CHAPTER - I

INTRODUCTION
1.1 INTRODUCTION TO FDI:

Foreign Direct Investment (FDI) broadly encompasses any long-term

investments by an entity that is not a resident of the host country. Typically, the
investment is over a long duration of time and the idea is to make an initial
investment and then subsequently keep investing to leverage the host country’s
advantages which could be in the form of access to better (and cheaper)
resources, access to a consumer market or access to talent specific to the host
country - which results in the enhancement of efficiency. This long-term
relationship benefits both the investor as well as the host country. The investor
benefits in getting higher returns for his investment than he would have gotten
for the same investment in his country and the host country can benefit by the
increased know how or technology transfer to its workers, increased pressure on
its domestic industry to compete with the foreign entity thus making the
industry improve as a whole or by having a demonstration effect on other
entities thinking about investing in the host country.

1.2 TYPES OF FDI’S

1.2.1 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.
1.2.2 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.

1.2.3 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

1.3 OBJECTIVES OF FDI:

 Sustaining a high level of Investment:

Since the under developed countries want to industrialize within a short

period of time, it becomes necessary to raise the level of investment
substantially. This require, in turn a high level of saving. However, because of
general poverty of mass, the saving are often very low. Hence emerge a
resource gap between investment and saving. This gap has to be filled through
foreign capital.

 Technological gap:

The under developed countries have very low level of technology as

compared to the advanced country. However, they posses strong urge for
industrialization to develop their economy and to wiggle out of the low level of
equilibrium trap in which they are caught.

 Development of basic economic infrastructure:

It has been observed that the domestic capital of under developed

country is often too inadequate to build up the economy infrastructure of its
own. Thus, these countries require to assistance of foreign capital to undertake
this task.
 Exploitation of natural resources:

A number of underdeveloped countries posses huge mineral resources

which await exploitation. These countries themselves do not posses the required
technological skill and they expertise to accomplish to depend upon foreign
capital to undertaken the exploitation of their mineral wealth.

1.4 METHODS OF FOREIGN DIRECT INVESTMENTS

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:

•By incorporating a wholly owned subsidiary or company

• By acquiring shares in an associated enterprise

•Through a merger or an acquisition of an unrelated enterprise

•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

 Tax holidays
 Preferential tariffs
 Special economic zones
 Investment financial subsidies
 Soft loan or loan guarantees
 Free land or land subsidies
 Relocation & expatriation subsidies
 Job training & employment subsidies
 Infrastructure subsidies
 R&D support
1.5 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.
1.6 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.
4) Some of the producrs in cottage and village industries
CHAPTER - II
LITERATURE REVIEW
2.0 LITERATURE REVIEW:

The issue of economic prosperity is often linked to massive inflows

offoreign direct investment (FDI) into a nation, and the impact of FDI on
economic growth has been argued considerably in the development and
economic growth literature for many years. Many researchers have conducted
studies to investigate the fundamental theories of FDI, various macroeconomic
variables that influence FDI, the impact of economic integration . on the
movements of FDI, and the advantages and disadvantages of FDI (Yusop 1992;
Jackson and Markowski 1995; Cheng and Yum 2000; Lira and Maisom 2000).
Most ofthem agree that there exists a positive causal relationship between FDI
and economic performance, either in the short ran, or in the long run, or both.

Jose I. Golan and Javier Gonzalez-Benito2 (2001) have developed a

model to identify the ownership advantages, Internalisation advantages,
locational advantages.

M.M. Metwally (2004) (Impact of EU FDI on economic growth in

Middle Eastern countries) develops a simultaneous equations model to test the
process ofinteraction between foreign direct investment (FDI), exports and
economic growth in three Middle Eastern countries: Egypt, Jordan and Oman,
and tests for any possible feedback, effects.

Georgies Zekos (2005) (Foreign direct investment in a digital economy)

analysed the role of foreign.direct investment (FDI) in the emergence and
development of digital economy. Nowadays the term “new/digital economy”
signifies a noninflationary growth model based both on heavy investment in
new ICTs and on reforming the economy around these new technologies
(OECD, 2000). Consequently, FDI will be focused on locations offering cheap
high skilled workforce, clustering of information companies and JV and
licensing will be the new forms ofFDI applied by MNEs. The development of e-
MNEs will bring different utilisation of production plants and use oflogistics to
distribute tangible goods while intangible goods will be distributed by very
advanced technology centres based on home locations. At present the digital
economy has proven to be less destructive than had been thought.

Miyamoto6 (2003) takes a view ofthe complex linkages between the

activities ofthe MNCs and the policies of host developing countries. The
literature indicates that a high level of human capital is one ofthe key
ingredients for attracting FDI as well as for the host countries to get maximum
benefits from these activities. He finds that one way to improve human capital
formation and attract more FDI is to provide, a strong incentive for MNCs and
Investment Promotion agencies to participate in formal education and
vocational training for workers employed with domestic firms.

Alan Jones Grahame Fallon and Roman Golov (2000) (Obstacles to

foreign direct investment in Russia) explores the obstacles facing trans-national
corporations (TNC) considering FDI in Russia.

Shady Kholdy and Ahmad Sohrabian (2008) (Foreign direct investment,

financial markets, and political corruption) has investigated whether foreign
direct investment (FDI) can stimulate financial development in countries with
corrupt dominant elites.

Federico Bonaglia and Andrea Goldstein (2006) (Egypt and the

investment development path Insights from two case studies) analyzed the
process of internationalization of multinational corporations from emerging
economies, and more broadly test the investment development path (IDP)
hypothesis for EgyptThe paper highlights how poor investment climate and
broader geopolitical motives receive limited foreign direct investment (FDI)
inflows, while outward FDI limited in size and scope. Despite this climate, the
two multinational corporations have successfully expanded abroad, .following
different strategies.

Maria Carkovich and Ross Levine (2002) conclude that an economic

rationale for treating foreign capital favourably is that FDI and portfolio flows
encourage technology transfers that accelerates overall economic growth in the
recipient countries. While micro economic studies give a pessimistic view ofthe
growth effects of the foreign capital, macroeconomic studies find a positive link
between FDI and growth.

Douglas H. Brooks and Lea R. Sumulong (2003) in their study analyse

the policy context in which FDI flow occurs. They find that a favourable policy
framework for FDI is the one that generally provides economic stability,
transparent rules on entry and operations, equitable standards oftreatment
between domestic and foreign firms and secures the proper functioning and
structure ofthe markets. In general empirical evidence suggests that policies
encouraging domestic investment help to attract domestic investment. They find
that FDI contributes to the development process by providing capital, foreign
exchange, technology, competition and export market •access, while also
stimulating domestic innovation and investment.

2.1 HISTORY OF FDI INDIA

India intent to open its markets to foreign investment can be traced back
to the economic reforms adopted during two prime periods- pre- independence
and post independence.

Pre- independence, India was the supplier of foodstuff and raw materials
to the industrialised economies of the world and was the exporter of finished
products- the economy lacked the skill and means to convert raw materials to
finished products. Post independence with the advent of economic planning and
reforms in 1951, the traditional role played changes and there was remarkable
economic growth and development. International trade grew with the
establishment of the WTO. India is now a part of the global economy. Every
sector of the Indian economy is now linked with the world outside either
through direct involvement in international trade or through direct linkages with
export and import.

Development pattern during the 1950-1980 periods was characterised by

strong centralised planning, government ownership of basic and key industries,
excessive regulation and control of private enterprise, trade protectionism
through tariff and non-tariff barriers and a cautious and selective approach
towards foreign capital. It was a quota, permit, licence regime which was
guided and controlled by a bureaucracy trained in colonial style. This inward
thinking, import substitution strategy of economic development and growth was
widely questioned in the 1980’s. India’s economic policy makers started
realising the drawbacks of this strategy which inhibited competitiveness and
efficiency and produced a much lower growth rate that was expected.

Consequently economic reforms were introduced initially on a moderate

scale and controls on industries were substantially reduced by 1985 industrial
policy. This set the trend for more innovative economic reforms and they got a
boost with the announcement of the landmark economic reforms in 1991. After
nearly five decades of insulation from world markets, state controls and slow
growth, India in 1991 embarked on an accelerated process of liberalization. The
1991 reforms ensured that the way for India to progress will be through
globalization, privatisation, and liberalisation. In this new regime, the
government is now assuming the role of a promoter, facilitator and catalyst
agent instead of the regulator and

India has a number of advantages which make it an attractive market for

foreign capital namely, political stability in democratic polity, steady and
sustained economic growth and development, significantly huge domestic
market, access to skilled and technical manpower at competitive rates, fairly
well developed infrastructure. FDI has attained the status of being of global
importance because of its beneficial use as an instrument for global economic
integration.

2.2 FDI 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 up to 100% on the automatic route, subject to applicable laws/
regulations; security and other conditionality’s.
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.
CHAPTER - III
RESEARCH METHODOLOGY
3.1 STATEMENT OF 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.

3.2 METHODOLOGY OF 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.

3.3 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).

 CHAPTER - IV
DATA ANALYSIS AND INTERPRETATION
4.0 ANALYSIS OF FDI INFLOWS GLOBAL AND BY GROUP OF
ECONOMIES

Chart 4.1

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 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.

4.1 ANALYSIS OF FDI IN INDIA YEAR WISE

Table 4.1: FDI inflows year wise in India

Financial Year (April- % change over

March) Amount (US $ 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.
4.2 ANALYSIS OF COUNTRY WISE INFLOWS OF FDI IN INDIA

Table4.2
Cumulative
2007-08 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.
 4.3 ANALYSIS OF SECTOR WISE INFLOWS OF FDI IN INDIA

Table 4.3
Sector 2007-08 2008-09 2009-10 2010-11 2011-12 Cumulative % age to
(April- (April- (April- ( April- (April- Inflows total Inflows
March) March) March) March) Dec.) (April 2000) (In 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, (1,261) (2,558) (2,539) (1,665) (1,989) (12,544)
basic 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 4,686 4,157 1,999 5,023 6,881 25,469 4%

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

PETROLEUM & NATURAL 5,729 1,931 1,297 2,543 920 14,581 2%

GAS (1,427) (412) (266) (556) (196) (3,333)

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

PHARMACEUTICALS (213) (209) (3,193) (9,155)
Ranking of Sector wise FDI inflows in India since April 2000- Dec 2011

Table 4.4

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 4.2

Pie chart representing % of total FDI inflows in different sectors

PETROLEUM & DRUGS &

NATURAL GAS Chart Title PHARMACEUTI
3% CALS
METALLURGICA
6%
L INDUSTRIES
6%
AUTOMOBILE
INDUSTRY SERVICES
6% SECTOR

POWER 30%
6% COMPUTER
CONSTRUCTION SOFTWARE &
ACTIVITIES HARDWARE
TELECOMMUNI 11%
9% HOUSING & CATIONS
REAL ESTATE
11% 12%
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.
4.5 TRENDS AND PATTERNS OF FDI IN DIFFERENT SECTORS

Service Sector:

Chart 4.3

SERVICES SECTOR
(financial & non-financial)
$7,000
$6,000
SERVICES SECTOR
$5,000 (financial & non-
$4,000 financial)

$3,000
Linear (SERVICES
$2,000 SECTOR
(financial & non-
$1,000
financial))
$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:

Chart 4.4

COMPUTER SOFTWARE &

HARDWARE
$2,000.00

$1,500.00 COMPUTER
SOFTWARE &
$1,000.00 HARDWARE

$500.00 Linear
(COMPUTER
$- SOFTWARE &
HARDWARE)

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:

Chart 4.5

TELECOMMUNICATIONS
(radio paging, cellular mobile,
basic telephone services
3,000
2,500 TELECOMMUNICATI
2,000 ONS
1,500
(radio paging,
1,000
500 cellular mobile,
0 basic telephone
services

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
(with reference to table 4.3). 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:

Chart 4.6

HOUSING & REAL ESTATE

3,500
3,000
2,500
2,000 HOUSING & REAL
1,500 ESTATE
1,000
500 Linear (HOUSING &
0 REAL ESTATE)

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:

Chart 4.7

CONSTRUCTION ACTIVITIES
(including roads & highways)
3,000

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

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.

4.6 Analysis of State wise inflows of FDI in India Table 4.6

Amount RBI’s - State covered 2008-09 2009-10 2010-11 Cumulative %age to
Rupees in Regional Inflows total
Crores (US$ Office2 (Apr. - (Apr.- ( Apr.-
in million) S. Mar.) (April ’00 – Inflows
Mar.) March)
No. March ‘11) (in terms

of US$)

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

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

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

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

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

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

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

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

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

PONDICHERRY
(1,724) (774) (1,352) (6,851)

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

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

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

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

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

ARH` PUNJAB,
HARYANA, (224) (416) (1,024)
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

LAKSHADWEEP
(82) (128) (37) (368)

13 BHUBANE ORISSA 42 702 68 1,207 0.2

SHWAR
(9) (149) (15) (261)

14 KANPUR UTTAR - 227 514 812 0.1

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

15 GUWAHA ASSAM, 176 51 37 316 0.1

TI 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.
4.7 FINANCIAL YEAR AND ROUTE WISE FDI INFLOWS DATA

Table 4.7
Sl.No Financial Foreign Direct Investment In INDIA (FDI) Investme
Year nt by FII's
(April- fund (net)
March)
Equity Re- Other FDI
investe capital Flows
d + into
earning India
s+
FIPB Equity capital Total %age
route/RBI's of FDI growth
Automatic unincorporate Flows over
Route/Acquisiti d bodies# previou
on Route s
year(in
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 (-) 18% 377

4 2003-04 2197 32 1460 633 4322 (-) 14% 10918

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 (+) (-) 15017

)9%

10 2009-10 25609 1504 8669 1945 37763 (-) 29048

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

11 2010-11 19430 657 6703 234 27024 (-) 28% 29422

(P) (+)

Cumulativ 132330 7523 48861 6100 194814 100265

e Total
(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.
4.8 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 subsidies.

Table 4.8

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

Table 4.9 Calculation of Karl Pearson’s co-efficient

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.

Chart 4.8

FDI In RS crores
140,000
120,000
100,000
80,000 FDI In RS crores
60,000
40,000
20,000 Linear (FDI In RS
0 crores)

Chart 4.9

GDP fc (Rs Crores)(y)

8000000
7000000
6000000
5000000
4000000 GDP fc (Rs Crores)(y)
3000000
2000000 Linear (GDP fc (Rs
Crores)(y))
1000000
0

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.
4.9 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.
 Chart 4.10

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 Chart 4.10 officials have
acknowledged that the country needs to improve its business climate,
particularly as other emerging markets craft investor-friendly policies
FDI inflow in China and India

Table 4.10

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

All fig. in US billion $

Chart 4.11

200.00
180.00
160.00
140.00
120.00 China

100.00 India

80.00 Linear (China)

Linear (India)
60.00
40.00
20.00
0.00
2000 2002 2004 2006 2008 2010 2012
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.

Table 4.11

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 - V
FINDINGS, SUGGESTIONS AND CONCLUSION
5.0 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.
6.0 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.(According to JP Morgan risk index of India)
 BIBLIOGRAPHY:

The necessary data were collected through following websites-

 www.rbi.org.in
 www.worldbank.org.in
 www.dipp.nic.in
 http://indiahighcom-mauritius.org
 www.docs.google.com
 www.imf.org
 www.uscc.gov