3.

HISTORY OF FDI IN 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 industrialized 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
characterized by strong centralized 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, license 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 realizing 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,
privatization, and liberalization. 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.
 Pre-Independence Reforms: Under the British colonial rule, the Indian
economy suffered a major set-back. An economy with rich natural resources
was left plundered and exploited to the hilt under the English regime. India is
originally an agrarian economy. India’s cottage industries and trade were
abused and exploited as means to pave the way for European manufactured
goods. Under the British rule the economy stagnated and on the eve of
independence India was left with a poor economy and the textile industry as the
only life support of the industrial economy.
Post-Independence Reforms: India’s struggle post-independence has been an
excruciating financial battle with a slow economic growth and development
which were largely due to the political climate and impact of the economic
reforms. The country began it transformation from a native agrarian to industrial
to commercial and open economy in the post-independence era. India in the
post-independence era followed what can be best called as a ‘trial and error’
path. During the post-independence era, the Indian Economy geared up in favor
of central planning and resource allocation. The government tailored policies
that focused a great deal on achieving overall economic self-reliance in each
state and at the same time exploit its natural resource. In order to augment trade
and investments, the government sought to play the role of custodian and trustee
by intervening in the practice of crucial sectors such as aviation,
telecommunication, banking, energy mainly electricity, petrol and gas. The
policy of central planning adopted by the government sought to ensure that the
government laid down marked goals to be achieved by the economy thereby
establishing a regime of checks and balances. The government also encouraged
self-sufficiency with the intent to encourage the domestic industries and
enterprises, thereby reducing the dependence on foreign trade. Although,
initially these policies were extremely successful as the economy did have a
steady economic growth and development, they weren’t sustained. In the early,
1970’s, India had achieved self-sufficiency in food production. During the
1970’s, the government still continued to retain and wield a significant spectra
of control over key In the Early 1980’s-Macro-Economic Policies were
conservative. Government control of industries continued. There was marginal
economic growth & development courtesy of the development projects funded
by foreign loans. The financial crisis of 1991 compelled drafting and
implementation of economic reforms. The government approached the World
Bank and the IMF for funding. In keeping with their policies there was
expectation of devaluation of the rupee. This lead to a lack of confidence in the
investors and foreign exchange reserves declined. There was a withdrawal of
loans by Non Resident Indians. Economic reforms of 1991: India has been
having a robust economic growth since 1991 when the government of India
decided to reverse its socially inspired policy of a retaining a larger public
sector with comprehensive controls on the private sector and eventually treaded
on the path of liberalization, privatization and globalization. During early 1991,
the government realized that the sole path to India enjoying any status on the
global map was by only reducing the intensity of government control and
progressively retreating from any sort of intervention in the economy – thereby
promoting free market and a capitalist regime which will ensure the entry of
foreign players in the market leading to progressive encouragement of
competition and efficiency in the private sector. In this process, the government
reduced its control and stake in nationalized and state-owned industries and
enterprises, while simultaneously lowered and deescalated the import tariffs. All
of the reforms addressed macroeconomic policies and affected balance of
payments. There was fiscal consolidation of the central and state governments
which lead to the country viewing its finances as a whole. There were limited
tax reforms which favored industrial growth. There was a removal of controls
on industrial investments and imports, reduction in import tariffs. All of this
created a favorable environment for foreign capital investment. As a result of
economic reforms of 1991, trade increased by leaps and bounds. India has
become an attractive destination for foreign direct and portfolio investment.
3.1 Government Approvals for Foreign Companies Doing Business in India
Government Approvals for Foreign Companies Doing Business in India or
Investment Routes for Investing in India, Entry Strategies for Foreign Investors
India's foreign trade policy has been formulated with a view to invite and
encourage FDI in India. The Reserve Bank of India has prescribed the
administrative and compliance aspects of FDI. A foreign company planning to
set up business operations in India has the following options:
1. Automatic approval by RBI: The Reserve Bank of India accords automatic
approval within a period of two weeks (subject to compliance of norms) to all
proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is
allowed depending on the category of industries and the sectoral caps
applicable. The lists are comprehensive and cover most industries of interest to
foreign companies. Investments in high-priority industries or for trading
companies primarily engaged in exporting are given almost automatic approval
by the RBI.
2. The FIPB Route – Processing of non-automatic approval cases: FIPB stands
for Foreign Investment Promotion Board which approves all other cases where
the parameters of automatic approval are not met. Normal processing time is 4
to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and
rejections are few. It is not necessary for foreign investors to have a local
partner, even when the foreign investor wishes to hold less than the entire equity
of the company. The portion of the equity not proposed to be held by the foreign
investor can be offered to the public.
3.2 FOREIGN DIRECT INVESTMENT POLICY IN INDIA
FDI is prohibited in sectors like (a) Retail Trading (except single brand product
retailing) (b) Lottery Business including Government /private lottery, online
lotteries, etc. (c) Gambling and Betting including casinos etc. (d) Chit funds (e)
Nidhi Company (f) Trading in Transferable Development Rights (TDRs) (g)
Real Estate Business or Construction of Farm Houses (h) Manufacturing of
Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
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.