“A Study On Foreign Direct Investment (FDI) Inflow And Its Impact In India”

Chapter 1

 Introduction
 Types of FDI
 Methods of FDI

Chapter 2

 History of FDI in India

 Investment routes for FDI in India
 FDI policy in India
 FDI promotion initiatives

Chapter 3

 Statement of the Problem

 Objectives of the research
 Methodology of data collection
 Hypothesis
 Scope of the study
 Limitations of the study

Chapter 4

 FDI inflows in the world

 FDI inflows analysis in India year wise
 FDI inflows analysis country wise in India
 FDI inflows sector wise in India
 Trends and patterns of FDI in diffront sector
 State wise FDI inflows analysis in India
 Route wise FDI inflows analysis in India
 FDI and Economic development
 Comparison of FDI between India and China

Chapter 5

 Findings and Conclusions

Chapter 6

 Recommendations and Suggestions

 Bibilography
 CHAPTER 1

Executive Summary
India has already marked its presence as one of the fastest growing economies of the world. It has been
ranked among the top 10 attractive destinations for inbound investments. Since 1991, the regulatory
environment in terms of foreign investment has been consistently eased to make it investor-friendly.
The measures taken by the Government are directed to open new sectors for foreign direct investment,
increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. FDI
policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment
in the country.

Foreign Direct Investment FDI has played an important role in 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 developing countries like India.

The title of the empirical study is “FDI inflows and its impact in India” during 2007 to 2011. The present
study aims at providing detailed information about FDI inflows in India during the subsequent years. The
analysis is fully based on secondary data collected through different website and journals.

Introduction to FDI

After independence there was serious efforts in India to strengthen the economy, the first reform was the
nationalization of commercial banks (1969) even though there were lacks in the money market in
reshaping and revamping the economy. The sea change could be seen after the economic reforms 1991
well-known as LPG (liberalization, privatization and globalization). The Indian economy has now
reached in the orbit of high rate of economic growth.

It is passing through the second economic reforms; primarily this phase of reforms was concerned with
increasing transparency and accountability of the country’s financial sector. The main purpose of the
reforms was to bring better integration of banking, insurance and other financial agencies so that capital
market in India can function smoothly. FDI refers to capital inflows from abroad that is invested in or to
enhance the production capacity of the economy. It involves in direct production activities and is also a
medium to long- term nature.

India is a preferred destination for foreign direct investments (FDI). India’s recently liberalized FDI
policy permits up to a 100% FDI stake real-estate as last year in ventures. Industrial policy reforms have
substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated
easy access to foreign technology and FDI. The upward moving growth curve of the real-estate sector
owes some credit to a booming economy and liberalized FDI regime. A number of changes were
approved on the FDI policy to remove the cap in most of the sectors.
Restrictions will be relaxed in sectors as diverse as civil aviation, construction development, industrial
parks, commodity exchanges, petroleum and natural gas, credit- information services, Mining etc.

The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service
sector, availability of large number of competent professionals, vast market for every product, increasing
impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and
existence of four hundred million middle class people. Today, India provides highest returns on FDI than
any other country in the world.

The financial crisis in global markets has made the outlook of Indian economy grim. While the
consistently volatile markets and the rupee plunging to an all-time low against the USD are some major
concern at this moment, natural calamities and economic scandals seem to be the icing on the cake. Two
decades ago, in the early 90’s, India faced a similar crisis. At that time India’s major concerns were the
problem in balance of payments and poor foreign exchange reserves.

During the crisis, Dr. Manmohan Singh, the Finance Minister of India at that time, came up with a
solution to reform the Indian economy. He liberalized the economy and gave rise to the phenomena of
foreign investments in India. Thus, opening the gates for foreign players to come and invest in India.
According to the World Bank Investment Report (1997) foreign capital flows during the period 1991 to
1996 have marked by a sharp expansion in net and gross capital flows and an appreciable increase in the
participation of foreign investors in developing countries.

In this respect the Finance Minister Manmohan Singh took number of encouraging steps for attracting
FDI. After the start of economic reforms in India in July 1991, the large number of investment proposals
was received into different industrial sectors both from the domestic investors and foreign industrialists
including the Non- Residents Indians (NRI). This shows the confidence of Indian as well as foreign
investors in Indian economy.

Meaning of Foreign Direct Investment:

Foreign direct investment is an investment made by a foreign individual or company in productive
capacity of another country. It is the movement of capital across national frontiers in a way that grants the
investor control over the acquired asset.

Foreign Direct Investments (FDI) is investment of foreign assets into domestic structures, equipment, and
organizations. FDI inflows are into the primary market and do not include foreign investments into the
stock markets. It is a long-term investment and is used by the developing countries as a source of their
economic development, productivity growth, to improve the balance of payments and employment
generation.

Its aim is to increase the productivity by utilizing the resources to their maximum efficiency. According to
International Monetary Fund, FDI is defined as Investment that is made to acquire a lasting interest in an
enterprise operating in an economy other than that of the investor. The investor’s purpose being to have
effective voice in the management of the enterprise.
FDI is normally defined as a form of investment made in order to gain unwavering and long-lasting
interest in the enterprises that are operated outside of the economy of the shareholder. There is a parent
enterprise and a foreign associate to form a Multinational Corporation (MNC). Parent enterprise has
power and control over its foreign affiliate on the investment.

Types of FDI
BY DIRECTION

Outward FDI:

An outward-bound FDI is backed by the government against all types of associated risks. This form of
FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the
domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are
also known as 'direct investments abroad.'

Inward FDIs:

Different economic factors encourage inward FDIs. These include interest loans, tax breaks, subsidies,
and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include
necessities of differential performance and limitations related with ownership patterns.

Horizontal FDI- Investment in the same industry abroad as a firm operates in at home.

Vertical FDI

 Backward Vertical FDI: Where an industry abroad provides inputs for a firm's domestic production
process.

 Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's domestic production.

BY TARGET

Greenfield investment: - Direct investment in new facilities or the expansion of existing facilities.
Greenfield investments are the primary target of a host nation’s promotional efforts because they create
new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the
global marketplace. The Organization for International Investment cites the benefits of Greenfield
investment (or in sourcing) for regional and national economies to include increased employment (often
at higher wages than domestic firms); investments in research and development; and additional capital
investments. Disadvantage of Greenfield investments include the loss of market share for competing
domestic firms. Another criticism of Greenfield investment is that profits are perceived to bypass local
economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to
local industries whose profits are seen to flow back entirely into the domestic economy.
Mergers and Acquisitions

Transfers of existing assets from local firms to foreign firm takes place; the primary type of FDI. Cross-
border mergers occur when the assets and operation of firms from different countries are combined to
establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is
transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign
company. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997,
accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for
multinationals to do FDI.

BY MOTIVE

FDI can also be categorized based on the motive behind the investment from the perspective of the
investing firm:

 Resource-Seeking

Investments which seek to acquire factors of production those are more efficient than those obtainable in
the home economy of the firm. In some cases, these resources may not be available in the home economy
at all. For example seeking natural resources in the Middle East and Africa, or cheap labour in Southeast
Asia and Eastern Europe.

 Market-Seeking

Investments which aim at either penetrating new markets or maintaining existing ones.FDI of this kind
may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed
towards this type of investment out of fear of losing a market rather than discovering a new one. This type
of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s Accounting,
Advertising and Law firms.

 Efficiency-Seeking

Investments which firms hope will increase their efficiency by exploiting the benefits of economies of
scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after
either resource or market seeking investments have been realized, with the expectation that it further
increases the profitability of the firm
Methods of FDI
The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an
economy through any of the following methods :
1. By incorporating a wholly owned subsidiary or company
2. By acquiring shareowners an associated enterprise
3. Through a merger or an acquisition of an unrelated enterprise
4. Participating in an equity joint venture with another investor or enterprise foreign direct
investment incentives may take the following forms : low corporate tax and income tax rates
5. Tax holidays
6. Other types of tax concession
7. Preferential tariffs
8. Special economic zones
9. Investment financial subsidies
10. Soft loan or loan guarantees
11. Free land or land subsidies
12. Relocation & expatriation subsidies
13. Job training and employment subsidies
14. Infrastructure subsidies
15. R & D support derogation from regulations (usually for very large project)
 CHAPTER 2

History of FDI In India

he economic liberalisation in India refers to ongoing economic reforms in India that started on 24
July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were made
to liberalize economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a
stronger version of socialism was adopted. Second major attempt was in 1985 by Prime Minister
Rajiv Gandhi. The process came to a halt in 1987, though 1966 style reversal did not take place.
In 1991, after India faced a balance of payments crisis, it had to pledge 20 tons of gold to Union
Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal with the
International Monetary Fund (IMF). In addition, the IMF required India to undertake a series of
structural economic reforms. As a result of this requirement, the government of P. V. Narasimha
Rao and his finance minister Manmohan Singh (currently the Prime Minister of India) started
breakthrough reforms, although they did not implement many of the reforms the IMF wanted.
The new neo-liberal policies included opening for international trade and investment,
deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The
overall direction of liberalisation has since remained the same, irrespective of the ruling party,
although no party has yet tried to take on powerful lobbies such as the trade unions and farmers,
or contentious issues such as reforming labour laws and reducing agricultural subsidies.Thus,
unlike the reforms of 1966 and 1985 that were carried out by the majority Congress
governments, the reforms of 1991 carried out by a minority government proved sustainable.

India in 1997 allowed foreign direct investment (FDI) in cash and carry wholesale. Then, it
required government approval. The approval requirement was relaxed, and automatic permission
was granted in 2006. Between 2000 to 2010, Indian retail attracted about $1.8 billion in foreign
direct investment, representing a very small 1.5% of total investment flow into India.

Single brand retailing attracted 94 proposals between 2006 and 2010, of which 57 were approved
and implemented. For a country of 1.2 billion people, this is a very small number. Some claim
one of the primary restraint inhibiting better participation was that India required single brand
retailers to limit their ownership in Indian outlets to 51%. China in contrast allows 100%
ownership by foreign companies in both single brand and multi-brand retail presence.

Indian retail has experienced limited growth, and its spoilage of food harvest is amongst the
highest in the world, because of very limited integrated cold-chain and other infrastructure. India
has only 5386 stand-alone cold storages, having a total capacity of 23.6 million metric tons.
However, 80 percent of this storage is used only for potatoes. The remaining infrastructure
capacity is less than 1% of the annual farm output of India, and grossly inadequate during peak
harvest seasons. This leads to about 30% losses in certain perishable agricultural output in India,
on average, every year.

Indian laws already allow foreign direct investment in cold-chain infrastructure to the extent of
100 percent. There has been no interest in foreign direct investment in cold storage infrastructure
build out. Experts claim that cold storage infrastructure will become economically viable only
when there is strong and contractually binding demand from organized retail. The risk of cold
storing perishable food, without an assured way to move and sell it, puts the economic viability
of expensive cold storage in doubt. In the absence of organized retail competition and with a ban
on foreign direct investment in multi-brand retailers, foreign direct investments are unlikely to
begin in cold storage and farm logistics infrastructure.

Until 2010, intermediaries and middlemen in India have dominated the value chain. Due to a
number of intermediaries involved in the traditional Indian retail chain, norms are flouted and
pricing lacks transparency. Small Indian farmers realize only 1/3rd of the total price paid by the
final Indian consumer, as against 2/3rd by farmers in nations with a higher share of organized
retail. The 60%+ margins for middlemen and traditional retail shops have limited growth and
prevented innovation in Indian retail industry.

India has had years of debate and discussions on the risks and prudence of allowing innovation
and competition within its retail industry. Numerous economists repeatedly recommended to the
Government of India that legal restrictions on organized retail must be removed, and the retail
industry in India must be opened to competition. For example, in an invited address to the Indian
parliament in December 2010, Jagdish Bhagwati, Professor of Economics and Law at the
Columbia University analysed the relationship between growth and poverty reduction, then
urged the Indian parliament to extend economic reforms by freeing up of the retail sector, further
liberalization of trade in all sectors, and introducing labor market reforms. Such reforms
Professor Bhagwati argued will accelerate economic growth and make a sustainable difference in
the life of India’s poorest.,

A 2007 report noted that an increasing number of people in India are turning to the services
sector for employment due to the relative low compensation offered by the traditional agriculture
and manufacturing sectors. The organized retail market is growing at 35 percent annually while
growth of unorganized retail sector is pegged at 6 percent.

The Retail Business in India is currently at the point of inflection. As of 2008, rapid change with
investments to the tune of US $ 25 billion were being planned by several Indian and
multinational companies in the next 5 years. It is a huge industry in terms of size and according
to India Brand Equity Foundation (IBEF), it is valued at about US$ 395.96 billion. Organised
retail is expected to garner about 16-18 percent of the total retail market (US $ 65-75 billion) in
the next 5 years.
India has topped the A.T. Kearney’s annual Global Retail Development Index (GRDI) for the
third consecutive year, maintaining its position as the most attractive market for retail
investment. The Indian economy has registered a growth of 8% for 2007. The predictions for
2008 is 7.9%.The enormous growth of the retail industry has created a huge demand for real
estate. Property developers are creating retail real estate at an aggressive pace and by 2010, 300
malls are estimated to be operational in the country.

After 2011

For years, India had prevented innovation and organized competition in its consumer retail
industry. Several studies claim that the lack of infrastructure and competitive retail industry is a
key cause of India’s persistently high inflation. Furthermore, because of unorganized retail, in a
nation where malnutrition remains a serious problem, food waste is rife. Well over 30% of food
staples and perishable goods produced in India spoils because poor infrastructure and small retail
outlets prevent hygienic storage and movement of the goods from the farmer to the consumer.

One report estimates the 2011 Indian retail market as generating sales of about $470 billion a
year, of which a minuscule $27 billion comes from organized retail such as supermarkets, chain
stores with centralized operations and shops in malls. The opening of retail industry to free
market competition, some claim will enable rapid growth in retail sector of Indian economy.
Others believe the growth of Indian retail industry will take time, with organized retail possibly
needing a decade to grow to a 25% share. A 25% market share, given the expected growth of
Indian retail industry through 2021, is estimated to be over $250 billion a year: a revenue equal
to the 2009 revenue share from Japan for the world’s 250 largest retailers.

The Economist forecasts that Indian retail will nearly double in economic value, expanding by
about $400 billion by 2020. The projected increase alone is equivalent to the current retail
market size of France.

In 2011, food accounted for 70% of Indian retail, but was under-represented by organized retail.
A.T. Kearney estimates India’s organized retail had a 31% share in clothing and apparel, while
the home supplies retail was growing between 20% to 30% per year. These data correspond to
retail prospects prior to November announcement of the retail reform. The Indian market offers
endless possibilities for investors.

It might be true that India has the largest number of shops per inhabitant. However we (locatus)
have detailed figures for Belgium, the Netherlands and Luxemburg. In Belgium, the number of
outlets is approximately 8 per 1,000 and in the Netherlands it is 6. So the Indian number must be
far higher.

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience stores
or any retail outlets, to sell multiple products from different brands directly to Indian consumers..
The government of Manmohan Singh, prime minister, announced on 24 November 2011 the
following:

India will allow foreign groups to own up to 51 per cent in “multi-brand retailers”, as
supermarkets are known in India, in the most radical pro-liberalisation reform passed by an
Indian cabinet in years;

single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up
from the previous cap of 51 percent;

both multi-brand and single brand stores in India will have to source nearly a third of their goods
from small and medium-sized Indian suppliers;

all multi-brand and single brand stores in India must confine their operations to 53-odd cities
with a population over one million, out of some 7935 towns and cities in India. It is expected that
these stores will now have full access to over 200 million urban consumers in India;

multi-brand retailers must have a minimum investment of US$100 million with at least half of
the amount invested in back end infrastructure, including cold chains, refrigeration,
transportation, packing, sorting and processing to considerably reduce the post harvest losses and
bring remunerative prices to farmers;

the opening of retail competition will be within India’s federal structure of government. In other
words, the policy is an enabling legal framework for India. The states of India have the
prerogative to accept it and implement it, or they can decide to not implement it if they so
choose. Actual implementation of policy will be within the parameters of state laws and
regulations.

The opening of retail industry to global competition is expected to spur a retail rush to India. It
has the potential to transform not only the retailing landscape but also the nation’s ailing
infrastructure.

A Wall Street Journal article claims that fresh investments in Indian organized retail will generate
10 million new jobs between 2012–2014, and about five to six million of them in logistics alone;
even though the retail market is being opened to just 53 cities out of about 8000 towns and cities
in India.

It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by
millions of small retailers, who see large foreign chains as a threat. The need to control food
price inflation—averaging double-digit rises over several years prompted the government to
open the sector, analysts claim. Hitherto India’s food supplies have been controlled by tens of
millions of middlemen (less than 5% of Indian population). Traders add huge mark-ups to farm
prices, while offering little by way of technical support to help farmers boost their productivity,
packaging technology, pushing up retail prices significantly. Analysts said allowing in big
foreign retailers would provide an impetus for them to set up modern supply chains, with
refrigerated vans, cold storage and more efficient logistics. “I think foreign chains can also bring
in humongous logistical benefits and capital,” Chandrajit Banerjee, director-general,
Confederation of Indian Industry, told Reuters. “The biggest beneficiary would be the small
farmers who will be able to improve their productivity by selling directly to large organised
players,” Mr Banerjee said.

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
Indian retail, forbidding foreign groups from any ownership in supermarkets, convenience stores
or any retail outlets, to sell multiple products from different brands directly to Indian consumers..

The government of Manmohan Singh, prime minister, announced on 24 November 2011 the
following:

India will allow foreign groups to own up to 51 per cent in “multi-brand retailers”, as
supermarkets are known in India, in the most radical pro-liberalisation reform passed by an
Indian cabinet in years;

single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up
from the previous cap of 51 percent;

both multi-brand and single brand stores in India will have to source nearly a third of their goods
from small and medium-sized Indian suppliers;

all multi-brand and single brand stores in India must confine their operations to 53-odd cities
with a population over one million, out of some 7935 towns and cities in India. It is expected that
these stores will now have full access to over 200 million urban consumers in India;

multi-brand retailers must have a minimum investment of US$100 million with at least half of
the amount invested in back end infrastructure, including cold chains, refrigeration,
transportation, packing, sorting and processing to considerably reduce the post harvest losses and
bring remunerative prices to farmers;

the opening of retail competition will be within India’s federal structure of government. In other
words, the policy is an enabling legal framework for India. The states of India have the
prerogative to accept it and implement it, or they can decide to not implement it if they so
choose. Actual implementation of policy will be within the parameters of state laws and
regulations.

The opening of retail industry to global competition is expected to spur a retail rush to India. It
has the potential to transform not only the retailing landscape but also the nation’s ailing
infrastructure.
A Wall Street Journal article claims that fresh investments in Indian organized retail will generate
10 million new jobs between 2012–2014, and about five to six million of them in logistics alone;
even though the retail market is being opened to just 53 cities out of about 8000 towns and cities
in India.

It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by
millions of small retailers, who see large foreign chains as a threat. The need to control food
price inflation—averaging double-digit rises over several years—prompted the government to
open the sector, analysts claim. Hitherto India’s food supplies have been controlled by tens of
millions of middlemen (less than 5% of Indian population). Traders add huge mark-ups to farm
prices, while offering little by way of technical support to help farmers boost their productivity,
packaging technology, pushing up retail prices significantly. Analysts said allowing in big
foreign retailers would provide an impetus for them to set up modern supply chains, with
refrigerated vans, cold storage and more efficient logistics. “I think foreign chains can also bring
in humongous logistical benefits and capital,” Chandrajit Banerjee, director-general,
Confederation of Indian Industry, told Reuters. “The biggest beneficiary would be the small
farmers who will be able to improve their productivity by selling directly to large organised
players,” Mr Banerjee said.

According to Bloomberg, on 3 December 2011, the Chief Minister of the Indian state of West
Bengal, Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19
votes to the ruling Congress party-led coalition, claimed that India’s government may put the
FDI retail reforms on hold until it reaches consensus within the ruling coalition. Reuters reports
that this risked a possible dilution of the policy rather than a change of heart.,

India Today claimed that the resistance to Indian retail reforms is primarily because it has been
badly sold, even though it can help fix the exploitation of Indian farmers by the decades-old
“arhtiya” and “mandi” monopoly system. India Today claims the policy is good for the small
Indian farmer and the Indian consumer.

Pratap Mehta, president of the Centre for Policy Research, claimed any U-turn or postponement
of retail reforms will cause an immense loss of face to the Congress-led central government of
Manmohan Singh. The mom-and-pop farmers of India support these reforms. The consumers of
India want the reforms. The government has already annoyed those who oppose change and
innovation in retail. By putting retail reforms on hold, the government will additionally alienate
much larger segment of India’s population supporting FDI. So they will now have the worst of
both worlds, claims Mehta.

Deepak Parekh, Ashok Ganguly and other economic policy leaders of India, on 4 December
2011, called placing investment and innovation in retail on hold for the sake of vested interests as
unfair and detrimental to vast majority in India. They urged farmers, consumers and the common
people to raise their voice against this false drama of apprehension against investment and
modernising trade in organised retailing. They called upon Indians to come out and strongly
support progressive measures and reforms with the same spirit and gusto with which we take the
liberties to criticize policies or issues we do not appreciate.

Several newspapers claimed on 6 December 2011 that India parliament is expected to shelve
retail reforms while the ruling Congress party seeks consensus from the opposition and the
Congress party’s own coalition partners. Suspension of retail reforms on 7 December 2011
would be, the reports claimed, an embarrassing defeat for the Indian government, suggesting it is
weak and ineffective in implementing its ideas.

Anand Sharma, India’s Commerce and Industry Minister, after a meeting of all political parties
on 7 December 2011 said, “The decision to allow foreign direct investment in retail is suspended
till consensus is reached with all stakeholders.”

On January 11, 2012, India approved increased competition and innovation in single-brand retail.

The reform seeks to attract investments in operations and marketing, improve the availability of
goods for the consumer, encourage increased sourcing of goods from India, and enhance
competitiveness of Indian enterprises through access to global designs, technologies and
management practices. In this announcement, India requires single-brand retailer, with greater
than 51% foreign ownership, to source at least 30% of the value of products from Indian small
industries, village and cottage industries, artisans and craftsmen.

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any
retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process.

In November 2011, India’s central government announced retail reforms for both multi-brand
stores and single-brand stores. These market reforms paved the way for retail innovation and
competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single
brand majors such as IKEA, Nike, and Apple. The announcement sparked intense activism, both
in opposition and in support of the reforms. In December 2011, under pressure from the
opposition, Indian government placed the retail reforms on hold till it reaches a consensus.

In January 2012, India approved reforms for single-brand stores welcoming anyone in the world
to innovate in Indian retail market with 100% ownership, but imposed the requirement that the
single brand retailer source 30 percent of its goods from India. Indian government continues the
hold on retail reforms for multi-brand stores.

In June 2012, IKEA announced it has applied for permission to invest $1.9 billion in India and
set up 25 retail stores. Fitch believes that the 30 percent requirement is likely to significantly
delay if not prevent most single brand majors from Europe, USA and Japan from opening stores
and creating associated jobs in India.
On 14 September 2012, the government of India announced the opening of FDI in multi-brand
retail, subject to approvals by individual states. This decision has been welcomed by economists
and the markets, however has caused protests and an upheaval in India’s central government’s
political coalition structure. On 20 September 2012, the Government of India formally notified
the FDI reforms for single and multi brand retail, thereby making it effective under Indian law.

Government approvals for foreign companies doing business in India

Basically, there are two routes for FDI in India. There is the Automatic Route, where no approval
or authority is required by the private foreign investor. He can invest in any company it wishes
with no need for government approval. And then there is the Government Route. In this route,
there is no investment without the prior approval of the Government of India.

Foreign Direct Investment in India does not have a uniform rate. Some industries allow 100%
FDI, i.e. the entire funds of the business can be from a foreign direct investment. The
percentages vary from 6% to 49% to 51%. There are a few industries where FDI is strictly under
any route. These industries are

i. Atomic Energy Generation

ii. Any Gambling or Betting businesses

iii. Lotteries (online, private, government etc)

iv. Investment in Chit Funds

v. Nidhi Company

vi. Agricultural or Plantation Activities (although there are many exceptions like
horticulture, fisheries, tea plantations, Pisciculture, animal husbandry etc)

vii. Housing and Real Estate (except townships, commercial projects etc)

viii. Trading in TDR’s

ix. Cigars, Cigarettes, or any related tobacco industry

There has always been opposing views about FDI in some sensitive industries like defense,
insurance, media etc. Because, the integrity of our democracy and the safety of our nation are at
stake. So, for many such industries, the FDI limits are there. For example, defense industry
allows only 49% FDI.
FDI Curent policy in India
 49% FDI under automatic route permitted in Insurance and Pension sectors
 Foreign investment up to 49% in defence sector permitted under automatic route. The
foreign investment in access of 49% has been allowed on case to case basis with
Government approval in cases resulting in access to modern technology in the country or
for other reasons to be recorded
 FDI limit of 100% (49% under automatic route, beyond 49% government route) for
defence sector made applicable to Manufacturing of Small Arms and Ammunitions
covered under Arms Act 1959
 FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable
Networks, Mobile TV, Headend-in- the Sky Broadcasting Service
 FDI up to 100% under automatic route permitted in Up-linking of Non-‘News & Current
Affairs’ TV Channels, Down-linking of TV Channels
 In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’
products, sourcing norms can be relaxed up to three years and sourcing regime can be
relaxed for another 5 years subject to Government approval
 Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground
Handling Services increased from 74% to 100% under the automatic route
 100% FDI under automatic route permitted in Brownfield Airport projects
 FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline
and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under
automatic route and FDI beyond 49% through Government approval
 Foreign airlines would continue to be allowed to invest in capital of Indian companies
operating scheduled and nonscheduled airtransport services up to the limit of 49% of
their paid up capital
 In order to provide clarity to the e-commerce sector, the Government has issued
guidelines for foreign investment in the sector. 100% FDI under automatic route
permitted in the marketplace model of e-commerce
 100% FDI under Government route for retail trading, including through e-commerce, has
been permitted in respect of food products manufactured and/or produced in India
 100% FDI allowed in Asset Reconstruction Companies under the automatic route
 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond
74% will be allowed through government approval route
 FDI limit for Private Security Agencies raised to 74% (49% under automatic route,
beyond 49% and upto 74% under government route)
 For establishment of branch office, liaison office or project office or any other place of
business in India if the principal business of the applicant is Defence, Telecom, Private
Security or Information and Broadcasting, approval of Reserve Bank of India would not
be required in cases where FIPB approval or license/permission by the concerned
Ministry/Regulator has already been granted
  Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding
of dogs), Pisciculture, Aquaculture and Apiculture has been waived off

FOREIGN DIRECT INVESTMENT POLICY IN INDIA

FDI is prohibited in sectors like

(a) Retail Trading (except single brand product retailing)

(b) Lottery Business including Government /private lottery, online lotteries, etc.

(c) Gambling and Betting including casinos etc.

(d) Chit funds

(e) Nidhi Company

(f) Trading in Transferable Development Rights (TDRs)

(g) Real Estate Business or Construction of Farm Houses

(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

substitutes

(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway
Transport (other than Mass Rapid Transport Systems).

Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business and Gambling and Betting
activities.

PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each sector/activity is
allowed, subject to applicable laws/ regulations; security and other conditionalities. In
sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to
applicable laws/ regulations; security and other conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share premium

received along with the face value of the share, only when it is received by the company upon
issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue
transfer of shares beyond the issue price of the share, cannot be taken into account while
calculating minimum capitalization requirement;

FDI policies in permitted sectors in India

 % of FDI
Sl.No Sector/Activity Cap/Equity Entry Route

AGRICULTURE

1 Agriculture & Animal 100% Automatic

Husbandry

a) Floriculture, Horticulture,
Apiculture and Cultivation of
Vegetables & Mushrooms under
controlled conditions.

b) Development and production of

Seeds and planting material.

c) Animal Husbandry,
Pisciculture, Aquaculture under
controlled conditions and

d) services related to agro and

allied sectors
Note- Besides the above, FDI is
not allowed in any other
agricultural sector/activity

2 Tea Plantation

Tea sector including tea 100% Government

plantations.
Note- Besides the above, FDI is
not allowed in any other
plantation sector/activity

Other conditions: 1) Compulsory divestment of 26% equity of the

company in favour of an Indian partner/Indian public within a period of
5 years

3 Mining 100% Automatic

a) Mining and Exploration of
metal and non metal ores
including diamond, gold, silver
but excluding titanium bearing
minerals and its ores; subject to
Mines and Minerals
(Development & Regulation) Act,
1957.

b) Coal and Lignite

1) Coal and Lignite mining for 100% Automatic

captive consumption by power
projects, iron & steel and cements
units and other eligible activities
permitted under and subject to
provisions of Coal and Mines
(Nationalization) Act, 1973

2) Setting up coal processing 100% Automatic

plants like washeries subject to the
condition that co. shall not do coal
mining and shall not sell washed
coal from its processing unit in
open market

c) Mining and mineral separation of titanium bearing minerals and

ores, its value addition and integrated activities.

Mining and mineral separation of 100% Government

titanium bearing minerals and
ores, its value addition and
integrated activities.

4 Petroleum & Natural Gas

 Exploration activities of oil and 100% Automatic
natural gas fields, infrastructure
related to marketing of petroleum
products and natural gas,
marketing of natural gas and
petroleum products, petroleum
product pipelines, natural
gas/pipelines, LNG Regasification
infrastructure, market study and
formulation and Petroleum
refining in the private sector,
subject to the existing sectoral
policy and regulatory framework
in the oil marketing sector and the
policy of the Government on
private participation in exploration
of oil and the discovered fields of
national oil companies

Petroleum refining by the Public 49% Government

Sector Undertakings (PSU),
without any disinvestment or
dilution of domestic equity in the
existing PSUs.

5 Manufacturing

Manufacture of items reserved for production in Micro and Small

Enterprises (MSEs)
 FDI in MSEs will be subject to the sectoral caps, entry routes and other
relevant sectoral regulations. Any industrial undertaking which is not a
Micro or Small Scale Enterprise, but manufactures items reserved for the
MSE sector would require Government route where foreign investment
is more than 24% in the capital. Such an undertaking would also require
an Industrial License under the Industries (Development & Regulation)
Act 1951, for such manufacture. The issue of Industrial License is
subject to a few general conditions and the specific condition that the
Industrial Undertaking shall undertake to export a minimum of 50% of
the new or additional annual production of the MSE reserved items to be
achieved within a maximum period of three years. The export obligation
would be applicable from the date of commencement of commercial
production and in accordance with the provisions of section 11 of the
Industries (Development & Regulation) Act 1951.

6 Defence

Defence Industry subject to 26% Government

Industrial license under the
Industries (Development &
Regulation) Act 1951

7 Service Sector

a) Broadcasting

Terrestrial Broadcasting FM 26% (FDI, NRI Government

(FM Radio) subject to such terms & PIO
and conditions as specified from investments and
time to time by Ministry of portfolio
Information and Broadcasting for investment)
grant of permission for setting up
of FM Radio Stations

Cable Network, subject to Cable 49% (FDI, NRI Government

Television Network Rules, 1994 & PIO
and other conditions as specified investments and
from time to time by Ministry of portfolio
Information and Broadcasting investment)
Direct–to-Home subject to such 49% (FDI, NRI Government
guidelines/terms and conditions as & PIO
specified from time to time by investments and
Ministry of Information and portfolio
Broadcasting investment)
Within this limit,
FDI component
not to exceed
20%

Headend-In-The-Sky (HITS) Broadcasting Service refers to the

multichannel downlinking and distribution of television programme in
C-Band or Ku Band wherein all the pay channels are downlinked at a
central facility (Hub/teleport) and again uplinked to a satellite after
encryption of channel. At the cable headend these encrypted pay
channels are downlinked using a single satellite antenna, transmodulated
and sent to the subscribers by using a land based transmission system
comprising of infrastructure of cable/optical fibres network.

FDI limit in (HITS) Broadcasting 74% (total direct Automatic up

Service is subject to such and indirect to 49%
guidelines/terms and conditions as foreign Government
specified from time to time by investment route beyond
Ministry of Information and including 49% and up to
Broadcasting. portfolio and FDI 74%

Setting up hardware facilities

such as up-linking, HUB etc.

1) Setting up of Up-linking HUB/ 49% (FDI & FII) Government

Teleports

(2) Up-linking a Non-News & 100% Government

Current Affairs TV Channel

(3) Up-linking a News & Current 26% (FDI & FII) Government
Affairs TV Channel subject to the
condition that the portfolio
investment from FII/ NRI shall
not be ―persons acting in
concert‖ with FDI investors, as
defined in the SEBI(Substantial
Acquisition of Shares and
 Takeovers) Regulations, 1997

b) Print Media

Publishing of Newspaper and 26% (FDI and Government

periodicals dealing with news and investment by
current affairs NRIs/PIOs/FII)

Publication of Indian editions of 26% (FDI and Government

foreign magazines dealing with investment by
news and current affairs NRIs/PIOs/FII)

Publishing/printing of Scientific 100% Government

and Technical
Magazines/specialty journals/
periodicals, subject to compliance
with the legal framework as
applicable and guidelines issued
in this regard from time to time by
Ministry of Information and
Broadcasting.

Publication of facsimile edition of 100% Government

foreign newspapers

c) Civil Aviation

Airports

(a) Greenfield projects 100% Automatic

(b) Existing projects 100% Automatic up

to 74%
Government
route beyond
74%

d) Air Transport Services

 1) Scheduled Air Transport 49% FDI
Service/ Domestic Scheduled (100% for NRIs)
Passenger Airline Automatic

(2) Non-Scheduled Air Transport 74% FDI Automatic up

Service (100% for NRIs) to 49%
Government
route beyond
49% and up to
74%

(3) Helicopter services/seaplane 100% Automatic

services requiring DGCA approval

e) Other services under Civil Aviation sector

(1) Ground Handling Services 74% FDI Automatic up

subject to sectoral regulations and (100% for NRIs) to 49%
security clearance Government
route beyond
49% and up to
74%

(2) Maintenance and Repair 100% Automatic

organizations; flying training
institutes; and technical training
institutions

Courier services for carrying 100% Government

packages, parcels and other items
which do not come within the
ambit of the Indian Post Office
Act, 1898 and excluding the
activity relating to the distribution
of letters.

Construction Development: Townships, Housing, Built-up

f) infrastructure
 Townships, housing, built-up 100% Automatic
infrastructure and construction-
development projects (which
would include, but not be
restricted to, housing, commercial
premises, hotels, resorts, hospitals,
educational institutions,
recreational facilities, city and
regional level infrastructure)

Industrial Parks – new and 100% Automatic

g) existing

h) Satellites – Establishment and operation

Satellites – Establishment and 74% Government

operation, subject to the sectoral
guidelines of Department of
Space/ISRO

i) Private Security Agencies 49% Government

j) Telecom Services 74% Automatic up

to 49%
Government
route beyond
49% and up to
74%

k) Trading

Cash & Carry Wholesale Trading/ 100% Automatic

Wholesale Trading (including
sourcing from MSEs)

l) E-commerce activities 100% Automatic

Test marketing of such items for 100% Government

which a company has approval for
manufacture, provided such test
marketing facility will be for a
period of two years, and
investment in setting up
manufacturing facility commences
simultaneously with test
 marketing.

Single Brand product trading 51% Government

m) Financing Services

Foreign investment in other financial services , other than those

indicated below, would require prior approval of the Government:

Asset Reconstruction Companies

Asset Reconstruction Company‘ 49% of paid-up Government

(ARC) means a company capital of ARC
registered with the Reserve Bank
of India under Section 3 of the
Securitisation and Reconstruction
of Financial Assets and
Enforcement of Security Interest
Act, 2002 (SARFAESI Act).

n) Banking –Private sector

Banking –Private sector 74% including Automatic up

investment by to 49%
FIIs Government
route beyond
49% and up to
74%

Banking- Public Sector

Banking- Public Sector subject to 20% (FDI and Government

Banking Companies (Acquisition Portfolio
& Transfer of Undertakings) Acts Investment)
1970/80. This ceiling (20%) is
also applicable to the State Bank
 of India and its associate Banks.

0) Policy for FDI in Commodity 49% (FDI & FII) Government

Exchange [Investment by
Registered FII
under Portfolio
Investment
Scheme (PIS)
will be limited to
23% and
Investment under
FDI Scheme
limited to 26%)

p) Infrastructure Company in the Securities Market

Infrastructure companies in 49% (FDI & FII) Government

Securities Markets, namely, stock [FDI limit of 26 ( For FDI)
exchanges, depositories and per cent and an
clearing corporations, in FII limit of 23 per
compliance with SEBI cent of the paid-
Regulations up capital ]

q) Insurance 26% Automatic

Non-Banking Finance Companies (NBFC)

r) Foreign investment in NBFC is 100% Automatic
allowed under the automatic route
in only the following activities:
(i) Merchant Banking
(ii) Under Writing
(iii) Portfolio Management
Services
(iv) Investment Advisory Services
(v) Financial Consultancy
(vi) Stock Broking
(vii) Asset Management
(viii) Venture Capital
(ix) Custodian Services
(x) Factoring
(xi) Credit Rating Agencies
(xii) Leasing & Finance
(xiii) Housing Finance
(xiv) Forex Broking
(xv) Credit Card Business
(xvi) Money Changing Business
(xvii) Micro Credit
(xviii) Rural Credit
FDI Promotion Initiatives
(a) On the policy front, the FDI policy is already very liberal & it is being further progressively
rationalized, on the basis of an exercise initiated for integration of all prior regulations on FDI,
contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so
as to reflect the current regulatory framework. The latest consolidated FDI policy document has
been launched by Department of Industrial Policy & Promotion on 30.09.2010, which is
available at DIPP’s website (www.dipp.nic.in) for public domain.

(b) On the investment promotion front, the Department organises ‘Destination India’ and ‘Invest
India’ events in association with CII and FICCI.

(c) DIPP has been undertaking concerted efforts for improving the business environment in the
country. The business reforms aimed at improving the business environment include setting up of
single windows, online registrations, computerization of information, simplification of taxes and
payments, reduction of documents through developing single forms for various
licences/permissions and reduction of inspections etc.

(d) As a step towards promoting an online single window at the national level for business users,
the Department has undertaking e-Biz project, which is one of Mission Mode Projects (MMPs)
under the National eGovernance Plan (NeGP). The objectives of setting up of the e-Biz Portal
are to provide a number of services to business users covering the entire life cycle on their
operations. The project aims at enhancing India’s business competitiveness through a service
oriented, event-driven G2B interaction.

(e) The National Manufacturing Competitiveness Council (NMCC) has been set up to provide a
continuing forum for policy dialogue to energise and sustain the growth of manufacturing
industries.

(f) The Department has regular interaction with foreign investors. Such interactions have been
held in bilateral/regional/international meets such as Indo-ASEAN, Indo-EU, Indo-Japan, etc.
Meetings with individual investors were also held on a regular basis.

(g) The Department website (www.dipp.nic.in) has been made both comprehensive and
informative, with an online chat facility.
 CHAPTER 3

Research Methodology

Statement of the problem:

There are many factors that influence the economic condition. One of them is FDI. Hence there is a need
to study the impact of FDI on the change in economy.

Objectives of the research:

1. To Study the concept of FDI.

2. To study the trends and patterns of flow of FDI.

3. To evaluate the impact of FDI on the economy.

Methodology and Data collection:

AIM: To establish the relationship between FDI and growing trends in the Indian economy.

PRIMARY SOURCE: Not Applicable in this research

SECONDARY SOURCE:

The present study is of analytical nature and makes use of secondary data. The relevant secondary data
has been collected from reports of the Ministry of Commerce and Industry, Government of India, Centre
for Monitoring Indian Economy, Reserve Bank of India, World Investment Report. It is a time series data
and the relevant data has been collected for the period 2007-2011.
Hypothesis:

The study has been taken up for the period 2007-2011 with the following hypothesis

 Ho: FDI doesn’t affect the economic growth of the country (India).
 H1: FDI affect the economic growth of the country (India).

Scope of the study:

1) The study is aimed to understand the flow of FDI in the Indian economy.

2) Finding out the reason for the difference in FDI inflows

3) How FDI is affecting various sector of economy.

Limitations of the study:

1) It’s not only FDI that effects the growth of economy there are other factors such as FII, monetary
policy and government policies.

2) FDI data keeps on changing.

3) Time limitation.ANALYSIS AND INTERPRETATION

4) Analysis of FDI inflows global and by group of economies

 CHAPTER-4

Analysis of FDI inflows global and by group of economies

Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5 trillion, surpassing
the previous record set in the year 2000. It was due to continuous rise in FDI in all of three groups of
economies -- in developed countries, developing economies and in South-East Europe and the
Commonwealth of Independent States (CIS) -- largely reflecting the high-growth propensities of
transnational corporations (TNCs) and strong economic performance in many parts of the world.
Increased corporate profits and an abundance of cash boosted the value of the cross-border mergers and
acquisitions (M&A’s) that constitute a large portion of FDI flows, although the value of M&A’s in the
latter half of 2007 declined.

The financial and credit crisis that began in the latter half of 2007 has not affected the overall volume of
FDI inflows. Even with a slowdown of the United States economy, the depreciation of the US dollar may
have helped to maintain high levels of FDI flows into the country, in particular from countries with
appreciating currencies, such as Europe and developing Asia. While sub-prime loan problems have
impinged on the lending capabilities of banks, new capital injections from various funds, including
sovereign wealth funds, have helped alleviate some of the problems.

FDI flows to developed countries in 2007 grew for the fourth consecutive year, reaching US$1 trillion.
The European Union (EU) as a whole continued to be the largest host region, attracting almost 40% of
total FDI inflows in 2007. FDI inflows to developing countries and economies in transition (the latter
comprising South-East Europe and CIS) rose by 16% and 41% respectively, and reached new record
levels. In Africa, FDI inflows in 2007 remained relatively strong. The unprecedented level of inflows
(US$36 billion) was supported by a continuing boom in global commodity markets. FDI inflows to Latin
America and the Caribbean, meanwhile, rose by 50% to a record level of US$126 billion. FDI inflows to
South, East and South-East Asia, and Oceania maintained their upward trend in 2007, reaching a new
high of US$224 billion, an increase of 12% over 2006. In West Asia, overall FDI inflows declined by
12%. FDI to South-East Europe and the CIS, or transition economies, expanded significantly, by 41%, to
a new record of US$98 billion. Despite some unfavourable economic projections for 2008 and potential
tightening of rules for foreign investment in natural resources and related industries, high demand for
natural resources around the world -- and, as a result, the opening up of new potentially profitable
opportunities in the primary sector - are likely to boost FDI in the extractive industries. And later during
2008 due to subprime crisis in US led to decline in FDI of the world.

However global FDI inflows in 2010 reached an estimated $1,244 billion from the above figure– a small
increase from 2009’s level of $1,185 billion. How- ever, there was an uneven pattern between regions and
also between sub regions. FDI inflows to developed countries and transition economies contracted further
in 2010. In contrast, those to developing economies recovered strongly, and together with transition
economies – for the first time – surpassed the 50 per cent mark of global FDI flows. FDI flows to
developing economies raised by 12% (to $574 billion) in 2010, due to their relatively fast economic
recovery, the strength of domestic demand. The value of cross-border M&A’s into developing economies
doubled due to attractive valuations of company assets, strong earnings growth and robust economic
fundamentals (such as market growth). As more international production moves to developing and
transition economies, TNCs are increasingly investing in those countries to maintain cost-effectiveness
and to remain competitive in the global production networks. This is now mirrored by a shift in
international consumption, in the wake of which market-seeking FDI is also gaining ground. This
changing pattern of FDI inflows is confirmed also in the global ranking of the largest FDI recipients: In
2010, half of the top 20 host economies were from developing and transition economies, compared to
seven in 2009.In addition, three developing economies ranked among the five largest FDI recipients in the
world. While the United States and China maintained their top position, some European countries moved
down in the ranking. Indonesia entered the top 20 for the first time.

Analysis of FDI in India year wise

FDI inflows year wise in India

Financial Year Amount (US $ % change over

(April-March) million) previous year

August 1991-
March 2000 14485

2000-01 2,463.00

2001-02 4,065.00 65%

2002-03 2,705.00 -50%

2003-04 2,188.00 -19%

 2004-05 3,219.00 47%

2005-06 5,540.00 72%

2006-07 12,492.00 125%

2007-08 24,575.00 97%

2008-09 27,330.00 11%

2009-10 25,834.00 -5%

2010-11 19,427.00 -25%

Total 146319

According to the statistics released by India’s Ministry of Commerce and Industry, the country has
received US $19.43 billion in FDI during the last fiscal (April ‘10-March’11), compared to US $25.83
billion that came in the previous financial year. Although it is a significant dip (-25%), the government is
confident that the trend will be reversed. Cumulative FDI inflows received during the post liberalization
period i.e. 1991-2011 were to the tune of US $146,319 million as per the above table. From the year 2000
up to 2002, investments into India grew 65% but declined during the subsequent two years from 2002 to
2004. 2004 to 2006, India once again experienced a surge in investments, growing 47% in 2004-05 and
72% in 2005-06 respectively. The year 2006-07 was an exceptional year with a 125% growth in FDI
inflows. The subsequent year was again very good, where investment inflows gained 97%, followed by an
increase of 11% during 2008-09. During the year of the financial crisis, Apr’09-Mar’10, foreign direct
investments suffered a slight setback with inflows declining a little over 5% over the previous year.

Last year (Apr’10-Mar’11) FDI into India declined further by 25% to US $19,427 million. Foreign direct
investment (FDI) in India’s services sector, which contribute over 50 per cent in the country’s economic
growth, declined by 22.5 per cent to USD 3.4 billion in 2010-11, according to the industry ministry’s
latest data. The services sector (financial and non-financial services) had attracted FDI worth USD 4.39
billion during 2009-10. According to experts, global financial problems, particularly in the European
markets are making players cautious of undertaking overseas investments. Mauritius, Singapore, the US,
UK, Netherlands, Japan, Germany and the UAE, among other countries, are the major investors in India.
“The decline is mainly because of global financial problems and it was a worldwide downfall. Also the
setback in attracting FDI was partly due to macroeconomic concerns such as a high current account
deficit and inflation, as well as to delays in the approval of large FDI projects.
Analysis of country wise inflows of FDI in India

2007- Cumulative
08 2008- 2009- 2010- 2011- Inflows % to
(April- 09(April 10(April 11(April 12(April (April '00 Total
Rank Country March) -March) -March) -March) -August) August '11) Inflows

1 Mauritius 44483 50794 49633 31855 26634 269395 41

2 Singapore 12319 15727 11295 7730 13350 66407 10

3 USA 4377 8002 9230 5353 2066 44609 7

4 UK 4690 3840 3094 3434 11311 40744 6

5 Japan 3336 1889 5670 7063 7855 31813 5

6 Netherlands 2780 3922 4283 5501 3207 28834 4

7 Cyprus 3385 5983 7728 4171 1830 23778 4

8 Germany 2075 2750 2980 908 5737 19113 3

9 France 583 2098 1437 3349 1668 11936 2

10 UAE 1039 1133 3017 1569 376 8968 1

Total FDI
Inflows 98664 123025 123378 88520 77864 658586

India’s 83% of cumulative FDI is contributed by ten countries while remaining 17 per cent by rest of the
world. The analysis of country wise inflows of FDI in India indicates that during 2007-2010, the total
amount of Rs 526537 of FDI was received from 113 countries including NRI investments. India’s
perception abroad has been changing steadily over the years. This is reflected in the ever growing list of
countries that are showing interest to invest in India. Mauritius emerged as the most dominant source of
FDI contributing 44 % of the total investment in the country. Singapore was the second dominant source
of FDI inflows with 9% of the total inflows. However, USA slipped to third position by contributing 7%
of the total inflows. They maintained continuous increasing trend under the period of study. UK occupied
fourth position with 5%followed by Netherlands with 4%, Japan with 4%, Cyprus with 4%, Germany
with 3%, France with 1%, UAE with 1%. It has been observed that some of the countries like Israel,
Thailand, Hong Kong, South Africa and Oman increased their share gradually during the period under
study.

It is also interesting to note that some of the new countries such as Hungary, Nepal, Virgin Islands, and
Yemen are making significant investments in India.
Mauritius:

After 1991-2011, Mauritius have always topped the position for FDI inflows in India with FDI on 2011-
12 standing at 26634 US $ million, consisting of 41% of total FDI inflows. The inordinately high
investment from Mauritius is due to routing of international funds through the country given significant
tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius
is a capital gains tax haven, effectively creating a zero-taxation FDI channel.

The India-Mauritius Double Taxation Avoidance Agreement (DTAA) was signed in 1982
and has played an important role in facilitating foreign investment in India via Mauritius. It has emerged
as the largest source of foreign direct investment (FDI) in India, accounting for 50 per cent of inflows
between August 1991 and 2008. A large number of foreign institutional investors (FIIs) who trade on the
Indian stock markets operate from Mauritius. According to the DTAA between India and Mauritius,
capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and
not in the country of residence of the company whose shares have been sold. Therefore, a Company
resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no
capital gains tax in Mauritius, the gain will escape tax altogether. The DTAA has, however, recently been
in the news, with Indian left-wing parties demanding a review of the treaty. They argue that businessmen
are misusing the provisions of the treaty to evade taxes.

The Mauritius stock market was opened to foreign investors following the lifting of foreign exchange
controls in 1994. No approval is required for the trading of shares by foreign investors, unless investment
is for the purpose of legal and management control of a Mauritian company or for the holding of more
than 15 per cent in a sugar company. Incentives to foreign investors include free repatriation of revenue
from the sale of shares and exemption from tax on dividends and capital gains.

Mauritius has an active offshore financial sector, which is a major route for foreign investments into the
Asian subcontinent. Foreign direct investment transiting through the Mauritian offshore sector to India
has been considerably increasing in the recent years, according to figures released by the Indian Ministry
of Commerce and Industry. Major US corporations use the Mauritius offshore sector to channel their
investment to India.

Singapore:

Singapore has become a rapidly growing source of investment funds to India in the past few years. In
fact, the data above shows that investment from Singapore has grown to very high levels. Singapore has
become India’s second largest source of FDI inflow for the period April 2011 till August 2011, with a
cumulative amount of Rs. 66407 crore. Its share has gone up from less than 1% of total FDI inflow in
2003-04, to 13% in 2007-08. For the past two years, it has overtaken even large developed economies like
US, UK and Japan which are normally viewed as the most important places to look for funds. FDI
increased from Rs. 172 crore 2003-04 to Rs. 822 crore in 2004-05, a jump of 378%! A major reason for
this, as was seen with Indo- Singaporean trade, probably was the anticipation for CECA’s signing that
boosted investment.30 Another major boost arrived in 2007-08, when FDI increased by 370%. Since
2004-05, Singapore has been consistently in the top few ranks since 2004-05, a situation not seen prior to
this. Although FDI inflow from most countries has grown in the past few years, the pace of growth in
Singapore’s investment has made others look surprised.
U.S.A:

The United States is the third largest source of FDI in India (7 % of the total), valued at 44609 crore in
cumulative inflows between April 2000 and August 2011. According to the Indian government, the top
sectors attracting FDI from the United States to India during 1991–2011 are fuel (36 percent),
telecommunications (11 percent), electrical equipment (10 percent), food processing (9 percent), and
services (8 percent). According to the available M&A data, the two top sectors attracting FDI inflows
from the United States are computer systems design and programming and manufacturing. Since 2002,
many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco Systems,
Adobe Systems, McAfee, and Intel have established R&D operations in India, primarily in Hyderabad or
Bangalore. The majority of U.S. electronics companies that have announced Greenfield projects in India
are concentrated in the semiconductor sector. By far the largest such project is AMD’s chip manufacturing
facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was found in the manufacturing
sector, most prominently in the machinery, chemicals, and transportation equipment manufacturing
segments. Other important categories of employment are professional, scientific, and technical services;
and wholesale trade, with 29 percent and 18 percent of U.S. affiliate employment, respectively.

European Union:

Within the European Union, the largest country investors were the United Kingdom and the Netherlands,
with 40744 crore and 28834 crore, respectively, of cumulative FDI inflows between April 2000 to August
2011. The United Kingdom, the Netherlands, Germany and France together accounted for almost 15% of
all FDI flows from the EU to India. FDI from the EU to India is primarily concentrated in the
power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the
European Union are similar to FDI from the United States. Manufacturing; information services; and
professional, scientific, and technical services have attracted the largest shares of FDI inflows from the
EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples
of EU companies investing in India by means of mergers and acquisitions. European companies
accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield
FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17
percent), heavy industry (16 percent), business and financial services (15 percent), and transport (11
percent). However, the heavy industry cluster accounted for the majority (68 percent) of the total value of
these projects.

Japan:

Japan was the fifth largest source of cumulative FDI inflows in India between April and August 2011, i.e.
the cumulative flow is 31813 crore and it is 5% of total inflow. FDI inflows to India from most other
principal source countries have steadily increased since 2000, but inflows from Japan to India have
decreased during this time period. There does not appear to be a single factor that explains the recent
decline in FDI inflows from Japan to India. India is, however, one of the largest recipients of Japanese
Official Development Assistance (ODA), through which Japan has assisted India in building
infrastructure, including electricity generation, transportation, and water supply. It is possible that this
Japanese government assistance may crowd out some private sector Japanese investment. The top sectors
attracting FDI inflows from Japan to India are transportation (54 percent), electrical equipment (7
percent), telecommunications, and services (3 percent). The available M&A data corresponds with the
 overall FDI trends in sectors attracting inflows from Japan to India. Companies dealing in the
transportation industry, specifically automobiles, and the auto component/peripheral industries dominate
M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and
Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an estimated 148 Greenfield
FDI projects valued at least at $3.7 billion between 2002 and 2006. In April 2007, Japanese and Indian
officials announced a major new collaboration between the two countries to build a new Delhi-Mumbai
industrial corridor, to be funded through a public-private partnership and private-sector FDI, primarily
from Japanese companies. The project was begun in January 2008 with initial investment of $2 billion
from the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited by
180 million people. At completion in 2015, the corridor is expected to include total FDI of $45–50 billion.
A large share of that total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6
airports, along with additional connections to existing ports. Private investment is expected to fund 10-12
new industrial zones, upgrade 5–6 existing airports, and set up 10 logistics parks. The Indian government
expects that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the
region, 28 percent growth in industrial output, and 38 percent growth in exports.

Analysis of sector wise inflows of FDI in India

Sector 2007- 2008- 2009- 2010- 2011- Cumulativ % age

08 09 10 11 12 e to total
(April- (April- (April- ( April (April Inflows Inflow
March March March - - Dec.) (April s
) ) ) March 2000 - (In
) Dec. 11) terms
of
US$)

SERVICES SECTOR 26,589 28,411 19,945 15,053 21,431 142,539 20%

(financial & non-financial) (6,615 (6,116) (4,176) (3,296) (4,575 (31,710)
)

COMPUTER SOFTWARE & 5,623 7,329 4,127 3,551 2,626 48,940 7%

HARDWARE (1,410) (1,677) (872) (780 (564) (10,973

TELECOMMUNICATIONS 5,103 11,727 12,270 7,542 8,969 57,035 8%

(radio paging, cellular mobile, basic (1,261) (2,558) (2,539) (1,665) (1,989 (12,544)
telephone services )

HOUSING & REAL ESTATE 8,749 12,621 14,027 5,600 2,544 48,819 7%
(2,179) (2,801 (2,935) (1,227) (551) (10,933

CONSTRUCTION ACTIVITIES 6,989 8,792 13,469 4,979 7,635 46,216 6%

(including roads & highways) (1,743) (2,028) (2,852) (1,103) (1,602 (10,239
)

POWER 3,875 4,382 6,138 5,796 6,639 32,176 4%

(967) (985) (1,272) (1,272) (1,447 (7,094
 )

AUTOMOBILE INDUSTRY 2,697 5,212 5,893 5,864 2,785 29,224 4%

(675) (1,152) (1,236) (1,299) (610 (6,444

METALLURGICAL INDUSTRIES 4,686 4,157 1,999 5,023 6,881 25,469 4%

(1,177) (961) (420) (1,098) (1,495 (5,750
)

PETROLEUM & NATURAL GAS 5,729 1,931 1,297 2,543 920 14,581 2%
(1,427) (412) (266) (556) (196) (3,333)

DRUGS & PHARMACEUTICALS NA NA 1,006 961 14,405 42,668 4%

(213) (209) (3,193 (9,155)
)

Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011

Industrial Sector Rank

Service Sector 1

Telecommunication 2

Computer Hardware & Software 3

Housing and Real Estate 4

Construction Activities 5

Drugs and Pharmaceuticals 6

Automobile Industry 7

Metallurgical Industry 8

Power 9

Petroleum and Natural Gas 10

 Chart Title

DRUGS & PHARMACEUTICALS; 6.06; 6.06%

PETROLEUM & NATURAL GAS; 3.03; 3.03%
METALLURGICAL INDUSTRIES; 6.06; 6.06%SERVICES SECTOR
AUTOMOBILE INDUSTRY; 6.06; 6.06% ; 30.3; 30.30%

POWER; 6.06; 6.06%

CONSTRUCTION ACTIVITIES
; 9.09; 9.09%
COMPUTER SOFTWARE & HARDWARE; 10.61; 10.61%
HOUSING & REAL ESTATE; 10.61; 10.61%
TELECOMMUNICATIONS
; 12.12; 12.12%

Pie chart representing % of total FDI inflows in different sectors

The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken place in the service
sector including the telecommunication, information technology, travel and many others. The service
sector is followed by the computer hardware and software in terms of FDI. High volumes of FDI take
place in telecommunication, real estate, construction, power, automobiles, etc.

The rapid development of the telecommunication sector was due to the FDI inflows in form of
international players entering the market and transfer of advanced technologies. The telecom industry is
one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom industry has the
highest growth rate in the world. During the year 2009 government had raised the FDI limit in telecom
sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector
registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal.

FDI inflows to real estate sector in India have developed the sector. The increased flow of foreign direct
investment in the real estate sector in India has helped in the growth, development, and expansion of the
sector. FDI Inflows to Construction Activities has led to a phenomenal growth in the economic life of
the country. India has become one of the most prime destinations in terms of construction activities as
well as real estate investment.

The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the
demand for cars and other vehicles is powered by the increase in the levels of disposable income in India.
The options have increased with quality products from foreign car manufacturers.
The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of
the automobile sector. The basic advantages provided by India in the automobile sector include,
advanced technology, cost-effectiveness, and efficient work force. Besides, India has a well-developed
and competent Auto Ancillary Industry along with automobile testing and R&D centres. The automobile
sector in India ranks third in manufacturing three wheelers and second in manufacturing of two wheelers.
Opportunities of FDI in the Automobile Sector in India exist in establishing Engineering Centres, Two
Wheeler Segment, Exports, Establishing Research and Development Centres, Heavy truck Segment,
Passenger Car Segment.

The increased FDI Inflows to Metallurgical Industries in India has helped to bring in the latest
technology to the industries. Further, the increased FDI Inflows to Metallurgical Industries in India has
led to the development, expansion, and growth of the industries. All this has helped in improving the
quality of the products of the metallurgical industries in India.

The increased FDI Inflows to Chemicals industry in India has helped in the growth and development of
the sector. The increased flow of foreign direct investment in the chemicals industry in India has helped in
the development, expansion, and growth of the industry. This in its turn has led to the improvement of the
quality of the products from the industry. Based upon the data given by department of Industrial Policy
and Promotion, in India there are sixty two (62) sectors in which FDI inflows are seen but it is found that
top ten sectors attract almost seventy percent (70%) of FDI inflows. The cumulative FDI inflows from the
above results reveals that service sector in India attracts the maximum FDI inflows amounting to Rs.
106992 Crores, followed by Computer Software and Hardware amounting to Rs. 44611 Crores. These
two sectors collectively attract more than thirty percent (30%) of the total FDI inflows in India.

The housing and real estate sector and the construction industry are among the new sectors attracting
huge FDI inflows that come under top ten sectors attracting maximum FDI inflows. Thus the sector wise
inflows of FDI in India shows a varying trend but acts as a catalyst for growth, quality maintenance and
development of Indian Industries to a greater and larger extend. The technology transfer is also seen as
one of the major change apart from increase in operational efficiency, managerial efficiency, employment
opportunities and infrastructure development.
Trends and Patterns of FDI in different sectors
Service Sector:

SERVICE SECTOR
(FINANCIAL & NON FINANCIAL
$7,000

$6,000 SERVICES SECTOR

(financial & non-
$5,000 financial)
$4,000 Linear (SERVICES
SECTOR
$3,000 (financial & non-
financial))
$2,000

$1,000

$0
2007-08 2008-09 2009-10 2010-11 2011-12

India stands out for the size and dynamism of its services sector. The importance of the services sector
can be gauged by looking at its contributions to different aspects of the economy. The share of services in
India’s GDP at factor cost (at current prices) increased rapidly: from 30.5 per cent in 1950-51 to 55.2 per
cent in 2009-10. The overall growth rate (compound annual growth rate) of the Indian economy from 5.7
per cent in the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a large measure due to
the acceleration of the growth rate (CAGR) in the services sector from 7.5 per cent in the 1990s to 10.3
per cent in 2004- 05 to 2009-10. The services sector growth was significantly faster than the 6.6 per cent
for the combined agriculture and industry sectors annual output growth during the same period. In 2009-
10, services growth was 10.1 per cent and in 2010-11 it was 9.6 per cent. India’s services GDP growth has
been continuously above overall GDP growth, pulling up the latter since 1997- 98, It has also been more
stable. An international comparison of the services sector shows that India compares well even with the
developed countries in the top 12 countries with highest overall GDP.

The two broad services categories, namely trade, hotels, transport, and communication; and financing,
insurance, real estate, and business services have performed well with growth of 11 per cent and 10.6 per
cent, respectively in 2010-11(with reference to table 4.3). Only community, social and personal services
have registered a low growth of 5.7 per cent due to base effect of fiscal stimulus in the previous two
years, thus contributing to the slight deceleration in growth of the sector. Among the subsectors of
services sectors, financial services attract of total FDI inflows followed by banking services, insurance
and non- financial services respectively. Outsourcing, banking, financial, information technology oriented
services make intensive use of human capital. The trend in this sectors first declines till 2011 and
increases in 2012 due to strong RBI policy and increase in consultancy services and devaluation of rupees
against dollar.

Computer Software and Hardware:

COMPUTER SOFTWARE & HARDWARE

$1,800.00

$1,600.00

$1,400.00

$1,200.00 COMPUTER SOFTWARE &

HARDWARE
$1,000.00 Linear (COMPUTER
SOFTWARE & HARDWARE)
$800.00

$600.00

$400.00

$200.00

$-
2007-08 2008-092009-102010-112011-12

Over the past few years the computer software industry has been one of the fastest growing sectors in
Indian economy. FDI Inflows to Computer Software and Hardware Industry in India have been
significant. 100 percent FDI is permitted under automatic route to the E-Commerce activities in India.
Software Technology Parks (STP) have been a major initiative in India to drive in Foreign Direct
Investment in the computer software industry. These Software Technology Parks provide highly
developed infrastructure and facilities that attract foreign investors. Regulatory measures by the Indian
government have also played a positive role in this regard. Measures like increased freedom of recruiting
and laying-off employees, tax benefits and easing of export producers have contributed to the growth of
FDI in this sector.

FDI is permitted under automatic route in the computer hardware industry in India. The huge market for
computer hardware in India, coupled with the availability of skilled workforce in this sector has boosted
the inflow of FDI. High growth prospects, in terms of increased consumption in the India as well as
increasing demand for exports are expected to lead to more Foreign Direct Investments in this sector.
Computer Software and Hardware sector received US$ 564 million which constitute 11% of the total FDI
inflows during the period Jan2000-Dec2011 (with reference to table 4.3). The maximum of FDI in this
sector was received from Mauritius which was followed by USA and so on. Among Indian locations
Mumbai received of investment followed by Bangalore, and Chennai. However the trend in this sector is
declining from 2008 due to economy crisis, recession and due to greater oppurtunity in countries like
China and Korea in respect of labour and technology.

Telecommunication:

TELECOMMUNICATIONS
(radio paging, cellular mobile, basic telephone services)
3,000

TELECOMMUNICATIONS
2,500
(radio paging, cellular
mobile, basic telephone
2,000 services
Linear
1,500 (TELECOMMUNICATIONS
(radio paging, cellular
mobile, basic telephone
1,000 services)

500

0
2007-08 2008-09 2009-10 2010-11 2011-12

Telecom is one of the fastest growing industries in India, and everyone, including foreign players and
investors, are eager to be a part of this growth. The last few years have witnessed many activities on the
foreign direct investment front with world's leading telecom operators picking up large stakes in domestic
operators.

The telecom services industry registered a growth of 20.7 percent clocking revenues of 1, 57,542 crore
in 2008-09 compared to Rs 130561 Crore in the previous year. During the year 2005, government had
raised the FDI limit in telecom sector from 49 percent to 74 percent, which has contributed to the robust
growth of FDI in the sector. In February 2009, the Government has further revised the methodology of
calculation of indirect foreign investment, according to which FDI of less than 50% in investing company
is not counted in the licensee company if the investing company is ‘owned’ and ‘controlled’ by resident
Indian citizens. This change of methodology of calculation of indirect foreign investment from earlier
proportionate basis to ‘owned’ and ‘controlled’ basis has brought down composite FDI in some of the
licensee companies and have given more room to bring in further investment. However, actual foreign
investment requirement of a licensee company depends on its business case. FDI in Indian
Telecommunications Industry is one of the most crucial parts that have caused such a hike in the telecom
market so far. Inflow of FDI into India’s telecom sector during April 2000 to Dec. 2010 was about US $
57035 million which constitute 8% of total FDI inflows and is second after FDI in services The trend in
telecom sector due to above reasons remains almost stable in 2008-10 but declines in 2011 due to 2G
scam and again increases in 2012.
Housing and Real Estate:

HOUSING & REAL ESTATE

3,500

3,000

2,500
HOUSING & REAL ESTATE
2,000 Linear (HOUSING & REAL
ESTATE)
1,500

1,000

500

0
2007-08 2008-09 2009-10 2010-11 2011-12

The housing and real estate sector in India witnessed foreign direct investment (FDI) of US $ 5600
million in April-September 2010-11, according to the Department of Industrial Policy and Promotion
(DIPP). Housing and real estate sector including Cineplex, multiplex, integrated townships and
commercial complexes etc, attracted a cumulative foreign direct investment (FDI) worth US $ 48819
million from April 2000 to Dec 2010 (with reference to table 4.3).

Foreign investors have so far contributed significant capital to India’s real estate market. Aggregate FDI
inflows into the real estate sector are recorded at approximately 7% of the total inflows. The relaxed FDI
rules implemented by India last year has invited more foreign investors and real estate sector in India is
seemingly the most lucrative ground at present. Private equity players are considering big investments,
banks are giving loans to builders, and financial institutions are floating real estate funds. Indian property
market is immensely promising and most sought after for a wide variety of reasons. However the trend in
this sector is declining from year 2010-12 due to current FDI regulations for the sector stipulate certain
conditions, such as minimum area of 50000 square metres to be developed, minimum capitalisation
requirements, lock-in period of 3 years, due to economic debt crisis in Europe and America and also due
to higher interest rate on loans that have been put in place from the perspective of preventing growth in
the sector. Such conditions, however, pose challenges for FDI inflows into various projects, where given
the nature of projects, it may not be possible to comply with such conditions.
Construction Activities:

CONSTRUCTION ACTIVITIES
(including roads & highways)
3,000

2,500 CONSTRUCTION ACTIVITIES

(including roads &
2,000 highways)
Linear (CONSTRUCTION
1,500 ACTIVITIES
(including roads &
highways))
1,000

500

0
2007-08 2008-09 2009-10 2010-11 2011-12

Construction activities Sector includes construction development projects viz. housing, commercial
premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure,
township. The amount of FDI in construction activities during Jan 2000 to Dec. 2011 is US$ 46216
million which is 6% (with reference to table 4.3) of the total inflows received through FIPB/SIA route,
acquisition of existing shares and RBI’s automatic route. The construction activities sector shows a steep
rise in FDI inflows from 2007 onwards. Major investment in construction activities is received from
Mauritius which is accounted for maximum of total FDI inflows during 2000-2010. In India Delhi,
Mumbai, and Hyderabad receives maximum amount of investment. The trend in this sector has declined
from 2010-11 due to RBI policy, financial debt crisis and there has been increase from 2011 because of
the Government acceded to a long-pending demand and permitted 100 percent foreign direct investment
(FDI) in construction housing and commercial premises, including hotels, resorts, hospitals, educational
institutions, recreational facilities, and city and regional level infrastructure. According to the new norms,
the existing 100-acre minimum area stipulation has been reduced to 25. As of now, all such projects
needed mandatory clearance from the Union Government. With the power to approve being vested with
the local Governments, FDI projects will now be treated on par with any other project. Also India has
several joint construction agreements with Japan and Russia to develop infrastructure and transportation
facilities in India.
Analysis of State wise inflows of FDI in India

Amount RBI’s - State covered 2008-09 2009-10 2010-11 Cumulative %age

Rupees Regional Inflows to
in Office2 (Apr. - (Apr.- ( Apr.- total
Crores Mar.) (April ’00 –
Mar.) March) Inflo
(US$ in March ‘11) ws
million)
S. (in
No. terms

of
US$)

1 MUMBAI MAHARASHTR 57,066 39,409 27,669 201,471 35

A, DADRA & (12,431)
NAGAR (8,249) (6,097) (45,068)
HAVELI,
DAMAN & DIU

2 NEW DELHI DELHI, PART 7,943 46,197 12,184 113,689 19

OF UP AND (1,868)
HARYANA (9,695) (2,677) (25,088)

3 BANGALOR KARNATAKA 9,143 4,852 6,133 36,657 6

E
(2,026) (1,029) (1,332) (8,229)

4 AHMEDABA GUJARAT 12,747 3,876 3,294 31,693 6

D
(2,826) (807) (724) (7,156)

5 CHENNAI TAMIL NADU, 7,757 3,653 6,115 30,848 5

PONDICHERR
Y (1,724) (774) (1,352) (6,851)

6 HYDERABA ANDHRA 5,406 5,710 5,753 26,562 5

D PRADESH
(1,238) (1,203) (1,262) (5,961)

7 KOLKATA WEST 2,089 531 426 6,368 1

BENGAL,
SIKKIM, (489) (115) (95) (1,488)
ANDAMAN &
NICOBAR
ISLANDS

8 CHANDIGAR CHANDIGARH, - 1,038 1,892 4,685 1

 H` PUNJAB, (224) (416) (1,024)
HARYANA,
HIMACHAL
PRADESH

9 PANAJI GOA 134 808 1,376 3,326 1

(29) (169) (302) (725)

10 BHOPAL MADHYA 209 255 2,093 3,009 0.5

PRADESH,
CHATTISGARH (44) (54) (451) (654)

11 JAIPUR RAJASTHAN 1,656 149 230 2,450 0.4

(343) (31) (51) (520)

12 KOCHI KERALA, 355 606 167 1,658 0.3

LAKSHADWEE
P (82) (128) (37) (368)

13 BHUBANESH ORISSA 42 702 68 1,207 0.2

WAR
(9) (149) (15) (261)

14 KANPUR UTTAR - 227 514 812 0.1

PRADESH,
UTTRANCHAL (48) (112) (177)

15 GUWAHATI ASSAM, 176 51 37 316 0.1

ARUNACHAL
PRADESH, (42) (11) (8) (72)
MANIPUR,
MEGHALAYA,
MIZORAM,
NAGALAND,
TRIPURA

16 PATNA BIHAR, - - 25 27 0
JHARKHAND
(5) (6)

17 REGION NOT INDICATED3 18,300 15,056 20,543 115,943 20

(4,181) (3,148) (4,491) (26,070)

Sub. Total 123,025 123,120 88,520 580,722 100

(27,331) (25,834) (19,427) (129,716)

 18 RBI’S-NRI SCHEMES 0 0 0 533 -

(from 2000 to 2002) (121)

GRAND TOTAL 4 123,025 123,120 88,520 581,255

(27,331) (25,834) (19,427) (129,837)

The choice of location of projects depends on the commercial judgement of investors based on factors
such as market size and growth potential, availability of skilled man-power; availability and reliability of
infrastructure facilities; fiscal and other incentives provided by State Governments; etc. The Central
Government supplements the efforts of the State Governments by providing fiscal incentives for
investments in core and infrastructure sectors as also high priority industries such as information
technology and through specific schemes such as the Growth Centre Schemes, Transport Subsidy
Schemes, New Industrial Policy for the North-East and other hill States, Electronic Hardware Technology
Park (EHTP), Software Technology Park (STP), Export Promotion Zones (EPZs), Special Economic
Zones (SEZs), etc. Maharashtra, Delhi, Karnataka, Gujarat, Tamil Nadu, Andhra Pradesh, West Bengal,
Punjab, Goa accounted for major portion of FDI investment approvals during the cumulative period.

The Mumbai/Maharashtra region continues to attract maximum foreign investments, which is 35% of
total investments since April 2000. Delhi and its neighbouring area, which includes part of Uttar Pradesh
like Noida and Haryana like Gurgaon, was the next most important region for foreign investments with a
share of 19%. Bangalore and Ahmedabad followed in the 3rd and 4th place accounting for up to 6% of
foreign investments since April 2000. The top 3 Indian Regions attracting the highest FDI (April 2000 to
January 2010) have been Mumbai Region (representing with US$ 38,074 million (INR 169,691 Crores)
followed by Delhi Region with US$ 21,460 million (INR 97,125 Crores) and Karnataka Region with US$
6,750 million (INR 29,850 Crores). The three put together have accounted for nearly 62% of the total FDI
inflows received over the last 10 years. Other Regions like Gujarat and Tamil Nadu are also beginning to
attract FDI inflows in the last 5 years and are currently not far behind Karnataka Region at US$ 6,382
(INR 28,171 Crores) million and US$ 5,309 (INR 23,864 Crores) million respectively In the last financial
year (Apr.’10 to Mar’11), Maharashtra and Delhi though still occupying the first and second position
respectively, saw decline in investments, particularly the Delhi area which saw a decline of over 72%.
The third most important region for foreign investments during the last year was Chennai (US $1,352)
followed closely by Bangalore (US $1,332) in the fourth place. The regions which saw increased
investment inflows during the last financial year were Tamil Nadu, Karnataka, Chandigarh, Goa and
noticeably Madhya Pradesh/Chhattisgarh.

More software companies are in Mumbai and Bangalore where the Indian industry originally developed,
but they are also developing quickly in Delhi and its surroundings as well as in Andhra Pradesh and Tamil
Nadu. As to the main poles of competitiveness, they are mainly concentrated in the South on the axis of
Chennai and Bangalore, and around Delhi and Mumbai. Gujarat, in particular, has grabbed the attention
of foreign investors due to the presence of strong road and rail network, availability of skilled manpower
(presence of academic and research institutions like IIM, NIFT, NID, CEPT etc), proactive governance
model and investor friendly regulations go in favour of this state. Some of the leading Indian and
Multinational companies including Reliance, Adani, Essar, Aditya Birla, ABG shipyard, Tata, Zydus
Cadila, Welspun, Torrent, Amul, Bombardier (Canada), Matsushita (Japan), McCain Foods (Canada),
Alstom (France), Shell (Netherlands) General Motors (USA), Linde ( Germany) have set up their
operations in the state.

Financial Year and Route Wise FDI Inflows Data

Sl.No Financia Foreign Direct Investment In INDIA (FDI) Investme

l Year nt by
(April- FII's
March) fund
Equity Re- Other FDI (net)
invest capita Flows
ed l+ into
earnin India
gs +
FIPB Equity Total %age
route/RBI's capital of FDI growt
Automatic unincorporat Flows h over
Route/Acquisi ed bodies# previo
tion Route us
year(i
n US$
terms)

Financial
Year
(2000-
2011)

1 2000-01 2339 61 1350 279 4029 1847

2 2001-02 3904 191 1645 390 6130 (+) 1505

52%

3 2002-03 2574 190 1833 438 5035 (-) 377

18%

4 2003-04 2197 32 1460 633 4322 (-) 10918

14%

5 2004-05 3250 528 1904 369 6051 (+) 8686

40%

6 2005-06 5540 435 2760 226 8961 (+) 9926

48%

7 2006-07 15585 896 5828 517 22826 (+) 3225

 146%

8 2007-08 24573 2291 7679 292 34835 (+) 20328

53%

9 2008-09 27329 702 9030 777 37838 (+) ) (-)

9% 15017

10 2009-10 25609 1504 8669 194 37763 (-) 29048

(P) (+) 5 0.2%
(++)

11 2010-11 19430 657 6703 234 27024 (-) 29422

(P) (+) 28%

Cumulati 132330 7523 48861 610 194814 100265

ve Total 0
(from
April
2000 to
March
2011)

Above table represents the inflows data for the 11-year period 2000-01 to 2010-11. The data presented in
the table are comparable since India adopted the international norms for presenting FDI statistics, alluded
to in the earlier section, from 2000-01. The change in the reporting practice which introduced new items,
especially reinvested earnings of the already established enterprises, contributed significantly to the
upward revision of total inflows. As compared to the earlier methodology, the new approach resulted in
increasing FDI inflows by 44 per cent for the period 2000-01 to 2004-05 and nearly 31 per cent for the
period 2005-06 to 2009-10. As can be seen from the Table, the dramatic rise in the inflows after 2005-06
was also a result of rapid increases in equity inflows (comprising of inflows on account of (i) government
approvals, (ii) acquisitions and (iii) through the automatic route). The FDI Equity inflows during the five
years 2005-06 to 2009-10 were almost seven times those of the previous years. The increase in inflows
since 2005 resulted from a number of policy initiatives taken by the government to attract FDI. In March
2005, the government announced a revised FDI policy, an important element of which was the decision to
allow FDI up to 100 per cent foreign equity under the automatic route in townships, housing, built-up

infrastructure and construction-development projects. The year 2005 also witnessed the enactment of the
Special Economic Zones Act, which opened further avenues for the involvement of foreign firms in the
Indian economy.

FDI and Economic Development

FDI is considered to be the lifeblood and an important vehicle of for economic development as far as the
developing nations are concerned. The important effect of FDI is its contribution to the growth of the
economy.
FDI has an important impact on country’s trade balance, increasing labour standards and skills, transfer of
technology and innovative ideas, skills and the general business climate. FDI also provides opportunity
for technological transfer and up gradation, access to global managerial skills and practices, optimal
utilization of human capabilities and natural resources, making industry internationally competitive,
opening up export markets, access to international quality goods and services and augmenting
employment opportunities.

Here we are trying to show the effect of FDI on economic growth with the help of Karl Pearson co
relation.

Karl Pearson co relation

The Correlation between two variables X and Y, which are measured using Pearson’s Coefficient, give the
values between +1 and -1. When measured in population the Pearson’s Coefficient is designated the value
of Greek letter rho (ρ). But, when studying a sample, it is designated the letter r. It is therefore sometimes
called Pearson’s r. Pearson’s coefficient reflects the linear relationship between two variables. As
mentioned above if the correlation coefficient is +1 then there is a perfect positive linear relationship
between variables, and if it is -1 then there is a perfect negative linear relationship between the variables.
And 0 denotes that there is no relationship between the two variables.

The degrees -1, +1 and 0 are theoretical results and are not generally found in normal circumstances. That
means the results cannot be more than -1, +1. These are the upper and the lower limits.

Pearson’s Coefficient computational formula

Here the two variables are FDI(x) and GDPfc (y)

GDP fc: -GDP at Factor cost means, money value of everything produced in India, without counting
Government's role in it i.e. indirect tax and subsidi
 Table 4.9 Calculation of Karl Pearson’s co-efficient

FDI and GDP(fc)

Year FDI (Rs Crores) (x) GDP fc (Rs Crores)(y)

2006-07 56,390 3952241

2007-08 98,642 4581422

2008-09 1,23,025 5282086

2009-10 1,23,120 6133230

2010-11 88,520 7306990

X Y XY X^2 Y^2

56,390 3952241 2,22,86,68,69,990 3,17,98,32,100 1,56,20,20,89,22,081

98,642 4581422 4,51,92,06,28,924 9,73,02,44,164 2,09,89,42,75,42,084

1,23,025 5282086 6,49,82,86,30,150 15,13,51,50,625 2,79,00,43,25,11,396

1,23,120 6133230 7,55,12,32,77,600 15,15,85,34,400 3,76,16,51,02,32,900

88,520 7306990 6,46,81,47,54,800 7,83,57,90,400 5,33,92,10,28,60,100

Total 4,89,697 27255969 27,26,55,41,61,464 51,03,95,51,689 15,55,18,68,20,68,561

sum x * sum y/N 13347166251393 2224527708565.50

sum x^2/N 39967191968

 sum y^2/N 123814641021493

Numerator 502026452899

Denominator 351038547077197000000000 592485060636.30

After putting all the value in the equation, we get the value of Karl Pearson co relation(r) is found to be
+.85. It means that there is high degree positive correlation between the FDI and GDP at factor cost.
Hence H1 hypothesis is accepted.

FDI In RS crores
140,000
120,000
100,000
80,000 FDI In RS crores
60,000 Linear (FDI In RS
crores)
40,000
20,000
0
6 07 08 09 10 11
-0 - - - - -
05 06 07 08 09 10
20 20 20 20 20 20

GDP fc (Rs Crores)(y)

8000000
7000000
6000000
5000000
GDP fc (Rs Crores)(y)
4000000
Linear (GDP fc (Rs
Axis Title 3000000 Crores)(y))
2000000
1000000
0
7 8 9 0 1
6 -0 7 -0 8 -0 9 -1 0 -1
2 00 2 00 2 00 2 00 2 01
With the help of both the data and the chart we can see the trend line of GDP and FDI are increasing
rapidly which tells us about the positive relationship between GDP and FDI and it is also resembles with
Karl Pearson co relation.

Conclusion

Foreign direct investment has continued to play a significant role in the India’s economy. From the above
calculation, the analysis shows that there is a positive relationship between the FDI and economic growth,
which the relationship is found to be significant. These findings have important policy implication where
the government has to concern the importance of the FDI contributed to economic growth. Economy
development of a country can be achieve by encourage more foreign direct investment, which it can help
to create more employment in the country. In addition, advance technology in production will trained
more skilled labour; therefore it will enhance the productivity and fulfil the satisfaction and demand from
the consumers. But, there is negative effect on domestic producer, because they losing the market power,
since the foreign investor become monopoly in the market. This indirectly will make the domestic
producer facing the difficulties to survive in the market in the long term as foreign companies can achieve
economy of scale with advance technology.

Comparison of FDI between India and China

China has been receiving substantial FDI compared to India. Although prior to 1980s India received
higher FDI than China but because of the liberalization policy adopted by China in 1978, turned the tables
in favour of China. Since late eighties and throughout nineties China has been in forefront of the
developing world in terms of FDI inflows and hence economic development.

Foreign Direct Investment (FDI) Confidence Index

The Foreign Direct Investment Confidence Index is a regular survey of global executives conducted by
A.T. Kearney. The Index provides a unique look at the present and future prospects for international
investment flows. Companies participating in the survey account for more than $2 trillion in annual
global revenue

FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover from the
global recession and continued economic uncertainty in Europe and the United States.

The Asia Pacific region remains the top destination for investors, attracting about one-fifth of global FDI
in 2010. Supported by strong growth and political stability, China tops the Index once again. India moves
up a spot to second place. Southeast Asia performs particularly well on the back of soaring inflows, with
its five major economies ranking in the top 20.

CHINA
China has held the top position since 2002, when it took the spot from the United States. Rising incomes,
urban migration, and increased demand for consumer goods in the world's most populous consumer
market are surely contributing to continued increased foreign investment. Inflows rose 6 percent to $185
billion in 2010, $10 billion above the previous peak in 2008.

With this growing emphasis on domestic consumption comes a shift toward services, FDI flows into
China's services sector grew faster than any other industry. China has also shown strong leadership and
the ability to move up the value chain in the technology sector. It has improved R&D capabilities and
better educated its workforce while also successfully creating vast technology clusters that are important
nodes in the global technology supply chains.

INDIA

India moves up one spot to 2nd place this year, passing the United States, as investors return to India after
a few years of soft inflows. In 2008, India attracted $43 billion in overseas investment. The following
year FDI dipped to $36 billion, and then to $25 billion in 2010. A significant portion of this decline was
due to weak inflows into service spaces such as computer software and hardware, financial services,
banking, and construction, industries where the global economic crisis led firms to scale back their
overseas operations.

Persistent local challenges, including the slow pace of reform and poor governance, may also be at play.
Senior government officials have acknowledged that the country needs to improve its business climate,
particularly as other emerging markets craft investor-friendly policies
Year China India

2002 49.31 5.62

2003 47.07 4.32

2004 54.93 5.77

2005 117.20 7.60

2006 124.08 20.33

2007 160.05 25.48

2008 175.14 43.40

2009 114.21 35.59

2010 185.08 24.15

 Chart Title
200.00
180.00
160.00
140.00 China
Linear (China)
120.00
India
100.00
Linear (India)
80.00
60.00
40.00
20.00
0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

India vs. China Economy

Making an in depth study and analysis of India vs. China economy seems to be a very hard task. Both
India and China rank among the front runners of global economy and are among the world's most diverse
nations. Both the countries were among the most ancient civilizations and their economies are influenced
by a number of social, political, economic and other factors. However, if we try to properly understand
the various economic and market trends and features of the two countries, we can make a comparison
between Indian and Chinese economy.

Going by the basic facts, the economy of China is more developed than that of India. While India is the
11th largest economy in terms of the exchange rates, China occupies the second position surpassing
Japan. Compared to the estimated $1.3123 trillion GDP of India, China has an average GDP of around
$4909.28 billion. In case of per capital GDP, India lags far behind China with just $1124 compared to
$7,518 of the latter. To make a basic comparison of India and China Economy, we need to have an idea of
the economic facts of the countries

Facts India China

GDP around $1.3123 trillion around 4909.28 billion

GDP growth 8.90% 9.60%

Per capital GDP $1124 $7,518

Inflation 7.48 % 5.1%

Labour Force 467 million 813.5 million

Unemployment 9.4 % 4.20 %

Fiscal Deficit 5.5% 21.5%

Foreign Direct Investment $12.40 $9.7 billion

Gold Reserves 15% 11%

Foreign Exchange Reserves $2.41 billion $2.65 trillion

World Prosperity Index 88th Position 58th Position

Mobile Users 842 million 687.71 million

Internet Users 123.16 million 81 million.

If we make the analysis of the India vs. China economy, we can see that there are a number of factors that
has made China a better economy than India. First things first, India was under the colonial rule of the
British for around 190 years. This drained the country's resources to a great extent and led to huge
economic loss. On the other hand, there was no such instance of colonization in China. As such, from the
very beginning, the country enjoyed a planned economic model which made it stronger.

Top sectors that attracted FDI equity inflows (from April 2000 to January 2011), from China, are:

 Metallurgical industries (76%)

 Chemicals (other than fertilizers) (7%)

 Trading (3%)

 Industrial machinery (3%) and

 Computer software & hardware (2%)

Agriculture
Agriculture is another factor of economic comparison between India and China. It forms a major
economic sector in both the countries. However, the agricultural sector of China is more developed than
that of India. Unlike India, where farmers still use the traditional and old methods of cultivation, the
agricultural techniques used in China are very much developed. This leads to better quality and high yield
of crops which can be exported.

IT/BPO

One of the sectors where Indi enjoys an upper hand over China is the IT/BPO industry. India's earnings
from the BPO sector alone in 2010 are $49.7 billion while China earned $35.76 billion. Seven Indian cites
are ranked as the world's top ten BPO's while only one city from China features on the list.

Liberalization of the market

In spite of being a Socialist country, China started towards the liberalization of its market economy much
before India. This strengthened the economy to a great extent. On the other hand, India was a little slow in
embracing globalization and open market economies. While India's liberalization policies started in the
1990s, China welcomed foreign direct investment and private investment in the mid-1980s. This made a
significant change in its economy and the GDP increased considerably.

Difference in infrastructure and other aspects of economic growth

Compared to India, China has a much well developed infrastructure. Some of the important factors that
have created a stark difference between the economies of the two countries are manpower and labour
development, water management, health care facilities and services, communication, civic amenities and
so on. All these aspects are well developed in China which has put a positive impact in its economy to
make it one of the best in the world. Although India has become much developed than before, it is still
plagued by problems such as poverty, unemployment, lack of civic amenities and so on. In fact unlike
India, China is still investing in huge amounts towards manpower development and strengthening of
infrastructure.

Company Development

Tax incentives are one area where China is lagging behind India. The Chinese capital market lags behind
the Indian capital market in terms of predictability and transparency. The Indian capital or stock market is
both transparent and predictable. India has Asia's oldest stock exchange which is the BSE or the Bombay
Stock Exchange. Whereas China is home to two stock exchanges, namely the Shenzhen and Shanghai
stock exchange. As far as capitalization is concerned the Shanghai Stock Exchange is larger than the BSE
since the SSE has US$1.7 trillion with 849 listed companies and the BSE has US$1 trillion with 4,833
listed companies. But more than the size what makes both these stock exchanges different is that the BSE
is run on the principles of international guidelines and is more stable due to the quality of the listed
companies. In addition to this the Chinese government is the major stake holder of most of its State-
owned organizations hence the listed firms have to run according to the rules and regulations lay down by
the government. Hence India is ahead of China in matters of financial transparency.
Company Management Capabilities

It is said that Indians have great managerial skills. India also leaves China behind as far as management
abilities are concerned. As compared to China India has better managed companies. One of the major
reasons for this is that management reform training in China began 30 years ago and sadly the subject has
still not picked up as a matter of interest by the citizens of the country. Another important factor behind
China not doing well in the business forefront is that most of the countries came to China and
manufactured their goods. It was not Chinas exports that drove the economy instead it were the export
products of outsiders. Even in the case of mergers and acquisitions China still has not managed to do too
well. On the other hand Indian companies are rapidly expanding mergers and acquisitions. Some of the
recent examples include; Tata Steel's $13.6 Billion Acquisition of Corus, Tata Tea's purchase of a
controlling stake in Britain's Tetley for US$407 million, Indian Pharmaceutical giant Ranbaxy's
acquisition of Romania's Terapia etc.

CHAPTER 5

Findings and Conclusion

1. Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5 trillion,
surpassing the previous record set in the year 2000. It was due to continuous rise in FDI in all of
three groups of economies - in developed countries, developing economies and in South-East
Europe.

2. However there was declining of global FDI in 2008 due to financial crisis in US but in 2010 FDI
was $1,244 billion, where developing economies contributed to more than 50% of the share in
global FDI.

3. From 2004 onwards FDI in India increases tremendously and in 2006-2007 there was a growth of
125% in FDI inflow. The subsequent year was again very good, where investment inflows gained
97%, but due to global financial crisis FDI declined from 2008 onwards. In 2010-11 the decline
was 25% due to decline in FDI in service sector because of debt crisis in Europe and US.
4. Mauritius, Singapore, the US, UK, Netherlands, Japan, Cyprus, Germany, France and the UAE,
among other countries, are the major investors in India. Where India’s 83% of cumulative FDI is
contributed by ten countries while remaining 17 per cent by rest of the world.

5. After 1991-2011, Mauritius have always topped the position for FDI inflows in India with FDI on
2011-12 standing at 26634 US $ million, consisting of 41% of total FDI inflows. The inordinately
high investment from Mauritius is due to routing of international funds through the country given
significant tax advantages; double taxation is avoided due to a tax treaty between India and
Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI
channel. This is the main reason why most of the countries invest in India through Mauritius.

6. Singapore however was very behind among the major investor in India but during the year 2010-
11 it came to second position because of CECA agreement between India & Singapore.

7. Service Sector contribute maximum of FDI inflow in India of about 20% of total inflow which is
followed by tele communications, computer hardware & software, housing and construction
activities.

8. The increase in service sector is because of increase in BPO services, consultancy services and
also devaluation of rupee against dollar resulting to more inflows of funds to software industries.

9. There has been decline in computer hardware & software sector due to global financial crisis and
due to greater opportunity in countries like China and Korea.

10. In tele communication sector there has been increase in FDI inflows due to change in FDI limit
from 49% to 74%.

11. Due to various government policies as to maintain minimum capitalization requirement, 3 yrs
lock in period minimum area requirement had led to decline in housing and real estate sector.

12. However in construction activities due to relaxation of government policies and also due to
improvement in infrastructure through agreement between India and Japan there has been
increase in FDI inflows.

13. Top three states which got the maximum FDI inflow are Maharashtra, New Delhi and Karnataka.
The top 3 Indian Regions attracting the highest FDI (April 2000 to January 2010) have been
Mumbai Region (representing with US$ 38,074 million (INR 169,691 Crores) followed by Delhi
Region with US$ 21,460 million (INR 97,125 Crores) and Karnataka Region with US$ 6,750
million (INR 29,850 Crores).

14. The three states together have accounted for nearly 62% of the total FDI inflows received over
the last 10 years, because of better infrastructure, more number of mergers and acquisition of
companies in these regions, more number of software companies.

15. More of FDI inflows are through automatic route because of government policies and enactment
of SEZ Act which attracted a lot of foreign companies to India.
 16. Because of China adopting policies regarding FDI in various sectors starting from 1978 it is at
present a top destination of FDI investment in the world. Because of improved R&D, skilled
manpower, technological advancement China is far more ahead than India.

17. FDI in China was 185.08 US billion $ which was very higher than that of India which was only
24.15 billion US $. With metallurgical industries being a top sector attracting FDI followed by
chemicals, trading, industrial machinery and computer software and hardware.

CHAPTER 6

Suggestion and Recommendations

Thus, it is found that FDI as a strategic component of investment needed by India for its sustained
economic growth and development. FDI is necessary for creation of jobs, expansion of existing
manufacturing industries and development of the new one. Indeed, it is also needed in the healthcare,
education, R&D, infrastructure, retailing and in long- term financial projects. So, the study recommends
the following suggestions:

1. This study states that policy makers should focus more on attracting diverse types of FDI. Like the
policy makers should design policies where foreign investment can be utilized as means of enhancing
 domestic production, savings, and exports; as medium of technological learning and technology
diffusion and also in providing access to the external market.

2. Indian economy is largely agriculture based. There is plenty of scope in food processing, agriculture
services and agriculture machinery. FDI in this sector should be encouraged.

3. India has a huge pool of working population. However, due to poor quality primary education and
higher there is still an acute shortage of talent. This factor has negative repercussion on domestic and
foreign business. FDI in Education Sector is less than 1%. Given 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. The issues of commercialization of education, regional gap and structural
gap have to be addressed on priority.

4. It can also be suggested that the government should invest more for improvement of infrastructure
sectors, R&D activities, human capital, education sector, technological advancement to attract more
of FDI.

5. Government should ensure the equitable distribution of FDI inflows among states. The central
government must give more freedom to states, so that they can attract FDI inflows at their own level.
The government should also provide additional incentives to foreign investors to invest in states
where the level of FDI inflows is quite low.

6. 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.

7. Though service sector is one of the major sources of mobilizing FDI to India, plenty of scope exists.
Still we find the financial inclusion is missing. Large part of population still doesn’t have bank
accounts, insurance of any kind, underinsurance etc. These problems could be addressed by making
service sector more competitive. Removal of sectoral cap in insurance is still awaited.

8. FDI should be guided so as to establish deeper linkages with the economy, which would stabilize the
economy (e.g. improves the financial position, facilitates exports, stabilize the exchange rates,
supplement domestic savings and foreign reserves, stimulates R&D activities and decrease interest
rates and inflation etc.) and providing to investors a sound and reliable macroeconomic environment.

9. FDI can be instrumental in developing rural economy. There is abundant opportunity in Greenfield
Projects. But the issue of land acquisition and steps taken to protect local interests by the various state
governments are not encouraging.

10. It is also suggested that the government while pursuing prudent policies must also exercise strict
control over inefficient bureaucracy and the rampant corruption, so that investor’s confidence can be
maintained for attracting more FDI inflows to India
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