94 (2.21)

9 Singapore 44830.1 (1.82) 26224.75 (3.0) 71054.85 (2.13)

10 Switzerland 28111.76 (1.14) 13641.82 (1.6) 41753.58 (1.25)


Top Ten Investors 1415947.84 (57.4) 648178.96 (75.2) 2064126.8 (62.0)

Total FDI Inflow to India 2467975.28 861973 (100.0) 3329948.28 (100.0)

Figures in the parentheses indicate percentages to the column


total
Source: SIA News Letter May 2003 and November
2006 7
II.3 Sectoral Distribution of FDI in
India:
In table 5, we have shown FDI inflow of top ten sectors in India from 1991 to 2005,
which
comprises 61.06 percent share of the total FDI inf low to all sectors. The table shows that the
top
ten sectors shared 56.78 percent of total FDI inflow during 1991-2002, which increased to
71.1
percent for the period 2003-05. Since 1991 major attraction of investor countries were
electrical
equipment (including software and electronics) sectors, which accounted for 14.02 percent of
total
FDI inflow to all sectors during the period 1991-
2005.
Table 5: Sector wise break up of FDI Inflow in India from 1991 to
2005
S.N. 1991-2002 2003-05 1991-05
Sectors
1 Electrical equipment 110908.7 (10.56) 99155.14 (22.14) 210063.8 (14.02)
(Including
S/W &
Electronics)
2 Transportation industry 98763.48 (9.41) 32856.74 (7.34) 131620.2 (8.79)
3 Service sector 65938.62 (6.28) 56804.56 (12.68) 122743.2 (8.19)

4 Telecommunications 98994.43 (9.43) 22999.56 (5.14) 121994 (8.14)


5 Fuels (power and oil refinery) 89762.37 (8.55) 17343.35 (3.87) 107105.7 (7.15)
6 Chemicals (other than fertilizers) 53993.62 (5.14) 20570.87 (4.59) 74564.49
(4.98)
7 Food processing industries 38228.38 (3.64) 8549.37 (1.91) 46777.75 (3.12)
8 Dru gs and pharmaceuticals 16893.94 (1.61) 23611.61 (5.27) 40505.55 (2.70)

9 Cement and Gypsum products 12166.66 (1.16) 20145.87 (4.50) 32312.53 (2.16)
10 Metallurgical industries 10590.68 (1.01) 16360.3 (3.65) 26950.98 (1.80)
Top ten sectors 596240.88 (56.78) 318397.4 (71.10) 914638.3 (61.06)
Grand total (all 1050092 (100.0) 447847.17 (100.0) 1497939.17
sectors) (100.0)

(Figures in parentheses indicate share of different sectors to total sectoral FDI inflow in
percent)
Source: SIA News Letter April 2006 DIPP, Ministr y of Industr y and Commerce,
GoI
Transportation sector realized second highest inflow (8.79 percent) of FDI followed b y
service
sector (8.19 percent) for the given period. It is clear from table 5 that share of electrical sector
was
double in the period 2003-05, which has risen from 10.56 percent in 1991 -2002 to 22.14 in 2003-
05. During the period 1991-2002 shares of telecommunications (9.43 percent) was second high
est,
followed by transportation sector (9.41 percent), fuels (8.55 percent) and service sectors
(6.28 8
percent). It is observed from table that service sector which occupied third place in terms of
FDI
inflow to India fo r the period 2003-2005 emerged as a major FDI attracting sector with
12.68
percent share of FDI inflow, which is nex t best to electrical sector. The shares of drugs
and
pharmaceuticals (5.27 percent), cement and gypsum (4.50 percent) and metallurgical
industries
(3.65 percent) increased in the period 2003-05 over the previous period, which were 1.61, 1.16
and
1.01 percents
respectively.
On the other hand shares of transportation sector (7.34 percent), telecommunication (5.14
percent),
fuel sector (3.87), chemical (4.59) and food processing industries have gone down in 2003-
2005
from 9.41, 9.43, 8.55, 5. 14 and 3.64 percents respectively during the period 1991-2002. Thus, it
may infer that sectoral direction of FDI has changed towards electrical and service sector
during
the recent
past.
II.4 Regional Distribution of FDI inflow to
India:
Regional distribution of FDI is probably o ne of the prominent indicators to gauge the
local
business investment climate with a strong implication for the state policy maker. FDI
inflow
besides other regional d istribution of FDI inflow shows disparity in regional level, which
is
evident from table 6. During the period August 1991 to December 2004, a total number of
22404
approvals received with an amount of Rs.1800761.04 million. The share of major FDI
attracting
ten states was 90.86 percent in terms of FDI approved amount and 78.74 in terms of number
of
approval. Maharashtra to ps the list with a share of 20.61 percent o f the total approved amount
of
FDI to India followed by Delhi (16.95 percent) and Tamil Nadu (12.58 percent). Out of
thirty-
four regions as mentioned in the annexure 1, nine states are above the average level for
the
mentioned period, which comprises 88.17 percent share of total FDI approved amount.
Rest
twenty-five regions have shared only 11.83 percent of total FDI approved amount. One
interesting
fact of the regional distribution of FDI to India is that twenty one regions, (from serial number
14
to 34 in the annexure 1) which has individual share of less than one percent attract only
4.2
percent of total FDI approved
amount.
It is observed from table 6 that states like Madhya Pradesh and Orissa, which shared a
small
number of approvals (1.2 percent and 0.7 percent respectively), attracted above average level
of
FDI approval amount (5.15 percent and 4.57 percent respectively) fo r the period. Moreover,
share
of North Eastern states excluding Sikkim in the total amount of approved FDI was only
0.04
9
percent, which is depicted in annexure 1, implies pathetic condition of local business
environment.
Foreign investors are attracted towards developed states like Maharashtra and Karn ataka due to
a
number of reasons (Narayana, 2006 and Business Today, 2003). Availability of power
at
affordable rate, availability of raw materials, availability of labour, proximity to
markets,
connectivity to international flexibility of state government policies, advance
cities, banking
facilities, telecom facilities, hassle free regulation, overall business environment, developed
IT
sector, etc. are some factors which attract FDI to these states. Above all investment incentives
are
very much attractive to conduct a business in these
regions.

Table 6: State-wise Break up of Amount Approved and Number of Approvals of Foreign


Direct
Investment in India (August, 1991 to December
2004)
Sl.No. State/Region Approved Amount (Rs. Number
of
1 Maharashtra 371077.94 (20.61) 5064 (24.8)

2 Delhi 305226.30 (16.95) 2816 (13.8)

3 Tamil Nadu 226512.88 (12.58) 2686 (13.2)


4 Karnataka 190963.88 (10.60) 2649 (13.0)

5 Gujarat 124625.13 (6.92) 1242 (6.1)


6 Andhra Pradesh 116344.43 (6.46) 1296 (6.4)

7 Madhya Pradesh 92714.08 (5.15) 243 (1.2)

8 Orissa 82293.13 (4.57) 141 (0.7)


9 West Bengal 77971.30 (4.33) 689 (3.4)

10 Uttar Pradesh 48365.63 (2.69) 815 (4.0)


Top Ten Regions 1636094.70 (90.86) 17641 (78.74)

Grand Total 1800761.04 (100.0) 22404 (100.0)

(Figures in parentheses represent percent to


total)
Source:
indiastat.com
III. FDI inf low to India vis-à-vis
China:
Chinese and Indian economies are presently performing way ahead of many
developing
economies of the world. However, performance of China in terms of attracting FDI is
much 10
better than India. India has attracted more foreign direct investor countries after 1991 (from 86
in th
1991 to 116 in 2007), which definitely enhance the stock of FDI inflow and placed India in
4
position in 2006 among developing countries. However compared to China, both inflow and
stock
are not comparable in nature since FDI inflow to India in stock sense covered approximately
62.5
percent of FDI inflow to China in flow sense in 2005 (UNCTAD, 2006). Nevertheless, in terms
of
growth rate of FDI inflow India has record ed 20.54 percent of growth in 2005 as against
19
percent in
China.
The relatively poor performance of India in attracting FDI as compared to China can be
attributed
to a number of Firs , China initiated their economic reforms in 1979 as against 1991
factors. t in
India. The main drawback in Indian context is the misgivings towards foreign financing. This
was
rooted in the nationalistic Neheruvian principles, which shaped economic policies up to
1991.
(Rahman et al, 2006). Moreover, in relation to labour laws India has simply
disadvantage
compared to China, as the laws are not MNE friendly and investor country always find it
difficult
to understand the
clause.
Secondl , since growth of economy is a major point of attraction from the investors’ point of
y view,
China has an edge over India in this regard. Since venturing on economic reforms two
decades
ago, Chinese economy has managed remarkable 95% growth rate, doubling in the last decad
e
alone. On the other hand India’s economy is also accelerating and Duetsche Bank in Germany
has
projected that economic reforms and a growin g work force will lead India to overtake C hina as
the
world’s fastest growing major economy over the next 15 years (Linda,
2006).
Thirdl , while India’s asset lies in the service sector with a huge base of well-educated
y manpower
in IT segment with a strong communication power of English, China’s success has been built
on
its booming manufacturing sector alon g with the skill and discipline of workers have besides
low
wages
.
Additionally, China has higher literacy rate, large natural resource endowments, more
competitive
physical infrastructure, which make it a more attractive destination for FDI, especially for
skilled
labour intensive manufacturing sector (UNCTAD, 2003). Besides, policies and procedures
in
China are more FDI friendly and more business- oriented. China is also found to be
favourably
placed with respect to some other important determinants of FDI inflows namely, flex ible
labour
laws, better labour climate and better entry and exit procedures for
business.
III. Prospects of India as FDI 11
Destination:
Prospects of India as a FDI destination for foreign countries may be counted on several
grounds,
which are outlined
as:
I. Rationalization of FDI Government of India (GoI) has recently further reviewed
Policy: the
policy of FDI, which allow FDI under automatic up to 100 percent in case of setting up
route of
green field investment projects, distillation and brewing of potable alcohol, laying of natural
gas
and LNG pipeline, manufacture of hazardous chemical, etc. (DIPP, 2006). Moreover, to
increase
FDI caps to 100 percent government permits under the automatic route for coal and lignite
mining
for captive consumption, setting up infrastructure relating to petroleum and natural gas sector
and
exploration of mining of diamonds and precious stones. With such policy initiatives GoI
can
expect more FDI inflow in the natural resource and infrastructure sector since world trend of
FDI
inflow in the recent times showed attraction towards such sector. United Kingdom will emerge
as
potential investors in terms of brewin g industr y since they are urging for 100 percent
approval
under automatic route in brewing industries (House of Commons,
2006).
II. Large and growing domestic According to survey report of National Council
market: of
Applied Economic Research 4 , more than 380 million Indians (72 million
(NCAER) households)
have an annual household income of over $10,000 (in PPP terms). This is expected to increase
to
550 million by 2010. Fast growing disposable incomes, increased availability and use of
consumer
finance and credit cards complement the keenness of the average Indian to adapt to and
assimilate
global trends. This has led to the creation of a rapidly growing consumer base and one of
the nd
world’s largest markets for manufactured goods and services. India has been ranked by AT
2
Kearney in a Global Retail Development Index of 30 developing countries. Moreover, four
large
retailing segments projected at compound annual average growth rate of 3 3,16,18 and 26
percents
for food, clothing, consumer durables and books and music segments respectively (Mukherjee
A,
2005).

III. Versatile, skilled human An unparalleled resource of educated, hard working,


capital: skilled 5
and ambitious workforce is the hallmark of India’s human capital. Amongst the countries
BRIC 6
,
India is projected to stay with its population of the age 25, which is estimated to be
youngest 70
percent of the total population b y 2030. A large number of English speaking workforces are
also
strength for India, which in fact constitutes larger population than USA. Besides, labour cost is
the
cheapest in India ($ 2200 per annum) compared to China ($3600) and Brazil
($6600).

12
IV. Sound economic Indian economy is growing at 7 percent annual average
performance: growth
rate from the 1993. According to an estimation done by the Central Statistical Organization,
GDP
growth rate was 6.5 percent for period 1993-03 and were 8.2 and 6.9 percent for the year 2003-
04
and 2004-05 respectively. Most recently, GDP growth rate increased to 9.2 percent for the
second
quarter of 2006-07. Definitely, this is a good sign because investors are attracted towards
rapidly
growing countries. Besides, interest rate has declined from 20.0 percent in 1991-92 to 11.1
percent
in 2004-05. Though inflation rate varied year to year, comparatively it was decreased from
10.6
percent in 1991-96 to 6.5 percent in 2004-05.

V. Tax : Double taxation avoidance treaty is one of the main achievements in the field
Measures of
tax regime, which is at present implemented with 79 nations. It will definitely boost
up
confidence of foreign investors since tax on both corporate profit and dividends are treated
as
disincentive by investors. Moreover, corporate tax rate has b een slashed down from 74.75
percent
in 1992 to 40 percent in 2004-05 and custom duties have also been reduced from 42 percent
in
1997 to 15 percent in 2005 as reported by Federation of Indian Chambers of Commerce
(FICCI).
VI. Liberalized Investment The policy on FDI has been progressively liberalized
policy: since
1991. Today, the FDI policy in India is widely reckoned to be among the most liberal in
the
emerging economies and FDI up to 100% is allowed under the automatic route in most sectors
and
activities. Recently, FDI up to 100 percent has been permitted under automatic route in
civil
aviation, automobiles, telecommunication, power and road sectors. Moreover, in some sectors
a
tax holiday for 10 years is also offered as an incentive to
FDI.
VII. FICCI had conducted a survey in 2004 on the experience of investment b y the
foreign
investors in India. According to them India’s strengths as FDI destination lies in
following:
The respondents had identified market size, highly skilled manpower and low cost
of
infrastructure and operation as important motivating factors for their entr y into Indian market.
98
percent of the respondents had rated India’s attractiveness as an export platform as ‘medium
to
high’. India as an “off-shoring” destination has been highly attracted by 63 percent of
the
respondents. 86 percent respondents rated India as highly attractive destination in terms
of
availability of ‘skilled workforce’ in Information Technology ( IT) and Business
Process
Outsourcing (BPO)
industries.
Besides, findings of a joint UNCTAD-Corporate Location Survey in April 2004 had shown
that
top three investment hot spots for the next four years are China, India and the United 13
States.
The report on FDI C onfidence Index has ranked India sixth in the confidence Index and
rated
India as one of the tops 10 most preferred investment locations (Kearney,
2003).

IV.
Challenges
UNCTAD Confidence Index placed India in nd rank in terms of FDI potentiality and th rank

82 112
in terms of performance during the period of 2002-2004 out of a survey of 141 economies. It
can
be inferred that despite its potentiality, performance is not satisfactor y and challenges are
still
ahead of India, which is highlighted with the help of survey report of GoI and other
organizations
as
follows:
Ground level hassles continue to be a major impediment for foreign investors. 88
percent
respondents rated this problem as ‘medium to high’ category (FICC I, 2004), which shows
a
marginal improvement of 3 percent over previous survey (FICCI, 20 03). According to
the th
corruption perception index 2006 of Transparency International India ranked with a score
74 of
3.33 out of 10, which is same as China and
Brazil.
Transport, Road, Power and Water availability continue to remain a cause of concern
for
investors, as revealed in the survey of FICCI, 2004. National Highway Authority of India
reported
that 6942 Km four-lane highway has been completed under highway development project. Out
of
a total 24971 Km, 7892 Km is under implementation and 9975 Km is still to be
completed. 7 , it is not
Though the per capita peak demand is less than per capita installed capacity in
India
equally surplus for all states in the country (indiasta.com). Kearney Confidence Index reflects
that
while Indian infrastru cture is attractive to 36 percent, Chinese infrastructure is attractive to
64
percent of
respondents.
Approval procedure of FDI in India is time consuming. The biggest barrier for India at first is
the
screening stage 8 . This is because we do not get across effectively to the decision-
itself making
“board room” levels of corporate entities where a final decision is taken. On the other hand,
China
is viewed as ‘more business oriented’, its decision-making is faster and has more FDI
friendly
policies (GoI,
2003).
One of the most prominent hurdles in attracting FDI inflow to India is it’s stringent labour
laws,
which discourage the entry of Greenfield FDI because of the fear that the company
concerned
would not be possible to downsize the labour strength in the time of d ownturn of
business. 14
(Planning Commission, 2002). The impediment was sounded in FICCI’s su rvey report 2004
where
69 percent of the respondents assessed the p roblem of FDI investment in India because of
labour 9
laws. Moreover, high rate of tariff , ex cessive red-tapism and bureaucracy and barriers
barriers of
perception pose as a challenge in realizing FDI inflow in India (House of Commons
2006).
V.
Conclusions:
Removing its long held restrictive foreign investment policy in 1991, India sought to compete
with
the successful Asian economies to get a greater share of wo rld’s FDI. Ongoing initiatives such
as
further simplification of rules and regulations, improvement in infrastructure are expected
to
provide necessary impetus to increase FDI inflows in future. The inflows of FDI would dep end
on
domestic economic conditions, world economic trends, and strategies of global
investors.
Government, on its part is fully committed to creating strong economic fundamentals and
an
increasingly proactive FDI policy
regime.
Moreover, various governmental and non-governmental organizations’ report revealed
India’s
potentiality as a FDI destination in developin g countries next to China, but performance is
still
very poor. The prospects of India as a FDI destination would be realized if some of its
constraints
could be
overcame.
Although FDI inflow to India has been increasing, regional distribution of the same is found to
be
more inequitable. To ensure a more equitable regional distribution of such flows both central
and
state government should take concerted strategy for improvement in infrastructure facilities
and
creation of sound economic and political environment. Moreover, state governments have to
take
attractive investment policy in the line of Maharashtra and Karnataka to invest in less
attracting
states or regions. Political willingness hence seems to be a major step in this
direction.
Development of infrastructure, especially power and transport network is an immediate need
of
the time since it is basic f or industrialization. Bureaucratic hassles, corruption and time
consuming
procedures should be reduced to attract more FDI inflow. After all a more transparent
investment
system will benefit and secure future prospect of FDI inflow in
India.

Notes:

1. Although DIPP has published data on FDI for the 2006-07, due to provisional nature it is excluded for present study.

2. Though we draw some table in respect of the above mention reasons for decline of FDI it doesn’t clearly express the reasons. For a better
inquiry of the negative growth, we rely on various issues of Economic Census. (2000, 2001, 2003, 2004).
15
3. Greenfield FDI, or FDI in new projects, adds directly to the stock of productive capital in the host country, while a merger or acquisition
represents a change in ownership that does not necessarily involve any immediate additions to investment or employment in the host country.

4. NCAER conducted market information survey of households in association with business Standard in 2005.

5. BRIC stands for Brazil, Russia, India and China.

6. The World Fact Book of Central Intelligence Agency disclosed that Indian mean working age was 25 years compared to 43,36 and 32 years for
Japan, USA and China respectively.

7. The per capita peak demand at an all India average was 84.27 watt for the period 2005-2006 against peak installed capacity of 111.86 watt. The
scenario is opposite in case of some regions like Punjab, Haryana, Chandigarh, Daman and Diu, etc.

8. When a foreign investor consider any new investment decision, it goes through four stages in the decision-making process and action cycle,
namely- a) screening, b) planning, c) implementing and d) operating and expanding. (Planning Commission, GoI)

9. The average applied tariff for industrial imports into India is around 16% and the bound rate is around 35% for industrial products.

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:
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Delhi
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Government of India Investment , DIPP, Ministry of Industry and Commerce,
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19.02.2007

17
Annexure 1:
Table-4: State-wise Amount Approved and Number of Approvals of Foreign Direct Investment
in India (August, 1991 to December
2004)
Sl.No. Approved Amount Total
State/R (Rs. Approval
egion371077.94 (20.61) 5064
1 Maharashtra Million)
(24.8)
2 Delhi 305226.3 (16.95) 2816 (13.8)
3 Tamil Nadu 226512.88 (12.58) 2686 (13.2)
4 Karnataka 190963.88 (10.60) 2649 (13.0)
5 Gujarat 124625.13 (6.92) 1242 (6.1)
6 Andhra Pradesh 116344.43 (6.46) 1296 (6.4)
7 Madhya Pradesh 92714.08 (5.15) 243 (1.2)
8 Orissa 82293.13 (4.57) 141 (0.7)
9 West Bengal 77971.3 (4.33) 689 (3.4)
10 Uttar Pradesh 48365.63 (2.69) 815 (4.0)
11 Haryana 38763.08 (2.15) 882 (4.3)
12 Rajasthan 29112.11 (1.62) 344 (1.7)
13 Punjab 21303.54 (1.18) 203 (1.0)
14 Kerala 17815.42 (0.99) 336 (1.6)
15 Pondicherry 12861.53 (0.71) 130 (0.6)
16 Himachal Pradesh 12266.45 (0.68) 102 (0.5)
17 Goa 9993.78(0.55) 285 (1.4)
18 Bihar 7397.05 (0.41) 49 (0.2)
19 Chattisgarh 6363.03 (0.35) 48 (0.2)
20 Chandigarh 3241.7 (0.18) 86 (0.4)
21 Jharkhand 1465.15 (0.08) 81 (0.4)
22 Uttaranchal 1256.49 (0.07) 52 (0.3)
23 Dadra & Nagar Haveli 1239.8 (0.07) 72 (0.4)
24 Daman & Diu 590.34 (0.03) 44 (0.2)
25 Meghalaya 529.6 (0.03) 5 (0.01)
26 Andaman & Nicobar 137.87 (0.01) 8 (0.01)
27 Arunachal Pradesh 110.6 (0.01) 2 (0.0)
28 Jammu and Kashmir 84.1 (0.0) 5 (0.01)
29 Nagaland 36.8 (0.00) 2 (0.0)
30 Manipur 31.85 (0.0) 2 (0.0)
31 Tripura 30.88 (0.00) 4 (0.0)
32 Mizoram 15.22 (0.00) 1 (0.0)
33 Assam 14.95 (0.0) 19 (0.1)
34 Lakshadweep 5 (0.00) 1 (0.0)
Grand Total 1800761.04 (100.0) 22404 (100.0)

Note: The Statement excludes ADR/GDR


amounts 18
Source:
indiastats.com