Project Report

MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY

Nature and Pattern of FDI flows in India: Sectoral Analysis
6th May, 2011

Group 5 Jitendra Narula [Roll Number 17] Rajesh Garg [Roll Number 30] Ravi Ganesh [Roll Number 33] Ravindra Singh Darri [Roll Number 34] Tejinder Singh [Roll Number 58]

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Project Report

MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY

Table of contents
Table of contents ............................................................................................................................... 2 Executive Summary ........................................................................................................................... 3 Introduction ....................................................................................................................................... 5 Components of FDI ............................................................................................................................ 6 Analysis of FDI inflows ....................................................................................................................... 7 Global trends in FDI inflows ........................................................................................................... 7 Indian trends in FDI inflows ........................................................................................................... 9 Source of FDI Inflows................................................................................................................ 10 Future potential of FDI inflows in India.................................................................................... 11 FDI route of entry to India ........................................................................................................ 13 FDI in India – Greenfield versus Brownfield ............................................................................. 14 FDI in India – Regional Dispersion ............................................................................................ 15 FDI in India – Sectoral Dispersion............................................................................................. 16 How the sectoral dispersion has changed over the years? ..................................................... 18 Sectoral analysis ....................................................................................................................... 19 FDI and other macro-economic indicators .............................................................................. 25 Determinants of FDI ................................................................................................................. 26 Conclusions ...................................................................................................................................... 28 Suggestions and recommendations ................................................................................................ 29 References ....................................................................................................................................... 31

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Project Report

MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY

Executive Summary
Foreign direct investment (FDI) has played an important role in the process of globalisation during the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalisation of trade and investment regimes, and deregulation and privatisation of markets in many countries including developing countries like India. Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. At the macro-level, FDI is a non-debt-creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and regions of the host economy. The aim of this report is to provide an insight to the trend and patterns of FDI emerging in India. The report also focuses on spatial and sectoral spread of FDI-enabled production facilities in India and their linkages with the growth and employment in India. The top FDI receiving sectors have strong backward and / or forward linkages with the economy. The sectors with strong backward and forward linkages include construction; fuels; chemicals; and metallurgical industries. Services sectors, telecommunications, and consultancy services have strong forward linkages. The sectors with strong backward linkages include electrical equipment; drugs and pharmaceuticals; food processing; and textiles. Normally FDI-enabled manufacturing firms pay higher wage per rupee of net fixed capital compared to domestically invested firms. Within FDI firms, the value is relatively high in sectors including electricity distribution and control apparatus; general purpose machinery; footwear; medical appliances; and building of construction parts. Output-capital ratio is also higher in FDI firms than in domestic firms. Within FDI-enabled firms, the output capital ratio is relatively high in sectors such as petroleum products; mining of iron ore; medical appliances; electricity distribution and control apparatus; and transport equipment. The corresponding values in these sectors are much lower in the case of domestically invested firms. The overall net foreign exchange earning is negative for FDI-enabled as well as domestically invested firms mainly due to a deficit in the manufacture of petroleum products. Sectors with positive net foreign exchange earnings include chemicals; mining of iron ores; textiles; and software and publishing. The market capitalisation of the FDI-enabled service firms is less than two-fifth the combined market capitalisation of manufacturing and service firms. FDI-enabled manufacturing firms account for 12 per cent of total exports by FDI-enabled and domestically invested manufacturing firms taken together. About 13 per cent of total sales by FDI-enabled firms are exported. This implies that FDI has entered India

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not least because it renders fatuous claims that being green is incompatible with development. While we are writing this report.g. automobiles. but it took POSCO six years to get the environmental clearance. spill-overs and natural advantage. photographic films. the Netherlands and Japan. wine. non-ferrous metals. Mining of iron ore. and medical appliances.3 billion compared with a corresponding figure of $24. but it is not certain if others will. In the case of output. general purpose machinery. textiles.. it is more likely that an integrated iron and steel plant would be located close to regions producing primary inputs (iron ore and coal) and a cement plant close to limestone quarries. motor parts. among others. medical appliances and transport equipment. special purpose machinery. real estate. transport equipment. the UK. among others. Multiple factors are likely to play a simultaneous role in helping a firm decide on plant location.. eight sectors are moderately clustered.6% to touch $18. e. six sectors are moderately clustered. viz. For example. telecommunications. So lengthy was the process that the original deal expired. to $35 billion.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY mainly to seek domestic markets.62 billion for FY 2009-10. tea. computer hardware & software. The decision would primarily be based on the nature of the plant under consideration. Some of the highly clustered sectors with high output in FDI-enabled production units include motor parts. Page |4 . etc. power. There are two types of cluster forces. metallurgical industries. petroleum and natural gas. It is observed that 10 out of the top 25 FDI employment sectors have relatively high clusters and 9 are relatively dispersed. POSCO perserved.7 billion and by 2008-09. Mauritius is the main source followed by Singapore. Spillovers refer to physical as well as intellectual spillovers. construction. and software and publishing have relatively high export-to-sales ratios. The services sector. By 2007-08. Total FDI inflows are estimated at US$90 billion during April 2000 to March 2009. Natural advantage refers to factors of production which provide enabling conditions for producing certain goods. 6 out of the top 25 FDI sectors have relatively high cluster and 11 are relatively dispersed. general purpose machinery. One important concern in India’s industrial policy is the dispersal of industrial plants across the states of the country. which is cause of concern. However FDI into India during April 2010 -February 2011 period has registered a decline of 25. and chemicals received the highest FDI. FDI in India amounted to a paltry $393 million in 1992-93. the US. India’s largest FDI project POSCO with an investment of $12 billion in steel plant has been cleared is cause for cheers. This is good news. Some of the highly clustered sectors with high employment in FDI-enabled production units include growing of crops. it had climbed to $34.

increased market concentration and incomplete utilisation of FDI benefits due to incoherent institutional policies and regulatory conditions. the main drivers of FDI are powerful and effective vehicles for disseminating technology from developed to developing countries and are often the only source of new and innovative technology which is not available in the arm’s length market. The large increase in the volume of FDI during the past two decades provides a strong incentive for research on this phenomenon. where benefits exist. there has been a tremendous growth in global Foreign Direct Investment (FDI). while in 2009 the share had increased to 30.6% of world Gross Domestic Product (GDP). Page |5 . FDI is less volatile than other private flows and provides a stable source of financing to meet capital needs. regions and firms. The growth in international flows of goods and capital implies that geographically distant parts of the global economy are becoming increasingly interconnected as economic activity is extended across boundaries. they may not be shared equitably in the society. The debate on the likely costs and benefits has reached new heights. Recent years have seen increased public concern that the benefits of FDI have yet to be demonstrated and that. Growing international flows of portfolio and direct investment. Under these circumstances it is important to inform the discussion by drawing lessons from the country experience and to assist the Government in identifying the conditions and policy requirements for maximising the benefits of FDI and minimising the risks and potential costs. The adjustment costs associated with FDI include higher short term unemployment due to corporate restructuring. FDI is an important and probably dominant channel of international transfer of technology. international trade.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Introduction During last thirty years. This report has been prepared in order to allow for the possibility of finding results that can provide knowledge about the nature. In 1980 the total inward stock of FDI equalled only 6. FDI is an important factor in the globalisation process as it intensifies the interaction between states. information and migration are all parts of this process.7% (UNCTAD 2010). skills and managerial know-how needed to appropriate technology properly. unavailability of skilled labour and infrastructure. The technology disseminated through FDI generally comes as a package including the capital. In this report we are discussing different aspects of FDI at the macro-economic level using aggregated data for FDI. trend and pattern of inward FDI flow in India. MNCs. This dramatic development has taken place simultaneously with a substantial growth in international trade.

FDI flows are the sum of three basic components. reinvested earnings and other capital associated with inter-company debt transactions:  Equity Capital: It consists of the value of the MNCs investment in shares of an enterprise in a foreign country. viz. trade credits. investment made by foreign venture capital investors. reinvested earnings of foreign companies. both incorporated and unincorporated (IMF. Page |6 . The concept of FDI includes the capital funds that the direct investor provides to a direct investment enterprise as well as the capital funds received by the direct investment enterprises from the direct investor.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Components of FDI The BPM5 and the benchmark recommend that FDI statistics can be compiled as a part of the BOP and international investment position statistics. The components of Direct Investment constitute direct investment income. Consequently countries are expected to collect and disseminate FDI data according to the standard components presented in the BPM5. control premium. It consists of non cash which can be in the form of tangible and intangible components such as technology fee. It comprises not only the initial transaction establishing the relationship between the investor and the enterprise but also all subsequent transactions between them and among affiliated enterprises. The IMF definition thus includes as many as twelve different elements.  Reinvested Earnings: It consists of the sum of the direct investor’s share (in proportion to the direct equity participation) of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to the direct investor. brand name etc. expand or reduce investments. non competition fee and so on. non cash acquisition of equity.  Other Direct Investment Capital: They are also known as inter-company debt transactions. bonds). namely: equity capital. equity capital. branches and associates (BPM5). inter-company debt transactions including short term and long term loans. They cover the short and long term borrowing and lending of funds including debt securities and supplier’s credit-between direct investors and subsidiaries. In sum direct investment capital transactions include those operations that create or liquidate investments as well as those that serve to maintain. grants. 1993). all shares in subsidiaries and associates and other capital contributions. It comprises equity in branches. overseas commercial borrowing (financial leasing. earnings data of indirectly held FDI enterprises. direct investment transactions and direct investment position.

as well as the reduced financial capabilities of TNCs.3). This shift was already apparent during 2007–2009 due to these economies’ growth and reform. developing and transition economies now account for nearly half of global FDI inflows (fig. ] Shift in foreign investment inflows towards developing and transition economies is expected to accelerate. as well as their increased openness to FDI and international production. most of it reflects a longer-term shift in TNC activity. I. At the same time. While part of this relative increase may be temporary. weighing on FDI flows to developed countries. FDI flows to developed countries further contracted by 44 per cent in 2009.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Analysis of FDI inflows Global trends in FDI inflows FDI inflows plummeted in 2009 in all three major groupings – developed. Page |7 . Following their 2008 decline. Falling profits resulted in lower reinvested earnings and intra-company loans. a drop in leveraged buyout transactions continued to dampen cross-border M&As. This global decline reflects the weak economic performance in many parts of the world. developing and transition economies. As a result.

I. and China was the second most popular destination (fig.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Global rankings of the largest FDI recipients confirm the emergence of developing and transition economies: three developing and transition economies ranked among the six largest foreign investment recipients in the world in 2009. a number of European countries saw their rankings slide. While the United States maintained its position as the largest host country in 2009.4). Page |8 .

however. It continued in FY 2007-08. In FY 1998-98. India registered FDI inflows of $33. The year-on-year fluctuations until 2003-04 make it difficult to identify a clear trend.6 bn and total cumulative inflows from August 1991 to March 2009 have been to the tune of $155 billion. the FDI has gone down largely because of Global recession and delays in environmental clearances to some big projects like POSCO steel. inflows have been increasing continuously since 2004-05. Page |9 . In FY 2008-09 and in 2009-10.7% in FY 2006-07 is remarkable. however with a significant growth of 50 %.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Indian trends in FDI inflows FDI inflows grew steadily through the first half of the 90s but stagnated between 1996-97 and 2003-04. This was the period when disinvestment was on peak in India. 200203 & 2003-04.During 2008-09. growth in FDI was negative which was largely due to political unrest. The growth rate of 154.

This is reflected in the ever growing list of countries that are showing interest to invest in India. India’s perception abroad has been changing steadily over the years. Among the countries heading the list of FDI inflows into India is Mauritius. Singapore is the second largest investor in India followed by the US and other developed countries like the UK and the Netherlands. However. This could be attributed to the double taxation treaty that India has signed with Mauritius and also to the fact that most US investment into India is being routed through Mauritius. While the significance of Germany and Japan has declined in terms of their share in FDI inflows into India. which are India’s major trading partners. Table 2. However. Singapore was the second dominant source of FDI inflows with 9% of the total inflows.10 shows the share of the top investing countries in India’s FDI for the two sub-periods defined earlier. Mauritius emerged as the most dominant source of FDI contributing 44 % of the total investment in the country. USA slipped to third position by contributing 7% of the total inflows.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Source of FDI Inflows India’s 83% of cumulative FDI is contributed by nine countries while remaining 17 per cent by rest of the world. P a g e | 10 . Cyprus and the UAE have entered the list of top 10 investing countries during the recent cumulative period.

India could not attract FDI. India implemented. accounting for 50 per cent of inflows between August 1991 and 2008. According to the DTAA between India and Mauritius. when the performance and potential is compared with other countries in the world. Future potential of FDI inflows in India India still regarded as an underperformer Though FDI in India is showing buoyant trends. it is still ranked as an under performer.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY 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. after its independence an inward looking strategy including planning. Therefore. where tax structure was complex and FDI was conditionally tolerated for internal needs and minority shares. 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. many illiterate people and poor social and economic infrastructures. Since there is no capital gains tax in Mauritius. we could see that: Being a developing country with a low GDP per capita. the gain will escape tax altogether. an import substitution policy. If we analyze the reason. P a g e | 11 . nationalization. It has emerged as the largest source of foreign direct investment (FDI) in India. A large number of foreign institutional investors (FIIs) who trade on the Indian stock markets operate from Mauritius. a Company resident in Mauritius selling shares of an Indian company will not pay tax in India.

India began to emerge with inertia. If India can further open up its economy. investment ceilings were raised. rate of growth of the market and political stability. reserves the potential to emerge as a top FDI destination India’s economic reforms way back in 1991 has generated strong interest in foreign investors and turning India into one of the favorite destinations for global FDI flows. create flexible labour laws. FDI inflows in India have grown due to its human capital. FDI was allowed not only for the domestic market but also for exports. Private and foreign firms were permitted to invest in activities previously reserved for the public sector. parallel with liberalisation of the economy. policy environment and procedures were simplified and streamlined. That means we need wider and more meaningful reforms to induce FDI inflows. This was beneficial for the Indian economy.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY If some measures of de-licensing were taken in 1985-86. size of market. create strategic infrastructure at SEZs and take strategic P a g e | 12 . However. it was mainly in 1991 that India opened up to foreign investment. However.

FDI route of entry to India The actual FDI inflows in India are welcomed under five broad heads:      Foreign Investment Promotion Board’s (FIPB) approval route for larger projects. Automatic approval route via RBI shows an upward trend of FDI inflows since 1995. Reserve Bank of India’s (RBI) automatic approval route acquisition of shares route (since 1996) RBI’s non – resident Indian (NRI’s) scheme External commercial borrowings (ADR/GDR) route The FIPB route – represents larger projects which require bulk of inflows and account for government’s discretionary approval. However. This route is meant for smaller sized investment projects. FDI inflows through NRI’s route show a sharp declining trend. P a g e | 13 .Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY policy initiatives of providing economic freedom. Although. Acquisition of existing shares route and external commercial borrowing route gained prominence (in 1999 and 2003) and shows an upward increasing trend. the share of FIPB route is declining somewhat as compared to RBI’s automatic route and acquisition of existing shares route. it may remain as a favourite destinations for global FDI flows.

Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY FDI in India – Greenfield versus Brownfield P a g e | 14 .

they are mainly concentrated in the South on the axis of Madras and Bangalore. The figures for FDI through acquisitions of shares and the non-acquisition modes indicate the clear continuous dominance of fresh foreign investments over investments made to acquire existing shares. As to the main poles of competitiveness. Most software companies are in Mumbai and Bangalore where the Indian Industry originally developed. the number of greenfield investments is far ahead of the M&A deals realised during any year. Mumbai. the greenfield investment itself may be used to set up a new unit altogether or to fund the expansion of an existing unit. According to the information provided in UNCTAD (2008). New Delhi and their surroundings include half of the FDI received by India since 2000.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Much of the FDI is realised either through the greenfield or the M&A route. Six regional offices received around more than 70 percent of Indian FDI inflows. This clearly indicates the preference for a new establishment as against choosing from the acquisition of an existing one or a merger. and around Delhi and Mumbai. The areas of Bangalore and Chennai with almost 7 percent and 6 percent each respectively lag behind. but they are also developing quickly in Delhi and its surroundings as well as in Andhra Pradesh and Tamil Nadu. P a g e | 15 . FDI in India – Regional Dispersion The regional distribution of FDI inflows in the above table shows highly concentrated patterns. However. Then there are places surrounding Hyderabad (4 percent) and Ahmedabad (4 percent).

etc. and expansion of the sector. Indian telecom industry has the highest growth rate in the world FDI inflows in 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. information technology. With a growth rate of 45%. The service sector is followed by the computer hardware and software in terms of FDI.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY FDI in India – Sectoral Dispersion Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken place in the service sector including the telecommunication. development. High volumes of FDI take place in telecommunication. The telecom industry is one of the fastest growing industries in India. power. construction. travel and many others. real estate. automobiles. 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. P a g e | 16 .

The automobile sector in India ranks third in manufacturing three wheelers and second in manufacturing of two wheelers. The FDI in Automobile Industry has experienced huge growth in the past few years. Passenger Car Segment. India has become one of the most prime destinations in terms of construction activities as well as real estate investment. Establishing Research and Development Centres. P a g e | 17 . Heavy truck Segment. expansion. cost-effectiveness. Exports. The options have increased with quality products from foreign car manufacturers. Further the increased FDI Inflows to Metallurgical Industries in India has led to the development. All this has helped in improving the quality of the products of the metallurgical industries in India. Besides. The basic advantages provided by India in the automobile sector include. easy repayment schemes has also helped the growth of the automobile sector. advanced technology. and efficient manpower.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY FDI Inflows to Construction Activities has led to a phenomenal growth in the economic life of the country. and growth of the industries. Opportunities of FDI in the Automobile Sector in India exist in establishing Engineering Centres. India has a well-developed and competent Auto Ancillary Industry along with automobile testing and R&D centres. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. Two Wheeler Segment. The introduction of tailor made finance schemes. The increased FDI Inflows to Metallurgical Industries in India has helped to bring in the latest technology to the industries.

2008 which accounts for 53. The increased flow of foreign direct investment in the chemicals industry in India has helped in the development.8% of FDI inflows are in high priority areas like Services. Services exports are the major driving force in promoting exports. Service sector tops the chart of FDI inflows in 2008 with India emerged as a top destination for FDI in services sector. Electrical Equipments. This in its turn has led to the improvement of the quality of the products from the industry. expansion. etc.2% of total FDI inflow. Out of this. P a g e | 18 .479 mn during August 1991 to Dec. nearly 40. How the sectoral dispersion has changed over the years? The major sectors attracting FDI inflows in India have been Services and Electrical & electronics amounting US$ 30.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY The increased FDI Inflows to Chemicals industry in India has helped in the growth and development of the sector. Telecommunication. Top 5 sectors in aggregate for FDI inflows constitute US$ 50. and growth of the industry.421millions or 32 % of total FDI.

insufficient power supply.Ltd. Infrastructure sector received 2528 numbers of foreign collaborations with an equity participation of US$ 111. 41. Out of 2528 foreign collaborations 633 were technical and 2795 are financial collaborations during 1991-2008.15%). P a g e | 19 . Air Transport. In order to attract the investment. Petroleum and natural gas. The shortage of power is estimated at about 10% of the total electrical energy and approximately 20% of peak capacity requirement. an over. but the demand for it is still not being fulfilled.05%) followed by construction activities (6.2%) and Mumbai (20. The major investment comes from Mauritius (56. Construction activities and real estate. Dabhol Power Company Ltd. investment is heavily concentrated in consumer durables sector rather than in long – term investment projects such as power generation. India has encouraged FDI in infrastructure sector from the very initiation of its economic reforms. Aircel Ltd. Bhaik Infotel P.16%). Telecommunication. Further.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Sectoral analysis Infrastructure Sector The infrastructure sector constitutes Power. water management and on modernizing the basic infrastructure. However. Ports.0 bn. maintaining roads. New Delhi (23. FDI up to 49% is allowed for investing companies in infrastructure/ services sector except telecom sector) through FIPB route.15% of the total investment. Non-conventional energy. Cellule Ltd. Initially the inflows were low but there is a sharp rise in investment flow from 2005 onwards.54%).62% of total FDI inflows from 2000 to 2008. insufficient and poor conditions of India’s infrastructure are the major factors to the slowdown in growth which reduces the trust and enthusiasm for FDI from investors and economic growth of the country. inadequate and unmaintained roads. severely congested urban areas.78%). and power (3.47%) enjoy the top two positions in India. real estate (5.30%) and Singapore (8. Relogistics Infrastructure P. The infrastructure sector accounted for 28. may continue to plague the Indian economy in the coming years. Telecommunication received the highest percentage (8.Ltd. The top Indian companies which received FDI inflows in Infrastructure sector during 2000 to 2008 are IDEA.burdened railway system. In fact.

2000. banking. Singapore (11. In India. Services sector ranks 3rd in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008. Citi Financial Consumer Finance (I) Ltd. Among the subsectors of services sectors.18%). Ltd. DSP Merrill Lynch Ltd.the leading Indian companies which received FDI inflows in services sector are: Cairn (I) Ltd.28% of the total investment. Ltd. Mauritius top the chart by investing 42.14%).. this amount does not include FDI inflows received through acquisition route prior to Jan. P a g e | 20 . It is among the main drivers of sustained economic growth and development by contributing 55% to GDP.2 bn which is 19.financial services (1. Majority of collaborations in technology transfers are from USA (30) and UK (8). Outsourcing. There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2005 onwards. However. Blue Dart Express Ltd. information technology oriented services make intensive use of human capital.78% of the total approvals) with an equity participation of US$ 8.34% of the total FDI inflows from 1991-2008 from FIPB/SIA. financial. 77 are technical and 1549 are financial in nature. CRISIL Ltd. financial services attract 10. The total number of approvals for services sector (financial nonfinancial) have been of the order of 1626 (5. Vyasa Bank Ltd.25% of total FDI inflows followed by banking services (2. insurance (1.52% in services sector followed by UK (14. FDI inflows in services sector are heavily concentrated around two major cities.66%).77%) and Delhi (16.62%) respectively. Service sector received an investment of US$ 19. Out of 1626 numbers of foreign collaborations. Pvt.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Services Sector Services sector puts the economy on a proper glide path. acquisition of existing shares and RBI’s automatic routes only. 10.Mumbai (33. Kappa Industries Ltd. Associates India Holding Co.60%) and non. AAA Global Ventures Pvt.a-vis services which make intensive use of semiskilled and unskilled labour.7 bn.22%). FDI would be much more efficient and result oriented in these services vis. Housing Development Finance Corp. Ltd.

Further. Ltd.05%).2%.93%) respectively. total numbers of 20 technical and 1111 financial collaborations have been approved for Trading sector from 1991-2008. Education Sector FDI up to 100% is allowed in education sector under the automatic route. and 14 with Germany from 1991-2008. As far as technology transfers are concerned. Bangalore (15. e-commerce with (2. Consultancy Sector Consultancy Sector received US$ 1. USA (25. Anchor Electricals. Education sector received US$ 308.76%). 21 with UK. FDI inflows in consultancy sector registered a continuous increasing trend of FDI inflows from 2005 onwards. acquisition of existing shares and RBI’s automatic route.76%). P a g e | 21 . The top five Indian companies which received FDI inflows are Multi Commodity Exchanges of India Ltd. and New Delhi (12. Maximum numbers of technology transfers are approved from USA (5). in India Mumbai (38. Trading sector shows a trailing investment pattern upto 2005 but there is an exponential rise in inflows from 2006 onwards. Investment in India is heavily concentrated in three cities viz. marketing US$138. Essilor India Pvt.97%).81%).60%) respectively from 2000-2008.04%.43. Management services received an investment of US$ 737. Japan (14.38%).76%) and New Delhi (13. Japan (3) and Netherlands. and Cayman Island (14. Trading (wholesale cash and carry) received highest percentage (84.6 million. out of which 40 technical collaborations are approved with USA.69%).28 million of FDI inflow from 2004-2008. Heavy investment in education sector came from Mauritius with 87. Multi Commodity Exchanges of India Ltd. Mumbai (40. Metro Cash and Carry India Pvt. Major share of investment in consultancy services comes from Mauritius with 37.47%) and Netherlands 6.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Trading Sector Trading sector received 1.63% respectively. USA (2. Ltd. Further.65 million and Design and Engineering services constitute an investment of US$ 110. followed by Netherlands (3.67% of the total FDI inflows from 1991-2008.25%) of total FDI inflow to this sector from 2000-2008 followed by trading (for exports) with 9.14% of total inflows received from 2000-2008 through FIPB/SIA route. Total numbers of technology transfers in consultancy services are 125.95%. major investment inflows came from Mauritius (24.01%) received major percentages of FDI inflow for consultancy sector from 2000-2008.1 bn which is 1. Education sector shows a steep rise in FDI inflows from 2005 onwards.

Mumbai (5. R & D. US$ 1245. As far as technology transfer and financial collaborations are concerned. Out of 2 technical collaborations. Housing and Real Estate sector Housing and Real Estate sector accounts US$ 4.e. acquisition of existing shares and RBI’s automatic route during 2000 – 2008.45%). Moreover.58%) respectively. educational institutions.7% and 29.78% of the total inflows received through FIPB/SIA route.9 bn which is 6. 2008 is US$ 4. acquisition of existing shares and RBI’s automatic route. India with this level of education attracts foreign firms in science. and high technology products and services. Further. Maximum numbers of foreign collaborations in Housing and Real Estate sector is with Mauritius (7). housing. The endowment of science. As far as technology transfers are concerned. and technology oriented people facilitate the spillovers of technology and know – how. Construction activities sector Construction activities Sector includes construction development projects viz. resorts.22 bn) of investment. city and regional level infrastructure.5. total number of 2 technical and 112 financial collaborations are approved for education sector. recreational facilities.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY In India. India is endowed with a large pool of skilled people with secondary and tertiary level of education. Mumbai. Ltd.61.K (2). township.7 bn of FDI inflows which is 5. There is an exponential rise in the amount of FDI inflows to this sector after 2005. and India Bulls Infrastructure Development. engineering. Shyamaraju & Company (India) Pvt. and U. Singapore (2). Shivaji Marg Properities. the medium of instruction at these education levels is English – the lingua franca of business. Major investment in construction activities is received from Mauritius which is accounted nearly 58. 1000. and Hyderabad receives maximum amount (viz. In India Delhi. total numbers of 9 technical and 223 numbers of financial collaborations have been approved for P a g e | 22 . The construction activities sector shows a steep rise in FDI inflows from 2005 onwards. and 943. India with this added advantage benefits in attracting foreign firms in education sector.14% of total FDI inflow followed by Delhi (6. Ltd. commercial premises. 61. Emaar MGF Land P.0 bn during 1991-2008. The total numbers of foreign collaborations in Housing and Real Estate sector is 18 with an equity participation of US$1. USA and Japan begged one each during 1991-2008. The amount of FDI in construction activities during Jan 2000 to Dec.15% of the total inflows received through FIPB/SIA route. Heavy investment i. The top five Indian companies which received maximum FDI inflows in this sector are: Emaar MGF Land P. In terms of most attractive locations in India New Delhi and Mumbai with 34.8% shares are on the first and second positions. Bangalore received 80. Ltd.96% came from Mauritius.61% of total FDI inflows during 2000-2008.

Caitlin Builders & Developers Pvt.2 bn which is 4. Electric Ltd. Mauritius with an investment of US$ 4789 bn remained at the top among the investing countries in India in this Sector.77%) and Netherlands (6. Computer Software and Hardware sector shows a continuous increasing trend of FDI inflows (Chart-3. Ltd. Among Indian locations Mumbai received 22.44% of investment followed by Bangalore (10.59%). Carmen Builders & Construction Pvt. and Fiat India Automobile P. in India Mumbai.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY construction activities. Major investment came from Japan (27. Ltd.01% of the total investment. Major Indian companies which received highest percentage of FDI inflows in automobile industry are Escorts Yamaha Motor Ltd.07%) etc. Punjab Tractors Ltd.47%).11% of the total collaborations approved during August 1991 to December 2008. Computer Software and Hardware Sector Computer Software and Hardware sector received US$ 8. 36. P a g e | 23 . acquisition of existing shares and RBI’ automatic route.20). Endurance Technologies P. auto ancillaries etc. Yamaha Motors India Pvt. USA (13..66%). Singapore (10.88%) followed by Mauritius(7. The trends in automobile sector show that there is a continuous increase of investment in this sector after 2005 onwards (Chart3.98%.8%). General Motors India td.9 bn which constitute 11.S Electric Ltd. Automobile industry sector ranks 5th in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008. Ltd. W. Highest numbers of technical collaborations are with Japan in automobile Industry.63% and 9.1 bn. The top five Indian companies’ which received FDI inflows in this sector are: W.88%). FDI inflows in the automobile Industry sector. The total numbers of approvals for automobile industry have been of the order of 1611 with an equity participation of US$ 6. which is 7.21). Automobile Industry Automobile Industry Sector comprises Passenger cars.91%). 26.90%). 2008 is US$ 3.e. Ltd. Out of 1611 numbers of foreign collaborations approved 734 are technical and 877 are financial in nature. Ltd. which accounts for 0. Ltd. Italy (14. during Jan 2000 to Dec.09% of the total inflows received through FIPB/SIA route. Maximum numbers of technical collaborations are approved with France (3) and USA (2).43% of the total FDI inflows during the period Jan 2000 to Dec 2007.S. Other major investing countries in this sector are USA (12. and PVP Ventures Pvt. Yamaha Motor Escorts Ltd. and Chennai (9. New Delhi and Ahmedabad received major chunks of investment i.

IFLEX Solutions Ltd.22). Telecommunications Sector Telecommunications Sector comprises Telecommunications. Telecommunications Sector received an inflow of US$ 8. Hathway Cable & Data Com.3 bn. Ltd. Out of this.3 per cent in 2006-07. (12). Encouraged by the increasing presence of multinationals. Flextronics Software Systems Ltd. Pvt. contributing nearly 17 per cent to the GDP (in 2008-09). which is 8. with a record 12. Industry and manufacturing were the major contributors to the economy. but there is an exponential rise in FDI inflows after 2005 (Chart-3. Manufacturing Sector The manufacturing sector plays a significant role in the Indian economy. Cellular Mobile/ Basic Telephone Services etc. Digital Global Soft Ltd. U. Bharti Tele Ventures Ltd.22% of investment remains on the top among the investing countries in this sector. India Bulls Financials Services P. Unitech Reality Projects Ltd. Ltd. The total numbers of approvals for telecommunications Industry have been of the order of 1099 with an equity participation of US$ 13. Major technological transfers come from USA (43.2 bn. Canada (12) and Germany (12). Other investing countries in the telecom sector are Russia (5. Aircel Ltd. Ltd. having a P a g e | 24 .0bn. The leading Indian companies which received FDI inflows in this sector are: Bhaik Infotel p. India received cumulative FDI inflows of US$ 100. Highest numbers (32) of technical collaborations are approved with USA followed by Japan (19). New Delhi attracts highest percentage (32.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Computer Software and Hardware industry fetched 3636 numbers of foreign collaborations. 14.41%) and USA (2%).K. Unitech Developers & Projects Ltd. Mauritius with 82. Radio Paging.34% of the total investment.Flex Solutions Ltd. Tata Consultancy Services Ltd.2%) and Japan (10.4%). I Flex Solutions ltd. There has been a steady flow of FDI in telecommunications from 1991 to 2005. Hutchison Essar South Ltd.4 bn during 1991-2008. the Indian manufacturing sector has been averaging 9 per cent growth in the past four years (2004-08).4% of the total FDI inflows during August 1991 to December 2008.58%) of FDI inflows during Jan 2000 to Dec 2008. Telecommunication sector ranks 2nd in the list of sectors in terms of cumulative FDI approved from August 1991 to Dec 2008. Out of 3636. The top Indian companies which received FDI inflows in this sector are: I Fliex Solutions Ltd. Bharti Telecom ltd. Mphasis BFL Ltd. 139 are technical and 960 are financial in nature. Infrasoft Technologies Ltd. the scaling up of operations by domestic companies and an ever-expanding domestic market. 125 are technical and 3511 are financial in nature with an equity participation of US$ 3. Etc. Out of 1099 foreign collaborations. I.

8 per cent) and drugs and pharmaceuticals (4. FDI inflows into manufacturing have been computed based on FDI records provided by DIPP. High degree positive correlation has been found between FDI and economic development. FDI has an important impact on country’s trade balance. The remaining sectors have a share of less than 4 per cent in total FDI inflows in manufacturing. P a g e | 25 . FDI to developing countries since 1990’s is the leading source of external financing. the share of manufacturing in total FDI inflows of India was 34.7 per cent).Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY consistently high GDP growth rate in the past two years. followed by the transportation industry (9. FDI also provides opportunity for technological transfer and up gradation.02 per cent in 2007. making industry internationally competitive. skilled manpower is attracting a number of companies across diverse industries. process and capital engineering. However. opening up export markets. The important effect of FDI is its contribution to the growth of the economy. access to global managerial skills and practices. 30. access to international quality goods and services and augmenting employment opportunities. skills and the general business climate. India’s cheap. due to its long manufacturing history and higher education system. transfer of technology and innovative ideas. increasing labour standards and skills. making India a global manufacturing powerhouse.0). optimal utilization of human capabilities and natural resources.6 per cent during 2000-2007. The reliance on FDI is rising heavily due to its al round contributions to the growth of the economy.. chemicals (other than fertilizers) (4. fuels (power & oil refinery) (7.9 per cent). FDI inflows in the manufacturing sector was as follows: electrical equipment (including s/w & elec. i. making India one of the fastest growing economies in the world. India has all the requisite skills in product.e. The rise in FDI volume is accompanied by marked change in its composition.) occupied the highest share. FDI and other macro-economic indicators FDI is considered to be the life blood and an important vehicle of for economic development as far as the developing nations are concerned.

because local sales are more profitable than export sales especially in larger countries where economies of scale can be eventually reaped. and 2005).ZS Determinants of FDI Market Size: The attractiveness of large markets is related to larger potential for local sales. remaining less than one (2000.org/indicator/BM. However the ratio improved dramatically (1.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY FDI as a percentage of GDP: The graph below suggests growing inflows of foreign direct investment in the 1990s.85) in 2006. which reflects the growth in the economy. The India’s share of FDI inflows in GDP has been very small in absolute terms. Source: World Bank Website http://data.worldbank. Economic stability of the country: This is measured in terms of        Interest Rates: The level of External Indebtedness Debt Service Ratio Foreign Exchange Reserves Exchange Rate Regime Inflation Rate Deficit in the Balance Of Payments P a g e | 26 . In 1970 and 1980. improvement in the investment climate as well as the buoyancy in FDI flows.GD. large parts of world except US had zero or small inflows of foreign investment.DINV.KLT. 2003.

other industries. tax structures. P a g e | 27 . regional integration frameworks. Infrastructural facilities: The development of roads. trade policies. specialized labor and intermediate inputs. Availability of natural resources: If the resources are available locally the cost of production remains low. Economic policies of the host country: Economic policies include the industrial policies. rails. electricity and communication system are important infrastructural facilities which are vital for the development of the industry Agglomeration effects: Agglomeration economies arise from the presence of other firms. It is the sustained availability of the resources which matter in the investment decisions. as the cost of transportation is saved. multilateral investment frameworks etc of a country.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Availability of human capital: Cheap and productive labour reduces the cost of production and yields high profitability and thus has a positive effect on FDI. the intellectual property protection regime. including knowledge spillovers. as well as from the availability of skilled labour force. bilateral investment treaties. This gives rise to economies of scale and positive externalities.

The major FDI inflows in India are concluded through automatic route and acquisition of existing shares route than through FIPB. More FDI is being pumped into India's housing sector. The economic reform process started in 1991 helps in creating a conducive and healthy atmosphere for foreign investors and thus.wise FDI inflows show that Maharashtra. Thus. Karnataka. This could be attributed to the fact that R&D sector is not receiving enough FDI as per its requirement. SIA route during 1991-2008. Trading sector shows a trailing pattern up to 2005 but there is an exponential rise in inflows from 2006 onwards. Research and Development expenditure shows unexpected negative sign as of expected positive sign.5 percent in 2003-04 to 2. India has considerably decreased its fiscal deficit from 4. Education sector attracts foreign investors in the last decade. with a share of nearly 75% emerged as a major recipient of global FDI inflows in South Asia region in 2007. resulting in substantial amount of FDI inflows in the country. State. Even though manufacturing industries have attracted rising FDI.6 percent to 1. the composition and type of FDI has changed considerably. Much of the FDI in India is realized through the Greenfield projects. the services sector accounted for a steeply rising share of FDI stocks in India since the mid-nineties. The changing policy framework has affected the trends and patterns of FDI inflows received by the country. In terms of investing countries. India. but there has been a generous flow of FDI in India since 1991. it can be noted that there is a high degree of concentration with nearly 40 percent of the investment coming from Mauritius. Gujarat and Tamil Nadu received major investment from investors because of the infrastructural facilities and favourable business environment provided by these states. Economic reform process since 1991 have paves way for increasing foreign exchange reserves to US$ 251985 millions as against US$ 9220 millions in 1991-92.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Conclusions It may be concluded that FDI share of developed countries is shrinking and developing countries had made their presence felt by receiving a descent amount of FDI in the last two decades. Although India is not the most preferred destination of global FDI. At the same time. although the magnitude of FDI inflows has increased. P a g e | 28 . in the absence of policy direction the bulk of them have gone into services and soft technology consumer goods industries bringing the share of manufacturing and technology intensive among them down.7 percent in 2007-08 and revenue deficit from 3. New Delhi.1 percent in 2007-08. This generous flow of FDI is largely because of India has maintained Double Tax Avoidance Agreements (DTAA) with nearly 70 countries of the world.

Indeed. expansion of existing manufacturing industries and development of the new one. infrastructure. India continued to attract substantial amount of FDI inflows. But overall situation is improving. will create around 48.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Even though the foreign direct investment (FDI) into the country continues to remain on a downward trajectory. it is also needed in the healthcare. In a nutshell. P a g e | 29 . These are indicators of continuing investor confidence in India and are likely to add to the FDI portfolio this year substantially.that delays undermine FDI inflow. R&D.000 direct and indirect jobs. We recommend the following suggestions to improve the inward flow of FDI in India--  Policy makers to focus more on attracting diverse types of FDI Quicker and greater government responsiveness will help transform a range of sectors and create employment.  Government should ensure the equitable distribution of FDI inflows among states. The government should also provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low. There are quite a few investments that have been received like the tie-up between the British-based oil company BP and Reliance Industries and the deal between Vodafone and Essar. so that they can attract FDI inflows at their own level. it’s estimated.  Firm time limits for green clearance would address concerns-voiced even by RBI. FDI is necessary for creation of jobs. this drop can be attributed to our Protectionist environmental policies which delayed some of the big FDI projects like POSCO’s. India due to its flexible investment regimes and policies prove to be the horde for the foreign investors in finding the investment opportunities in the country and the India story remains very strong. A number of fresh investments were in the pipeline which will boost overall FDI into the country in FY12. For example the POSCO project itself.  It is suggested that the government should push for the speedy improvement of infrastructure sector’s requirements which are important for diversification of business activities.The central government must give more freedom to states. education. retailing and in longterm financial projects. Suggestions and recommendations FDI as a strategic component of investment is needed by India for its sustained economic growth and development. despite troubles in the world economy.

and the rampant corruption. which would stabilize the economy (e.g. facilitates exports. This could be achieved by investing in human capital. stimulates R&D activities and decrease interest rates and inflation etc. P a g e | 30 . stabilize the exchange rates.  FDI should be guided so as to establish deeper linkages with the economy. So the government must invite Greenfield investments. infrastructure and sectors with high income elasticity of demand. The government while pursuing prudent policies must also exercise strict control over inefficient bureaucracy.tapism. dynamic products.  The policy makers should ensure optimum utilization of funds and timely implementation of projects.the government ensures FDI quality with magnitude. supplement domestic savings and foreign reserves. rules and regulations. productive capacity.Project Report  MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY Government must target at attracting specific types of FDI that are able to generate spillovers effects in the overall economy. clearance. so that investor’s confidence can be maintained for attracting more FDI inflows to India. R&D activities. As foreign investors doesn’t look for fiscal concessions or special incentives but they are more of a mind in having access to a consolidated document that specified official procedures. and opportunities in India.  Government must pay attention to the emerging Asian continent as the new economic power – house of business transaction and try to boost the trade within this region through bilateral.  As the appreciation of Indian rupee in the international market is providing golden opportunity to the policy makers to attract more FDI in Greenfield projects as compared to Brownfield investment.) and providing to investors a sound and reliable macroeconomic environment. environmental issues. red . Indeed. Last but not least. India needs a business environment which is conducive to the needs of business. improves the financial position. multilateral agreements and also concludes FTAs with the emerging economic Asian giants.

nic. Hooda. Gujrat. http://articles. Cirrus Graphics Pvt.com. 2011) P a g e | 31 .indiatimes. Sumna (2010). Fact Sheet on FDI (from August 1991 to February 2011). 2010.pdf (accessed April 22. An Economic Analysis of FDI in India. Doctoral dissertation.tradechakra. FDI in India and its growth linkages. Economic Survey 2010-11. Doctoral dissertation. (accessed April.nic.unctad. 2011) 8.Project Report MBA (IB) PT (2009-12) ¦ INDIAN ECONOMY AND TRADE POLICY References 1. http://siadipp. http://dipp.indiastat. www.B. 29. 2009. Chatterjee. Kurukshetra. The Maharaja Sayajirao University of Baroda.nic. (accessed April 22. Sapna (2011). (accessed April 22. Department of Economics. 2011) 9.4. http://www.in/Fdi_Circular/FDI_Circular_012011_31March2011.in/fdi_statistics/india_FDI_February2011. http://www. RBI’s FDI INFLOWS DATA AS PER INTERNATIONAL BEST PRACTICES (as per RBI’s monthly bulletin). 2011) 10.unctad.html. 2011) 11.com/keyword/foreign-direct-investment (accessed April. A Study of FDI and Indian Economy. New Delhi: M/s. National Council of Applied Economic Research.timesofindia. Govt. Singh. India 4. (accessed April 29.com/industries/18/foreigndirectinvestment/17578/staterbiregionwiseforei gndirectinvestment/449558/stats.pdf.” Indiatimes. of India. World Investment Report 2010. New Delhi: Ministry of Finance. http://dipp. (accessed April 22. 2011. Foreign Direct Investment.org/wir or www.pdf. Faculty of Arts.org/fdistatistics. Shalini (2011). Government of India.com/direct-foreign-india-investment. 2011) 6. Vadodara. Ltd.aspx. National Institute of Technology. State/RBI Region-wise Foreign Direct Investment (1991-2011). 2011) 7. 2.in/publicat/newsannual/2009/chapter1. Department of Humanities and Social Sciences. Naraina Industrial Area. Consolidated FDI policy. 22. Ministry of Commerce and Industry. UNCTAD. Department of Industrial Policy and Promotion. August 3. India 5. “Popular Articles About Foreign Direct Investment.

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