IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

AUTHOR: R. SUBASHINI
LECTURER
PPG BUSINESS SCHOOL
SARAVANAMPATTI
COIMBATORE
EMAIL ID: subashini1984@gmail.com
MOBILE NO: 9994329432
-----------------------------------------------------------------------------------------------------------------------
ABSTRACT
FDI – FOREIGN DIRECT INVESTMENT
The Concept of Foreign Direct Investment is now a part of India’s economic future but the
term remains vague to many, despite the profound effects on the economy
Foreign direct investment (FDI) or foreign investment refers to long term participation by
country A into country B. It usually involves participation in management, joint-
venture, transfer of technology and expertise. Foreign direct investment is that investment,
which is made to serve the business interests of the investor in a company, which is in a
different nation distinct from the investor's country of origin. A parent business enterprise
and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an
MNC. The parent enterprise through its foreign direct investment effort seeks to exercise
substantial control over the foreign affiliate company.
There are two types of FDI
 Inward foreign direct investment 
 Outward foreign direct investment
Foreign direct investment, which is inward, is a typical form of what is termed as 'inward
investment'. Here, investment of foreign capital occurs in local resources. 
The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of
existent regulations, loans on low rates of interest and specific grants. The idea behind this
is that, the long run gains from such a funding far outweighs the disadvantage of the
income loss incurred in the short run. Flow of Inward FDI may face restrictions from
factors like restraint on ownership and disparity in the performance standard.
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

Foreign direct investment, which is outward, is also referred to as “direct investment

abroad”. In this case it is the local capital, which is being invested in some foreign resource.
Outward FDI may also find use in the import and export dealings with a foreign country.
Outward FDI faces restrictions under a host of factors as described below: 
 Tax incentives or the lack of it for firms, which invest outside their country of origin
or on profits, which are repatriated
 Industries related to defense are often set outside the purview of outward FDI to
retain government's control over the defense related industrial complex
 Subsidy scheme targeted at local businesses
 Government policies, which lend support to the phenomenon of industry
nationalization
WHY WE NEED FOREIGN DIRECT INVESTMENT
 Offsetting the capital deficiency
 Acquiring advanced technology
 Gaining Production
 Promoting exports
HISTORY OF FDI IN INIDA
1947-1948 – British owned private foreign capital – Swadeshi movement and industrial
policy resolution
1949-1953 – Trio of Domestic Business houses, foreign capital and the government
nationalist sentiments kept away foreign investment.
1957 – Second Economic plan launched “industrialization though import substitution
“encourages private investment
1960 – Selective industries got foreign collaboration and JV mostly manufacturing – Indian
participation retained.
After 1960 – Devaluation of Rupee encouraged socialist idealism banks and foreign oil
majors nationalized.
1968 – Introduction of foreign investment board – encouraging investment on own terms
and conditions.
1973 – Foreign Exchange Regulation Act – (FERA) new clause introduced.
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

1980 – Restrictive licensing procedures softened technology transfer and royalty payments
relaxed, Where ever foreign investment was encouraged.
1990 – Rupee devalued, NRI money withdrew India turned to IMF Trade regime and
regulatory framework was liberalized. FDI invited in wide range of industry, limit was
increased from 51% to 100% in some cases, service sector reopened for FDI.
After 1995 – Political instability but perception towards FDI changed, changing
government kept focus on FDI.
FDI CULTURE
Many economists in the country have now realized the advantages of FDI to India.
According to the current policy FDI can come into India in two ways. Firstly FDI up to
100% is allowed under the automatic route in all activities/sectors except a small list that
require approval of the Government. FDI in sectors/activities under automatic route does
not require any prior approval either by the Government or RBI. The investors are
required to notify the Regional office concerned of RBI within 30 days of receipt of
inward remittances and file the required documents with that office within 30 days of
issue of shares to foreign investors. All proposals for foreign investment requiring
Government approval are considered by the Foreign Investment Promotion Board (FIPB).
The FIPB also grants composite approvals involving foreign investment/foreign technical
collaboration. As this clarity is useful for future investors, it has to be seen if these bodies
are effective. The Initial research revealed four major bodies that have been constituted
and could provide data pertaining to FDI.
INDIA'S FDI GROWTH
By the rapid speed of the economic progress, profitable investment system, flexible
procedural policies with the relaxations introduce in various sectors, has in turns prove to
be the horde for the international key players in finding the new investment opportunities
in the India. Rising trend of the foreign direct investment is also signaling towards the
pivotal role playing by the foreign direct investment in the growth of the economy. The
facts are also standing high as in the year 2007-08, foreign direct investment in India has
crossed the mark of US$25 billion, which was 56 per cent more than what it was in 2006-
07, i.e, US$15.7 billion.
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

The result of the global survey conducted by Ernst and Young has put the India on the
fourth rank of the most favorable destination after China, Central Europe and Western
Europe, on the basis of the prospects of the different business locations. India has been put
ahead of the United States of America and Russia. India received total 30 per cent votes but
both America and Russia got 21 per cent votes each.
The report of the National Council of Applied Economic Research (NCAER) has stated out
“In the first nine months of 2007-08, the net capital flows rose to US$ 83 billion from US$
30 billion the country received during the corresponding period of the previous
year."Those funds which have come as the FDI or the external commercial borrowing has
sufficient to raise the portfolio funds between the time period of financial year 2007 and
financial year 2008, the reserves have seen the rising trend by US$150 billion. Such influx
of the funds has found to be sufficient for financing the current account deficit during the
aforesaid time period. The Japan Bank for International Cooperation reveals that the India
has emerged out as the 'favorable business point' for the Japanese investors.
More flow of the foreign direct investment has been seen in the skill intensive and high
value added service industries, especially those which are related to the financial services
and information technology. Furthermore, India has come out as the international service
industry with the more attraction of FDI, providing the more unassailable low cost
opportunities, the prevalence of high technology and language skills and the high
supportive government policies. Companies from across the world are now busy in
evincing their interest into various sectors such as construction, energy, electrical
equipments, telecommunication, automobiles etc.
GOVERNMENT PLANNING
From last 10 years, India's government has undergone the complete change in its outlook
when it comes about the FDI. The government has taken up several measures for
augmenting the injection of the FD in the India. Some of the steps taken in this direction
are-
 It is hoping that the government would soon take concrete steps in removing the
disinvestment clause, which is the compulsory clause applicable on the
international companies on various key sectors like chemical, food processing etc.
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

 The government may permit 49% foreign direct investment in sectors like apparels,
gems & jewelery.
 Restructure of the Foreign Investment Promotion Board.
 Formation of the Indian Investment Commission for functioning as the 1 stop haven
for the investor and bureaucracy.
 Raising the FDI Limit in many sectors like media, petroleum, telecom, aviation,
banking etc.
THE MODEL AND THE VARIABLES

Though the literature on the subject has suggested several possible explanatory variables,
it is not possible to include all of them. The main criteria for reducing the number of
variables are as follows: 

(i) Relation and importance of the variable for India, 

(ii) Availability of data; 

(iii) Degrees of freedom; 

The economic model is specified as:

FDI = f (MS, OE/FT, I, DMA, EE, IE)

Where FDI = Foreign direct Investment,

MS = Size of domestic market,

OE/FT = openness of the economy to foreign trade,

I = Infrastructure of the host country,

DMA = Domestic market Attractiveness,

EE = External economic stability,

IE = Internal economic stability.

CURRENT NEWS OF FDI IN INIDA

 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

GOVERNMENT HAVE TIGHTEN FDI INVESTMENT NORMS

The struggling construction and housing sector will soon find it tougher to raise funds as
the government plans to tighten foreign direct investment rules to discourage short-term
profiteering.
1. Unitech was trading down 4.04% at Rs 34.45
2. Jaiprakash Associates down 2.43% at Rs 74.30
3. IVRCL Infrastructure & Projects down 2.19% at Rs 62.60
4. DB Realty down 5.45% at Rs 119.70
“The idea is to explicitly lay down the object of the FDI policy. The new set of rules will be
incorporated in the FDI circular due to be issued in March. It will require a firm to fulfill the
minimum capitalization norm for each project and not just at the company level as is the
rule now. At present, a company operating in the sector is required to have a minimum
capital of $10 million if it is 100% foreign owned and $5 million if it is in a joint venture.
This change will essentially push up the capital requirement for the sector as most
companies have more than one project and make it difficult for the firms to raise funds, an
executive with a real estate firm said.
Foreign investors will also find it more difficult to repatriate their original investment.
Under the new rules, repatriation of the original investment will be allowed only after the
project is completed or 50% of the project has been developed within a period of five years,
whichever is later. This means that a foreign investor will have to complete at least half of
the project before it can make an exit. The new rules will also provide that companies
having FDI can invest in only in FDI-compliant project, rejecting industry demand for
relaxed regime. Some developers had written to the DIPP and the Foreign Investment
Promotion Board seeking permission to have both FDI compliant and non-compliant
projects, which could be ring-fenced. The FIPB had in 2009 rejected a proposal by Unitech
to raise $700 million through foreign currency convertible bonds despite the company’s
assurance that the funds raised would be ring-fenced and used for an integrated township
and not for repaying the existing debt.
The new rules come amid mounting pressure from the Reserve Bank of India to tighten
norms for the sector to prevent money laundering. The central bank has been nudging the
government to put curbs on the real estate sector ever since FDI was allowed in it. It had
 IMPACT OF FOREIGN DIRECT INVESTMENT IN INIDA

earlier asked the government to remove the construction and housing industry from the
list of sectors where FDI was allowed via the automatic route. At present, 100% FDI is
allowed in realty projects via the automatic route with certain conditions like a three-year
lock-in on investments. Conditions have also been prescribed for minimum area that is
required to be developed for such projects.
This sector has attracted substantial investor interest since 2005 when the government
opened its doors for FDI. The sector had received more than $9 billion of FDI until
November 2010. The inflows between April and November 2010 stood at $999 million, 8%
of the total FDI flows into the country.
CONCLUSION
FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)
(From AUGUST 1991 to DECEMBER 2010)
FDI INFLOWS
CUMULATIVE FDI FLOWS INTO INDIA (1991-2011)
(Equity inflows + including data on ‘Re- US$
invested earnings’ & ‘Other capital’, which is 1,86,792
available from April 2000 onwards. These million
are the estimates on an average basis, based
upon data for the previous two years,
published by RBI in their Monthly Bulletin)

Ref: Indian reality news (Feb 11 2011)

-------------------------------------------------------------------------------------------------------------------