“ANALYTICAL STUDY ON FDI IN INDIAN

ECONOMY”

A Project Submitted to
University of Mumbai
For Partial Completion of the Degree of
Bachelor of Accounting and Finance.

By
Anushka Bhoir
T.Y.B.BAF
Roll. No: 02

Under the Guidance of

Prof. Nandkumar Haryan

Nava Samaj Mandal Degree College

Dixit Road, Ville Parle (East), Mumbai-400057.

February 2023.

1
“ANALYTICAL STUDY ON FDI IN INDIAN
ECONOMY”

A Project Submitted to
University of Mumbai
For Partial Completion of the Degree of
Bachelor of Accounting and Finance.

By
Anushka Bhoir
T.Y.B.BAF
Roll. No: 02

Under the Guidance of

Prof. Nandkumar Haryan

Nava Samaj Mandal Degree College

Dixit Road, Ville Parle (East), Mumbai-400057.

February 2023.
2
 DECLARATION
I, Anushka Bhoir, the student of TYBAF semester VI (2022-2023) hereby
declare that I have completed the project on “Analytical Study on FDI
in Indian Economy.”

The information submitted is true and original to the best of my

knowledge.

_________________
Anushka Bhoir
Roll.No.02

Nava Samaj Mandal Degree College

Dixit Road, Ville Parle (East), Mumbai-400057.

3
 CERTIFICATE
This is to certify that Ms. Anushka Uttam Bhoir Roll.No.02 of third year
BAF semester VI (2022-2023) has successfully completely the project on
“Analytical Study on FDI in Indian Economy.” Under the guidance of
Prof. Nanda Kumar.

_________________ ________________
Course Coordinator Principal
(Prof. Bina Ayer) (Dr . Pratibha Jha)

___________________
Project Guide / Internal Examiner
(Prof. Nandkumar Haryan)

_________________ _________________
External Examiner College Seal

4
 ACKNOWLEDDGEMENT
To list who all have helped me is difficult because they are so
numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels
and fresh dimension in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving
me chance to do this project.
I would like to thank my Principal, Dr. Pratibha Jha , for providing the
necessary facilities required for completion of this project .
I take this opportunity to thank our Co-Ordinator Prof. Bina Iyer, for
her moral support and guidance.
I would also like to express my sincere gratitude towards my project
guide NandKumar Haryan whose guidance and care made the project
successful.
I would like to thank my College Library, for having provided various
reference book and magazine related to my project.
Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my
Parents and Peers who supported me throughout my project.

index
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Sr no. Title Page no.

1. Introduction 7-12
2. Review and literature 13-14
3. Research gap 15
4. Fdi policy frame work in india 16-17
5. Objectives & methodology 18-24
6. Data analysis and interpretation 25-29

7. Historical analysis of fdi in India 30-48

8. attracting larger FDI INFLOWS IN INDIA 49-58

PROBLEMS & CHALLENGES
9. Impact of fdi on Indian economy 59-61
10. Impact of fdi in the retail SECTOR 62-76

11. FINDINGS 77-79

12. RECOMMENDATION 80
13. REFERENCE 81-83
14. Conclusion 84-85
15. Analysis on fdi in India & annexure 85-91

I.INTRODUCTION
Foreign Direct Investment (FDI) is a type of investment in to an
enterprise in a country by another enterprise located in another
6
country by buying a company in the target country or by expanding
operations of an existing business in that country. In the era of
globalization FDI takes vital part in the development of both developing
and developed countries. The simplest explanation of FDI would be a
direct investment by a cooperation in a commercial venture in another
country. A key to separate this action from involvement in other
ventures in a foreign country is that the business enterprises operate
completely outside the economy of the corporation’s home country.
The investing corporation must control 10 percent or more of the
voting power of the new venture.
According to history the United States was the leader in the FDI activity
dating back as far as the end of World War 2. Businesses from other
nations have taken up the flag of FDI, including many who were not in a
financial position to do so just few years ago.
Nation industrial infra, its growth and development is a backbone of its
economy. It reflects nations self-sufficiency which is herculean task and
requires judicious approach to justify factors involve. It imparts the
required dynamism to the economy which transforms the socio-
psychological environment of its historical, traditional economic and
social structure. The nation’s economy and its social growth depend
upon efforts, capital and knowledge. Among these three factors capital
has been recognized as most required and important. Its formation
involves multiple activities which are saving, finance and investment. To
form capital for economic activities there is a need of stable financial
sector and within financial sector banking sector play crucial role. Due
to liberalization, globalization, deregulation, competitive
disintermediation and economic intensification competition has grown
and every country want to become self-reliant and self-sufficient and
thus demand for financial resources grown to many folds. To cater the
economic demand, socio-political competition, economic complexities,

7
increasing populate India (GOI) adopted cataclysmic structural and
continuous reforms in Indian macroeconomic system. It started playing
a parental role by stoking the engine of economic growth through
garnering the internal and external resource in money supply and
introduced policy of tectonic economic liberalization, globalization,
digitalization and deregulation with metamorphic liberalized policy
in financial sector which in result brought drastic change and ultimate
revolution in Indian financial sector and transformed conservative
financial sector into global at par and led to the emergence for new
financial windows, non-debt financial capital FDI, new banks, new
instruments, new financial institutions and motivated foreign
investors to invest in diversified industrial and manufacturing sector.
“FDI is defined as an investment involving a long-term
“FDI is defined as an investment involving a long-term
relationship and reflecting a lasting interest and control by a
resident entity in one economy (foreign direct investor or
parent enterprise) in an enterprise resident in an economy
other than of the foreign direct investor (FDI enterprise
or affiliate enterprise or foreign affiliate)…A foreign
affiliate is an incorporated or unincorporated enterprise in
which an investor, who is a resident in another economy,
owns a stake that permits a lasting interest in the management of that
enterprise (an equity stake of 10% for an incorporated enterprise, or its
equivalent for an Foreign direct investment (FDI) is an investment made
by a firm or individual in one country into business interests located in
another country.
unincorporated enterprise).”

The concept of FDI gathered momentum in Indian context much

frequently after 1991 under the effect of new economic policy. The
year proved as a breakthrough by adopting more pragmatic and
scientific patterns and policies of economic development that almost
8
revolutionized the economic scenario of the country by opening up its
door to the world market. Our country has been holding the identity of
agriculture-based economy which contributed almost more than half of
the GDP fifty years back. With the passes of time, the contribution of
primary sector, industrial sector and service sector changed, and now
the service sector has become the largest contributor. Our economy
has abundant of natural, commercial and human resources, but there is
need of proper planning, execution, management and capital to exploit
them along excellence and skill that productivity could be maximized,
and economic prosperity could be further extended. FDI meant to all
such requirements. In 2008, when U.S. economy was exposed to the
financial crisis, the impact of the economic downturn crossed all border
due to withdrawal of caps from different economies by different nation.
Although, the experts urged that the Indian economy would not be
affected much severely, even then the FDI inflow was affected by
remarkably. Undoubtedly, Indian economy, industries, infrastructural
development, service sectors, education, health, and tourism sectors
etc. were badly affected by the financial crisis.

There are many studies conducted to examine the impact of FDI on

export and economic growth (GDP as the growth indicator) of India
However, the attention of researchers has gained momentum after
long to access the impact of foreign equity investment on economic
development. The comprehensive understanding about assessment of
the relationship between FDI and Export, and FDI and GDP and impact
of FDI have been reflected in various researches in Indian context
(Chadee and Schlichting, 1997; Sharma, 2000; Chakraborty and Basu,
2002; Chakrabory and Nunnenkamp, 2008; Prasanna,2010; Anitha,
2012; Singh et al. 2012; Barua, 2013; chandrachud and Gajalakshmi,
2013; Sultan, 2013; Saleena, 2013; Dwivedi and Badge, 2013;
Malhotra,2014; Singh and Tandon, 2015; Sengupta and puri, 2020). This
study helps to develop and adopt the model for association assessment
9
and impact analysis. Two equations have been therefore developed
along the rationale provided by the studies conducted earlier and have
been adopted to reach the inferences.

The study is causal in nature aims at exploring the impact of foreign

capital equity investment completely based on secondary data
collected from Economic Survey of India, 2019-20 as well as national
and global database i.e., World bank data bank, UNCTAD data portal
and India’s stats. Literatures to draw the best suited model on requisite
result and nature of data have been consulted from the studies which
have been carried in Indian context only. For the purpose of this study,
data on all the set of variables i.e., FDI data, export data and GDP data
have been taken into account for the last 20 years period ranging from
FY 2000-01 to FY 2019-20. To meet the stated objectives of examining
the trend overview, simple statistical calculations have been made and
depicted through tables, graphical representations, and pie charts. To
measure the impact of FDI on Economic growth indicator i.e., Gross
Domestic Product (GDP) and on export performance, simple linear
regression model has been used.

Data: The data on FDI shows that till 2008-09, equity capital and total
FDI kept on increasing gradually, but after the year which had
repercussions of U.S. financial crisis across the global investment and
economy there was abrupt fall in the annual investments, however
cannot be concluded the fall in the trend was only due to financial
crunch as during the period from 2010 to 2020, the fall was also
experienced during 2012-13, and in the period later to that have been
found increasing up to 2010-20. Foreign Institutional Investment (FDI)
have been found continuously fluctuating. The export has also been
found decreased during 2008- 09 and 2012-13. Of course, the earlier
one was as result of financial slump and the later one was due to
demand driven slowdown in the economy. Table 1 presents the values
10
and trends in growth total FDI comprises of equity capital inflow,
reinvested earnings inflow into unincorporated bodies and other
capitals. An additional column reflecting foreign institutional
investment has also been presented

Market size
According to Department of Industrial Policy and Promotion (DIPP), the
total FDI investments in India April- June 2018 stood at US$ 12.75
billion, indicating that government's effort to improve ease of doing
business and relaxation in FDI norms is yielding results. Data for April-
June 2018 indicates that the services sector attracted the highest FDI
equity inflow of US$ 2.43 billion, followed by trading – US$ 1.63 billion,
telecommunications – US$ 1.59 billion and computer software and
hardware – US$ 1.41 billion. Most recently, the total FDI equity inflows
for the month of June 2018 touched US$ 2.89 billion. During April-June
2018, India received the maximum FDI equity inflows from Singapore
11
(US$ 6.52 billion), followed by Mauritius (US$ 1.49 billion), Japan (US$

0.87 billion), Netherlands (US$ 0.84 billion), and United Kingdom (US$
0.65 billion).

Foreign Direct Investment (FDI) is one of the most remarkable

developments in the past two decades. Foreign Direct Investment (FDI)
in a broader sense is any long term investment by an entity who resides
outside the host country. Foreign entity invests money in the host
country for a long period of time. They make an initial investment in the
beginning and consequently keep investing according to the needs and
requirements of the host country which could be in the form of
admittance to better (and cheaper) resources, right of entry to a
consumer market or contact to talent specific to the host country -
which results in the enrichment of efficiency. This long-term
relationship payback both the investor as well as the host country. FDI
investments are considered to be more beneficial for the host country
since it directly involves infrastructure development, increase
employment opportunities, improved logistic and supply chain system
and a lot more to add. It also brings in technology transfer, enhanced
governance and management practices. It is an accepted fact that
Foreign Direct Investment in any developing/under developed country
can play a vital role in its economy; the reason being that there is a gap
in the available resources or fund and required resources and fund. It is
perceived that FDI fill this gap by pumping required fund and resources
and transfer of knowledge and technology as well. This knowledge
sharing and technology transfer enhances professional skills,
strengthens infrastructure, ensure availability of international brands at
doorstep, improve living standards and create employment. FDI is also
considered as a progressive tool in attaining self-sufficiency of the
country as a whole and certain sectors in particular.

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 II.REVIEW OF LITERATURE
Bajpai and Sachs’s (2009) attempted
to identify the issues
and problems associated with
India‟s current FDI regime
13
Bajpai and Sach’s (2009) attempted to identify the issues and
problems related to India’s current FDI regime and more importantly
the other associated factor’s location. They found that despite India
offering a large domestic market, rule of law, low labor costs, and a well
working democracy, her performance in attracting FDI flows has been
far from satisfactory level.

Singh J. (2010) analyzed Economic Reforms and Foreign Direct

Investment in Indian Policy, Trends and Patterns in the context
increasing competition among nations and sub nationality to attract
Foreign Direct Investment (FDI) and suggest that the FDI inflows, in
general, show an increasing trend during the post-reform period.
Taufeeque (2011) studied the impact of FDI on Indian economy and a
comparison with China & USA. The paper has also been ventured into
carving out set of strategies to deal with the issues & problems in
attracting FDI for promotion & growth of international trade. The
double log model has been used to find elasticity between different

factors in their paper. They also highlight the impact of FDI on

employment. They discussed that FDI helps in boosting growth of GDP a
country.
Agarwal G., and Khan M. A. (2011) analyzed the Impact of FDI on
GDP through Comparative Study of China and India and they found that
1% increase in FDI would result in 0.07% increase in GDP of China and
0.02% increase in GDP of India. They found that China growth is more
affected by FDI, than India’s growth.
affected by FDI, than India‟s growth.

14
Anitha, R. (2012) found that FDI inflow into the country
during the Post Liberalization period. Further, the trends of
FDI inflow into the country was projected for a period of
five years from 2010-11 to 2014-15 using Autoregressive
Integrated Moving Average (ARIMA) forecasting
technique.

Nayak, Ranjan Kumar (2013) has examined the growth

patterns and changing nature of Indian inward Foreign
Direct Investment, with an emphasis on the post
liberalization period, since FDI, along with trade, has been
an important mechanism which was brought about a greater
integration of Indian economy with world economy.

Singh, Gurmeet and Paul, Justin (2014) revealed that Foreign

Direct Investment (FDI) plays an important role in the growth process of
a country. There are two types of FDI: Inward Foreign Direct Investment
(IFD1) and Outward Foreign Direct Investment (OFDI).

responsible for India‟s unattractiveness as an investment

15
 III. RESEARCH GAP
The review of literature reveals that numerous studies have
been conducted to assess relation between FDI and its
growth. Moreover, several research articles have raised the
significant issues with regard to FDI also. However, this
research paper goes a step further to examine the relation of
FDI inflows in relation to FIPB /Acquisitions Route, Equity
Capital of Unincorporated Bodies, Re-Invested Earnings and other
Capital. The present stud would go to investigate the various routes of
FD inflows in India and its relationship with total FDI. It also seeks to
discuss the directional relationship between FDI through
FIPB/Acquisitions Route and Equity Capital of Unincorporated Bodies.
Further, in the research paper an attempt has been made to find out
the difference between FDI inflows and FIIs.

IV. FDI POLICY FRAMEWORK IN INDIA

16
Policy regime is one of the key factors driving investment flows to a
country. Apart from underlying overall fundamentals, ability of a nation
to attract foreign investment essentially depends upon its policy regime
- whether it promotes or restrains the foreign investment flows. This
section undertakes a review of India’s FDI policy framework. There has
been a sea change in India’s approach to foreign investment from the
early 1990s when it began structural economic reforms about almost all
the sectors of the economy.

a) Pre-Liberalization Period: Historically, India had followed an

extremely careful and selective approach while formulating FDI policy
in view of the governance of „import-substitution strategy‟ of
industrialization. The regulatory framework was consolidated through
the enactment of Foreign Exchange Regulation Act (FERA), 1973
wherein foreign equity holding in a joint venture was allowed only up
to 40 per cent. Subsequently, various exemptions were extended to
foreign companies engaged in export-oriented businesses and high
technology and high priority areas including allowing equity holdings of
over 40 per cent. Moreover, drawing from successes of other country
experiences in Asia, Government not only established special economic
zones (SEZs) but also designed liberal policy and provided incentives for
promoting FDI in these zones with a view to promote exports. The
announcements of Industrial Policy (1980 and 1982) and Technology
Policy (1983) provided for a liberal attitude towards foreign
investments in terms of changes in policy directions. The policy was
characterized by de-licensing of some of the industrial rules and
promotion of Indian manufacturing exports as well as emphasizing on
modernization of industries through liberalized imports of capital goods
and technology. This was supported by trade liberalization measures in
the form of tariff reduction and shifting of large number of items from
import licensing to Open General Licensing (OGL).
17
b) Post-Liberalization Period: A major shift occurred when India
embarked upon economic liberalization and reforms program in 1991
aiming to raise its growth potential and integrating with the world
economy. Industrial policy reforms slowly but surely removed
restrictions on investment projects and business expansion on the one
hand and allowed increased access to foreign technology and funding
on the other. A series of measures that were directed towards
liberalizing foreign investment included:

1) Introduction of dual route of approval of FDI–RBI‟s automatic route

and Government’s approval (SIA/FIPB) route.
2) Automatic permission for technology agreements in high priority
industries and removal of restriction of FDI in low technology areas as
well as liberalization of technology imports.
3) Permission to Non-resident Indians (NRIs) and Overseas Corporate
Bodies (OCBs) to invest up to 100 per cent in high priorities sectors.
4) Hike in the foreign equity participation limits to 51 per cent for
existing companies and liberalization of the use of foreign “brands
name”.
5) Signing the Convention of Multilateral Investment Guarantee Agency
(MIGA) for protection of foreign Investments.

V. OBJECTIVES AND METHODOLOGY

18
A. RESEARCH OBJECTIVES:
 To discuss the FDI policy framework in India.
 To identify the various determinants of FDI.
 To understand the need for FDI in India.
 To Study the trends of FDI Flow in India during 2000- 01 to 2014-15
(up to June, 2015).
 To analysis the FDI flows as to identify country wise approvals of
FDI inflows to India.
 To analysis sector wise inflow of FDI in India.
 To identify the problems relating to low inflow of FDI and to make
suitable suggestions for attracting more FDI inflow to India.

B. RESEARCH METHODOLOGY:
 Type of research: - Quantitative & Analytical Research.
 Data: - Data of Manufacturing, Services & Construction, Real
estate, mining sectors etc. from year April 2000 to June 2015 is
considered for the study.
 Data Collection Method: - Secondary data from different web sites
& reports of RBI, CEDAR-USIBC report on FDI, reports of Asian
development bank.
 Sources of data collection: - The study is based on published
sources of data collected from various sources. The data was
extracted from the following sources:
Handbook of Statistics on the Indian economy, RBI.
 Economic Survey, Government of India.
 Department of Industrial Policy and Promotion (DIPP).
 Secretariat of Industrial Assistance (SIA).
 Central Statistical Organization (CSO).

This research is a descriptive study in nature. The secondary data

was collected from various journals, magazines, and websites
19
particularly from the Department of Industrial Policy & Promotion,
Ministry of Commerce and Industry, India stat etc. Simple
percentages have been used to defect the growth rate of India.
Graphs and tables have also been used where ever required to
depict statistical data of FDI during the study period. The time period
of the study has been taken from the April 2000 to June 2015.

CURRENT STATUS OF FDI IN INDIA RETAIL SECTOR:-

As of June 2015, the Government of India allowed FDI in single and

multi-brand retailing along with the following conditions:-

1) Up to 100% FDI in single brand retail trading.

 By only one non-resident entity whether owner or the brand or
otherwise.
 30% domestic sourcing requirement eased to preferable sourcing
rather than compulsory.
 Further clarification on FDI companies that cannot engage in B2C e-
commerce.
 Products to be sold should be of a “single brand”. Product should
be sold under the same brand internationally.
 “Single brand” product retailing would cover only products, which
are branded during manufacturing.

2) Up to 51% FDI in multi brand retail trading.

 At least 100 million US$ must be invested into Indian company.
 At least 50% of the total FDI is to be invested in back end
infrastructure within 3 years.
 At least 30% of the value of procurement of processed product
shall be sourced from Indian small industry.
 Fresh agriculture produce is permitted to be sold unbranded.

20
 Indian states have been given the discretion to accept of refuse the
implementation of FDI.
 Retail outlets can be set up in cities having population of at least 1
million.
 Application needs to be approved by two levels at Department of
Industrial Policy and Promotion and Foreign Investment Promotion
Board.

CURRENT STATUS OF FDI IN INDIA SERVICE SECTOR:-

FDI plays a major role in the dynamic growth of the service sector.
The service sector in India has tremendous growth potential and as a
result it attracts huge FDI.

 The Computer Software and Hardware enjoy the permission of

100% FDI under automatic route.
 The limit of FDI in Telecom sector was increased from 49% to 74%.
FDI up to 49% is permissible under automatic route but FDI in the
licensee company/Indian promoters including their holding
companies shall require approval of FIPB.

India, the largest democratic country with the second largest

population in the world, with rule of law and a highly educated
English speaking work force, the country is considered as a safe
haven for foreign investors.
Yet, India seems to be suffering from a host of self-imposed
restrictions and problems regarding opening its markets completely
too global investors by implementing full scale economic reforms.
Some of the major impediments for India’s poor performance in the
area of FDI are: political instability, poor infrastructure, confusing tax
and tariff policies, Draconian labour laws, well entrenched
corruption and governmental regulations.
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1. Lack of adequate infrastructure:

It is cited as a major hurdle for FDI inflows into India. This bottleneck
in the form of poor infrastructure discourages foreign investors in
investing in India. India’s age old and biggest infrastructure problem
is the supply of electricity. Power cuts are considered as a common
problem and many industries are forced to close their business.

2. Stringent labor laws:

Large firms in India are not allowed to retrench or layoff any workers,
or close down the unit without the permission of the state
government. These laws protect the workers and thwart legitimate
attempts to restructure business. To retrench unnecessary workers,
firms require approval from both employees and state governments-
approval that is rarely given. Further, Trade Unions extort huge sums
from companies through over-generous voluntary retirement
schemes.

3. Corruption:

Corruption is found in nearly every public service, from defense to

distribution of subsidized food to the poor people, to the generation
and transmission of electric power. The combination of legal hurdles,
lack of institutional reforms, bureaucratic decision-making and the
allegations of corruption at the top have turned foreign investors
away from India.

4. Lack of decision making authority with the state governments:

22
The reform process of liberalizing the economy is concentrated
mainly in the Centre and the State Governments are not given much
power. In most key infrastructure areas, the central government
remains in control. Brazil, China, and Russia are examples where
regional governments take the lead in pushing reforms and
prompting further actions by the central government.

5. Limited scale of export processing zones:

India’s export processing zones have lacked dynamism because of

several reasons, such as their relatively limited scale; the
Government’s general ambivalence about attracting FDI; the unclear
and changing incentive packages attached to the zones; and the
power of the central government in the regulation of the zones. India
which established its first Export Processing Zone (EPZ) in 1965 has
failed to develop the zones when compared to China which took
initiative for establishment only in 1980.

6. High corporate tax rates:

Corporate tax rates in East Asia are generally in the range of 15 to 30

percent, compared with a rate of 48 percent for foreign companies in
India. High corporate tax rate is definitely a major disincentive to
foreign corporate investment in India.

7. Indecisive government and political instability:

There were too many anomalies on the government side during past
two decades and they are still affecting the direct inflow of FDI in
India such as mismanagement and oppression by the different
company.

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DETERMINANTS OF FDI:-

The determinant varies from one country to another due their unique
characteristics and opportunities for the potential investors. In
specific the determinants of FDI in India are:

1) Stable Policies:

India stable economic and socio policies have attracted investors

across border. Investors prefer countries which stable economic
policies. If the government makes changes in policies which will have
effect on the business. The business requires a lot of funds to be
deployed and any change in policy against the investor will have a
negative effect.

2) Economic factors:

Different economic factors encourage inward FDI. These include

interest loans, tax breaks, grants, subsidies and the removal of
restrictions and limitation. The government of India has given many
tax exemption and subsidies to the foreign investors who would help
in developing the economy.

3) Cheap and labour:

There is abundant labour available in India in terms of skilled and

unskilled human resources. Foreign investors will to take advantage
of the difference in the cost of labour as we have cheap and skilled
labours. Example: Foreign firms have invested in BPO’s in India which
require skilled labour and we have been providing the same.

24
4) Basic infrastructure:

India though is a developing country, it has developed special

economic zone where there have focused to build required
infrastructure such as roads, effective transportation and registered
carrier departure worldwide, Information and communication
network/technology, powers, financial institutions, and legal system
and other basic amenities which are must for the success of the
business.
A sound legal system and modern infrastructure supporting an
efficient distribution of goods and services in the host country.

5) Unexplored markets:

In India there is large scope for the investors because there is a large
section of markets have not explored or unutilized. In India there is
enormous potential customer market with large middle class income
group who would be target group for new markets.
Example: BPO was one sector where the investors had large scope
exploring the markets where the service was provided with just a call,
with almost customer satisfaction.

6) Availability of natural resources:

As we that India has large volume of natural resources such as coal,

iron ore, Natural gas etc. If natural resources are available they can
be used in production process or for extraction of mines by the
foreign investors.
VI. NEED FOR FDI IN INDIA

25
As India is a developing country, capital has been one of the scare
resources that are usually required for economic development.
Capital is limited and there are many issues such as Health, poverty,
employment, education, research and development, technology
obsolesce, global competition.

The flow of FDI in India from across the world will help in acquiring
the funds at cheaper cost, better technology, employment
generation, and upgraded technology transfer, scope for more trade,
linkages and spillovers to domestic firms. The following arguments
are advanced in favour of foreign capital.

1) Sustaining a high level of investment:

As all the under-developed and the developing countries want to

industrialize and develop themselves, therefore it becomes necessary
to raise the level to investment substantially. Due to poverty and low
GDP the saving are low. Therefore there is a need to fill the gap
between income and savings through foreign direct investments.

2) Technological gap:

In Indian scenario we need technical assistance from foreign source

for provision if expert services, training of Indian personnel and
educational, research and training institutions in the industry. It only
comes through private foreign investment or foreign collaborations.

3) Exploitation of natural resources:

26
In India we have abundant natural resources such as coal, iron and
steel but to extract the resources we require foreign collaboration.

4) Development of basic economic infrastructure:

In the recent years foreign financial institutions and government of

advanced countries have made substantial capital available to the
under developed countries. FDI will help in developing the
infrastructure by establishing firm’s different parts of the country.
There are special economic zones which have been developed by
government for improvising the industrial growth.

5) Understanding the initial risk:

In developing countries as capital is a scare resource, the risk of

investments in new ventures or projects for industrialization is high.
Therefore foreign capital helps in these investments which require
high risk.

6) Improvement in the balance of payments position:

The inflow FDI will help in improving the balance of payment. Firms
which feel that the goods produced in India will have a low cost, will
produce the goods and export the same to other country. This helps
in increasing the exports.

7) Foreign firm’s helps in increasing the competition:

27
Foreign firms have always come up with better technology, process,
and innovations comparing with the domestic firms.

VII. DATA ANALYSIS AND INTERPRETATION

Fact sheet on foreign direct investment (FDI)

Table No. 1
28
 Total FDI Inflows
(From April, 2000 to June, 2015):-

CUMULATIVE AMOUNT OF US$

1 FDI INFLOWS 380,215
(Equity inflows + ‘Re-invested MILLONS
earnings’ + ‘Other capital’)
CUMULATIVE AMOUNT OF Rs. US$
2 FDI EQUITY INFLOWS 1,293,30 258,020
(Excluding, amount remitted 3 MILLONS
through RBI’s NRI Schemes) Crore

Source: FDI Statistics, Department of Industrial Policy& Promotion,

Ministry of Commerce & Industry, Government of India, 2015.

Table 1 shows the amount of FDI inflows from April, 2000 to June,
2015. It shows the cumulative amount of FDI Inflows both in terms
of Crore and in US $ million.

Point 1 shows the sum of equity inflows, reinvested earnings and

other capital. Cumulative amount of inflows are 380,215 in US $
million. Other than this, cumulative FDI equity inflows which
excludes amount remitted through RBI’s-NRI schemes are 1,293,303
in Crore and 258,020 in US $ million.

Table No. 2
FDI Inflows during Financial Year
2015-16 (June, 2015):-

29
 TOTAL FDI INFLOWS INTO INDIA US$
1 (Equity inflows + ‘Re-invested 2,929
earnings’ + ‘Other capital’) MILLONS
(As per RBI’s Monthly bulletin dated:
10.08.2015).

Rs. US$
2 13,115 2,054
FDI EQUITY INFLOWS
Crore MILLONS

Source: FDI Statistics, Department of Industrial Policy& Promotion,

Ministry of Commerce & Industry, Government of India, 2015.

Table 2 shows the amount of FDI inflows during the Financial Year,
2015(June). It shows the total amount of FDI Inflows both in terms of
Crore and in US $ million.

Point 1 shows the sum of equity inflows, reinvested earnings and

other capital. Total amount of inflows are 2,929 in US $ million.
Point 2 shows the FDI equity inflows amounted 13,115 in Crore and
2,054 in US $ million.
VIII. HISTORICAL ANALYSIS OF FDI IN
INDIA
FDI is not a new phenomena, its existence is deep rooted and can be
traced out from ancient time period. Historically early traders move
from country to country, they purchase products from one place and
30
sell it to other. They give money to the manufacturer of the product to
produce more in quantity and with their desired quality. The recent and
most recognized historical evidence of FDI in India can be revealed from
the establishment of East India Company of Britain. During the
Britain colonial era in India British investment started increasing. Later
Japanese companies started entering in Indian market after Second
World War and established sound business relation with India but
comparatively their investment was lower than British Investment and
UK was found to be the dominant in India. After the independence
government of India was found reluctant toward foreign capital and
consider it with fear and suspicion. It was due to British occupation and
their exploitative role which they played. Later considering national
interest as a paramount the policy makers designed the FDI policies
distinctly and permitted FDI with strict rules and regulations. The
early policies of a nation permitted FDI as a medium for acquiring
advance technologies and to mobilize foreign exchange reserves. With
times and according to economic and political environment GOI kept on
introducing changes in the FDI norms and policies. The industrial policy
of 1965 adopted liberal attitude and allowed frequent equity to MNCs
and permitted them to venture through technical collaboration in India.

Figure: 1- Foreign Direct Investment (FDI) Inflows to India: Country

Wise

Foreign Direct Inflow Country wise

Source / Industry 2011-12 2012-13 2013-14 2014-15 2015-16

31
 Singapore 3,306 1,605 4,415 5,137 12,479

Mauritius 8,142 8,059 3,695 5,878 7,452

United States of 994 478 617 1,981 4,124

America

Netherlands 1,289 1700 1,157 2,154 2330

Japan 2.089 1,340 1,795 2,019 1,818

UAE 346 173 239 327 961

Germany 368 467 650 942 927

United Kingdom 2,760 1,022 111 1,891 842

Luxemburg 89 34 539 204 784

Cyprus 1,568 415 546 737 488

China 73 148 121 505 461

France 589 547 229 347 392

Hong Kong 262 66 85 325 344

South Korea 226 224 189 138 241

Switzerland 211 268 356 292 195

Spain 251 348 181 401 141

Malaysia 18 238 113 219 73

Others 890 1,156 1,015 1,251 2,016

Total FDI Total FDI 18,286 16,054 24,748 34,068

23,473 23,473
32
 18,286 18,286
16,054 16,054
24,748 24,748
36,068 36,068
Total FDI 23,473
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
33
 24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI
23,473
18,286
16,054
24,748
36,068
Total FDI

Source: Revealed by the researchers from Reserve Bank of India Annual

report 2015-16.

In order to stabilize the economy Government of India introduced the

macroeconomic stabilization and structural adjustment program with
the support of World Bank and IMF. Later GOI constituted “Foreign
Investment Promotion Board” (FIPB) whose core function was to
restore confidence of foreign investors and facilitate the foreign
investment staring with baseline of less than USD 1 Billion in 1990.
Prior to the liberalization external aid and debt were the two major
34
component of Capital Account of India’s Balance of Payment (BOP).
India’s Reliance on external aids comparatively started reducing with
economic reforms program. Due to adopted economic reforms India
started emphasizing on creating long term non debt capital such as FDI
and strategically started discouraging short term and volatile inflows
into the nation’s economy. To bring more transparency, balance and
stability “Government of India” on the recommendation of Dr C.
Rangarajan and Dr S. S Tarapore committee eased the restrictions on
the capital outflows in a non-disruptive manner. These bold economic
reforms liberalized the Indian capital account to a great extent and
signalled global investors for more positive reforms are in
consideration. In due course of action Government of India in its
Cabinet Note in October, 2014, proposed numerous amendments to
the Consolidated FDI policy, 2014 (FDI Policy), aimed at increasing
inflows and opportunities for growth and employment. With the
release of DIPPs Press Note No. 10 on December 3, 2014, the final
amendments to the FDI policy came into effect.

Figure: II
Total FDI of Study Period

35
 Source: Prepared by the researchers

In the year 1991, economic reforms were introduced and FDI was
issued under Foreign Exchange Management Act (FEMA). It has been
found that FDI increases swiftly from 2006-07 onwards as India allowed
100 percent FDI through automatic route. RBI issued notification No.
FEMA20/2000- RB dated 3rd May 2000 on the directive of Finance
Minister Mr Manmohan Singh. In the year 2013 June 18th due to
continuous devaluation of Indian rupee central government relaxed the
norms and permitted FDI in 12 areas of operation including
telecommunication sector, defence, public sector oil refineries, stock
exchange, power and electric sector. In telecommunication FDI raised
from 74 percent to 100 percent. In insurance sector it was raised from
26 percent to 49 percent, in infrastructure FDI limit raised to100
percent and in most protected area which is defence sector it has been
raised to 49 percent. The sector which attracted higher inflows was
service sector, telecommunication sector, infrastructure sector and IT
sector. Since 2000 India has received total foreign investment of 306.88
billion US dollars. In the period of 1999 to 2004, India received foreign
investment to the tune of 19.52 billion US dollars. In the period of 2004
-09, collective foreign investment in the country touched 114.55 billion
US dollars, further it raised to 172.82 billion dollar between 2009 to
September 2013. But during the period India also witness decline in
FDI, according to Department of Industrial policy and Promotion (DIPP),
Government of India (GOI) The declining amount are (2.94) billion US
Dollars in 2009-10, (1.23) billion US dollars in 2010-11, (0.73) billion US
dollars in 2011-12, (0.13) billion US dollars, (0.12) billion dollars in 2013-
14. Leading nations who invested in Indian economy are Mauritius,
Singapore, US and UK and biggest beneficiaries sectors are tourism,
pharmaceuticals, services, chemicals and construction. In the year 2013
in -between January to November, India witness mergers and
acquisitions deals worth of 26.76 billion.
36
 In May 2011, government of India considering the importance of share
purchase payment, allowed authorised dealers to open non-interest
bearing escrow accounts in Indian rupee and it also analyzed the
significance of foreign exchange and permitted authorised dealers to
keep securities in possession to facilitate FDI transactions without prior
approval from Reserve Bank. The core aim of this measure was to
provide operational flexibility and easing the procedures for such
transactions. In addition to this, authorised dealers (ADs) banks were
allowed to pledge shares acquired under the FDI route for loans and
advances for genuine purpose in India as well as overseas. In November
2011, Government of India (GOI) permitted Indian companies to
transact without prior approval of the RBI if they meet the relevant
pricing guidelines of SEBI and the transfer of shares under FDI schemes
in financial sector. Global investment through issues of shares or
transfer of “participating interest / right” in oil fields by Indian
companies to a non-resident will be treated as FDI.

Figure: III
STATEMENT ON SECTOR-WISE FDI EQUITY INFLOWS
FROM APRIL, 2000 TO JANUARY, 2015.

Sr Sector Amount of FDI Inflow Total

No. Inflow
%
(In Rs. (In US$
Crore) millions)
1. Service Sector 201,728.28 42,101.98 17.32
2. Construction Development: 112,916.36 24,028.19 9.88
Townships, Housing, Built-Up
Infrastructure & Construction-
Development Projects
37
 3. Telecommunications 83,697.07 16,994.68 6.99
4. Computer Software & Hardware 67,693.78 14,125.19 5.81
5. Drugs & Pharmaceuticals 63,629.47 12,856.02 5.29
6. Automobile Industry 60,725.08 11,857.11 4.88
7. Chemicals (Other Than Fertilizers) 48,641.77 10,229.69 4.21
8. Power 46,358.87 9,512.02 3.91
9. Metallurgical Industries 40,737.61 8,480.90 3.49
10 Hotel & Tourism 40,198.41 7,774.03 3.20
11. Trading 41,315.28 7,660.73 3.15
12. Petroleum & Natural Gas 31,650.29 6,519.53 2.68
13. Food Processing Industries 36,360.11 6,215.46 2.56
14. Miscellaneous Mechanical & 20,572.50 3,948.17 1.62
Engineering Industries
15. Information & Broadcasting 19,156.59 3,890.94 1.60
(Including Print Media)
16. Electrical Equipments 18,298.41 3,786.22 1.56
17. Non-Conventional Energy 18,524.21 3,521.78 1.45
18. Industrial Machinery 18,420.29 3,515.67 1.45
19. Cement And Gypsum Products 14,625.29 3,085.60 1.27
20. Construction (Infrastructure) 14,807.38 2,923.64 1.20
Activities
21. Hospital & Diagnostic Centers 14,565.34 2,793.72 1.15
22. Consultancy Services 13,908.16 2,786.52 1.15
23. Fermentation Industries 11,347.67 2,137.36 0.88
24. Agriculture Services 8,625.15 1,744.02 0.72
25. Rubber Goods 9,445.03 1,722.64 0.71
26. Mining 8,460.61 1,668.50 0.69
27. Ports 6,730.91 1,637.30 0.67
28. Textiles (Including Dyed, Printed) 7,710.42 1,555.69 0.64
29. Electronics 6,752.74 1,417.42 0.58
30. Sea Transport 6,546.83 1,368.93 0.56

38
31. Prime Mover (Other Than Electrical 6,299.78 1,200.92 0.49
Generators)
32. Education 5,649.81 1,071.50 0.44
33. Paper And Pulp (Including Paper 4,327.04 910.25 0.37
Products)
34. Medical And Surgical Appliances 4,608.04 887.09 0.36
35. Soaps, Cosmetics & Toilet 4,430.06 848.74 0.35
Preparations
36. Machine Tools 3,511.68 711.51 0.29
37. Ceramics 3,321.89 699.57 0.29
38. Railway Related Components 3,425.97 634.20 0.26
39. Diamond, Gold Ornaments 2,904.78 569.14 0.23
40. Air Transport (Including Air Freight) 2,720.46 562.65 0.23
41. Fertilizers 2,915.62 543.14 0.22
42. Vegetable Oils & Vanaspati 2,861.12 541.65 0.22
43. Glass 2,362.19 459.16 0.19
44. Printing Of Books (Including Litho 2,326.52 446.09 0.18
Printing Industry)
45. Agricultural Machinery 2,127.62 413.93 0.17
46. Commercial, Office & Household 1,516.81 309.34 0.13
Equipments
47. Retail Trading (Single Brand) 1,549.92 275.38 0.11
48. Earth-Moving Machinery 1,138.86 234.81 0.10
49. Scientific Instruments 960.98 171.98 0.07
50. Leather, Leather Goods & Pickers 709.83 137.92 0.06
51. Tea And Coffee (Processing & 497.78 108.41 0.04
Warehousing Coffee & Rubber)
52. Timber Products 537.09 101.93 0.04
53. Sugar 405.65 78.07 0.03
54. Dye-Stuffs 417.28 74.38 0.03
55. Photographic Raw Film & Paper 273.76 67.29 0.03

39
56. Industrial Instruments 310.86 67.11 0.03
57. Boilers And Steam Generating Plants 314.80 63.33 0.03
58. Glue And Gelatin 211.68 37.86 0.02
59. Coal Production 119.19 27.73 0.01
60. Mathematical, Surveying & Drawing 39.80 7.98 0.00
Instruments
61. Defense Industries 24.84 5.02 0.00
62. Coir 22.05 4.07 0.00
63. Miscellaneous Industries 42,392.57 8,975.05 3.69
Sub Total 1,199,386.19 243,106.84 100
64. RBI’s- NRI Schemes (2000-2002) 533.06 121.33 -
Grand Total 1,199,919.25 243,228.17

Source: (i) RBI’s Bulletin July, 2015 dt.10.08.2015.

GRAPHICAL REPRESENTATION OF THE ABOVE TABLES :-

40
The largest inflows of FDI’s over the period of April 2000 to June 2015
have been received from Mauritius, its share in these inflows have
being as high as 35%. Singapore is second with a share of 14%. The
other major sources of foreign direct investment are from UK, Japan,
Netherlands, U.S.A., Cyprus, Germany, France, Switzerland and their
respective share of inflow of FDI are 9%, 7%, 6%, 6%, 3%, 3%, 2%, and
1`% respectively. The inflows from U.S.A are routed through Mauritius
due to tax advantage. The tax advantage emanates from the double tax
avoidance agreement that India has with that country USA. This
agreement means that any foreign investor has the option of paying tax
either in India or in Mauritius.

41
II. Graph 2:

In the year 2011-12, government of India realizes to improve FDI inflow

in insurance, retail, aviation and in urban infrastructure sector. In this
context GOI further liberalized the FDI norms in retail sector and
proposed 51 percent of FDI in multi brand retail but due to lack of
consensus among various stakeholders mainly for predatory pricing or
42
under cost pricing by the large retail chains in order to expand their
business base. It was considered that such pricing behavior will
eliminate the existing small retailers and largescale retailer will
monopolize the market in absence of small retailer. These
apprehensions in FDI are contrast to international experience, due to
this it did not worked and has been kept in abeyance. FDI is retail
generally lead to increase competition and result in lowering the prices
of commodities which improves consumer welfare. It relatively helps in
improving supply chain management through greater investment in
supporting infrastructure, including cold storage for farm and poultry
products. In China, Retailing and wholesaling has emerged as major
sector of FDI. It has also benefitted many East Asian countries. In
January 2012 government raised the FDI limit in single brand retailing
under government approval route from 51 percent to 100 percent and
in addition capitalization of import payables and pre incorporation
expenses under the FDI schemes with prior approval from the FPIB. It is
also been found that due to many other emerging market outward FDI
has increased significantly. In the year 2011-12, the stock of outward
FDI from India touched 112 billion US dollars. These FDI outflow
generate benefits by enhancing competitiveness and market access.
Considering the impact of FDI outflow there is needed to balance the
domestic investment interests in the overall FDI policy. Moreover,
exponential rise in issuance of guarantees by the Indian corporate in
order to fund their joint ventures or to their wholly owned subsidiaries
abroad could become matter of concern for banks in long term.
Government of India in order to bring efficiency and transparency
toward rationalization of returns and liberalization of procedures
discontinued the physical filing of three FDI related returns, Advance
Remittance Form (ARF), from Foreign Currency Gross Provisional
Return (FCGPR) and from foreign currency transfer of share (FC-TRS)
and introduced online filling of forms on Governments- E- Biz portal.
According to the new facilitating guidelines and relaxed norms,
43
reporting by Authorized Dealers (AD) banks to RBI under Diamond
Dollar Account Scheme has been dispensed with. Filing of returns
revealing details of trade related loans and advances by exporters to
their overseas importers from the EEFC account has also been
dispensed with. In addition to this Government of India (GOI) took
initiative and submission of documents by FullFledged Money
Changers (FFMC) / AD Category – II became more transparent and
relaxed. Government also relaxed norms and procedures in opening
of additional branches while single / bulks filing of the SOFTEX form
of certification also were facilitated to all software exporters. During
the financial year FDI limit for insurance was increased from previous
limit of 26 percent to 49 percent under the automatic route.
Government also permitted FDI up to 100 percent in CICs through
automatic route to those entities that had a track record of running a
credit information bureau in well regulated environment.
Government prohibited FDI only in tobacco and of its substitutes;
cigars manufacturing, cigarillos, cheroots and cigarettes but other
activities in relation to these products like wholesale cash and carry
and retail trading were allowed. With liberalized and pro investor
policy and its implementation, India in the year 2015-16 became a
most preferred destination for foreign direct investment (FDI) and
received the highest annual net inflow during the year. Considering
the optimism and importance of capital inflows due to ongoing
liberalization of FDI policy, the repayment of FCNR (B) deposits
under the special swap scheme was managed carefully. In this
context, the level of reserves and covering through forward assets
provided ample resources. During the period these challenging
growth and developments, astute management including a
progressively liberal, futuristic and transparent FDI policy ensured a
steady improvement in external sector sustainability and also built
reserves of 17.9 billion US dollars on a BOP in the financial year.
Government of India in order to attract more FDI living no stone
44
unturned and putting all kind of measures to generate inflow. It
raises the ceiling of investment in important sector like broadcasting
and defense. It rationalized and simplified required procedure and
launched Make in India initiative. The impact of these initiatives was
found positive and net inflows of FDI surged to 36 billion US dollars
in the year 2015-16 which was 15 percent higher than the previous
year’s annual inflow. Comparatively gross FDI flows to India also
registered high growth and touched 55.6 billion US dollars during the
year. During the financial year Mergers and Acquisitions also played
instrumental role in defying FDI inflows. It is been found that during
the financial year 2015-16 green field investment largely dominated
FDI flows in India, it has grown three time more than 2014 and
replaced China as the top destination for green field FDI. Inflows in
the form of deposits by the non-resident Indians found strong and
touched 16 billion US dollars during the financial During the year due
to other emerging financial and competitive market net portfolio
flows in India turned negative with estimated net outflow of 3.5
billion US dollars from the equity market and 0.5 billion US dollars
from debt market. These outflows took place due to slow down in
major emerging market and growing geo-political tensions. The
diverging monetary policy stances in advance economies and rising
interest rate in the US also impacted the financial market and
became matter of concern. The selloff across EMEs and other debt
creating flows such as ECBs and trade credits were also found
negative under the weight of repayment which exceeds fresh
disbursements.

Impact of policy Initiatives in FDI

By analyzing the data of Reserve Bank of India we found that FDI

inflow in India is on increasing trend year to year with few decline. In
the year 2011-12 the total FDI in India was (23,473) crore but it
45
decline in the corresponding year 2012-13, and was (18,286) crore,
further in the year 2013-14 due to political changes in India and
global fall in economy, FDI inflow further declined and was (16,054)
crore, but in the year 2014-15, GOI took corrective measures and in
2015-16 introduced amendments in existing policies to attract FDI.
Due to GOI efforts and policies initiatives FDI inflows increases
astonishingly and was (24,748) crore, in the year 2015-16 it
maintained the increasing trend and was (36,068) crore. Increase in
FDI inflows impacted the economic growth, output and productivity
to a large extent. Performance of all the sector in which FDI inflow
increases are found high and growing according to the matching
pace of inflow. Improved performance of respective sector impacted
growth in nation’s export. Growing performance of respective
sectors impacted employment opportunities, and ultimately
transformed unemployment into employment which impacted
increase in output, productivity and domestic purchasing power.
Employment generated income and resulted in saving, this saving
impacted banking sector and financial market. Banks with more
available funds extend their resources to growing financial demand
in diversified sectors, which impacted growth in economic activities
and resulted into nation’s economic growth.

SECTORAL COMPOSITION OF FDI:-

The Sectoral composition of FDI over the period of April 2000 to June
2015, we can find that the largest recipient of such investment is
46
service sector (Financial and non-financial services). The share of this
sector in cumulative FDI flows is 27 % of the inflow total foreign
direct investment. The foreign investors are interested in mainly
financial services due its profit generating advantage. This sector
gives scope for the foreign investor to takes back the profits to the
home country. As service sector the services are consumed in the
host country and there by generating outflow of funds from the host
country. The second recipient is Construction Development sector
which shares 14% of total FDI. Telecommunication, Computer
software and hardware, Drugs and pharmaceuticals, Automobile
industry, Chemical (Other than Fertilizers),Power, Metallurgical
industries, Hotel and tourism contribute
11%,11%,8%,8%,7%,6%,6%2% respectively. The keys takeaways
regarding global flows are – the increase in the relative share of
developing countries as both destination and sources and flow to the
sector gaining over manufacturing. There are Sectoral limits or caps
designed by the RBI to limit the foreign direct investments. 100%
investment has been allowed to the following sectors- private sector
banking, NBFC’S, petroleum, housing and Real estate, Hotel and
tourism, road and highways, ports and harbors, advertising, films,
mass raped transportation, power, drug and pharmaceuticals,
pollutions control and management and special economic zones.
Other sectors such as airports are allowed with 74% caps and
telecommunication with 49% and insurance with 26%.

III. Graph 3

47
PERCENTAGE GROWTH ANALYSIS (YEAR WISE):

The above graph shows the total amount of FDI inflows in India
during the last 15 years i.e. 2000 to 2015. The FDI inflow from 2000-
2001 i.e. 10,733crore Rs. in 2001-02 it was 18,654 Crore rupees. It
shows the Good result in the FDI inflows in India. Little bit ups and
downs in FDI inflows up to 2005-06, but after that great hike in the
year 2007-08 i.e. 98,642crore rupees as compare to earlier years. In
2008-2009 there was a huge investment in FDI in 142,829 Crore
Rupees. But then there was a downfall in Inflow of FDI in two
consecutive years 2009-2010 and 2010-2011, with figures 123,120
and 97,320 respectively. We can analysis from the graph that in the
year 2011-2012 the inflow of FDI was second highest of last 15 years
i.e. 165,146.Year 2012-13 and 2013-14 the FDI inflow fluctuated
from 121,907 to 147,618 respectively. In last Financial Year i.e. 2014-

48
2015 the amount of FDI Inflow were 189,107 which is the highest FDI
inflow in last 15 years. Recently in the month of June 2015 there was
inflow of 60,298 Crore Rs.

So we can say that the foreign investment have been fluctuating but
rising as well in India.

IV. Graph 4

The above bar graph represents the amount of FDI inflows from April
2015 to June, 2015. It shows the amount in Crore Rs. The highest FDI
inflows in the country is in the month May 2015 i.e. 24,564 in Rs
Crores and 3,850 in US $. Other months shows the fluctuating trend.

49
 V. Graph 5

The above Figure shows the top five regions in India attracting FDI. It
shows that out of 51,437 of Cumulative FDI inflow in the financial
year April, 2015 to June, 2015, 43% share of the total investment is
carried by Mumbai region; also it continues to attract maximum
foreign investments followed by 30% - New Delhi, 10% - Chennai,
10% - Bangalore and 7% - Ahmedabad.

IX. ATTRACTING LARGER FDI INFLOWS IN

INDIA PROBLEMS & CHALLENGES
Both India and China are competing to get a larger share in world trade
and investment. Although China continues to be India’s major

50
competitor, many new economies like Indonesia, Vietnam and
Philippines have emerged as strong competitors.

No doubt Indian government has implemented several reform

measures in order to attract greater FDI but there are several studies
which have highlighted India’s weak spots. One such report is “Doing
Business 2014”, an annual report co-published by the World Bank and
International Finance Corporation that brings out the differences in
business regulations and their implementation across economies.

Table:

Doing Business in India Rank

Ease of doing business 134
Starting a business 179
Dealing with construction permits 182
Getting electricity 111
Registering property 92
Getting credit 28
Protecting investors 34
Paying taxes 158
Trading across borders 132
Enforcing contracts 186
Resolving insolvency 121

Analysis of Inflows of Foreign Direct Investment in India:

The table above indicates that India is performing well only on two
indicators, namely, getting credit and protecting investors. India’s
performance on three indicators, namely, starting a business, dealing

51
with construction permits and enforcing contracts shows a dismal
picture of the investment climate in India.
Another report “Global Competitiveness Report” published annually by
“World Economic Forum” ranks 148 economies on their
competitiveness with respect to indicators like infrastructure,
institutions, macro-economic stability, innovation etc. India’s overall
rank for 2013-14 on the Global Competitiveness Index was 60.
The most problematic factors for doing business identified in the report
are inadequate supply of infrastructure, corruption, inefficient
government bureaucracy, policy instability, tax regulation and
restrictive labor regulations.

MAJOR IMPEDIMENTS:
The major deterrents to larger flows of FDI to India are listed below:
1) Weak infrastructure:
Infrastructural bottlenecks continue to be a major cause of concern
in India. When it comes to competition, India doesn’t stand against
other emerging markets in terms of ports, roads, skills sets,
education etc. Even after six decades of planned economic
development, India suffers from poor transport links, inadequate
power supply, poor roads, and frequent power cuts, delays in ports,
water and sewerage problems and so on.
A study conducted by the Federation of Indian Chambers of
Commerce and Industry in 2013, revealed that each day Indian
companies are losing up to Rs. 40,000 because of power shortages;
and due to power cuts, 61% companies suffer more than 10% loss in

52
production. Warehousing and cold storage facilities are also in short
supply, because of which 40% of the fruits, vegetables and other
perishable products get destroyed before reaching the markets. In
the World Competitiveness Index for 2013-14, India ranked 85 out of
148 countries for its infrastructure, much behind China which ranked
48.
2) Complicated tax structure:
Stability and transparency in tax regime along with clarity in tax laws
can have far reaching impact on investments in any country. The
taxation policies in India remain inherently complex despite the fact
that government has taken several steps to simplify and redesign it.
In the recent years, India has witnessed several tax disputes with
respect to cross border transactions involving big MNCs. According
to a report in 2011-12, 30 corporations which comprise the BSE
Sensex had USD 7 billion clogged in tax law suits. Again, while
corporate tax rates in most of the nations are in the range of 15 to
25%, in India foreign companies are taxed at a rate of 40%.
The corporate tax rate for foreign companies is 25% in China along
with tax holidays for qualified tax payers. India’s indirect tax regime
is also very complex, imposing several taxes such as central sales tax,
VAT, service tax, central excise duty, octroi etc. and calls for a
number of compliances increasing the burden on companies.
Moreover, there is a lack of uniformity in the tax rates across the
country increasing the complexities for tax payers.

3) Restrictive labor laws:

53
India is known worldwide for its stringent and rigid labor laws and
overregulated labor market. Over the years, Indian government has
enacted a large number of legislations to protect the interests of
labor covering different aspects namely fixation and revision of
wages, worker’s health and safety, mode of payment of wages,
payment of compensation in the event of industrial accident,
provision of social security such as provident fund, gratuity,
insurance and so on. Indian economy has turned highly inflexible due
to these laws. These laws contain strict rules regarding overtime and
imposes financial obligation on the employer upon worker
retrenchment.
Laws such as taking prior permission from the government before
firing any worker in an organization employing more than 100
workers continues to haunt corporations. On several occasions OECD
and World Bank studies have highlighted the need to bring reforms
in Indian labor laws.
4) Bureaucracy, regulations and corruption:
Yet another handicap that India suffers from is bureaucracy, red
tapism and corruption. It takes months to obtain licenses, approvals
and permits. As per the doing business report, it takes 67 days for a
company to obtain electricity connection, 16 days to obtain
clearances and export goods from India, 182 days for dealing with
construction permits and 1420 days for enforcing contracts. It takes
4 to 8 weeks for a new company to get itself registered in India as
compared to few days in most developed and developing markets.
Many a times, the FDI approvals are kept pending for months that
prompts the investor to drop out. With respect to FDI policies, even
though several liberalization measures have been undertaken by the

54
government but FDI regulations continue to remain restrictive as
compared to many other nations. India has been selective in opening
sectors for FDI and FDI in India is subject to sectoral caps ranging
from 20 to 100%. The FDI Regulatory Restrictiveness Index 2013,
prepared and published by OECD has ranked India 6th (indicate
restrictive FDI policies) out of 58 countries. Again, corruption in India
is rampant where; licenses, clearances, and contracts are given not
on merit basis but based on bribes. Uncertain government policies
and frequent changes in them, inefficient administrative,
overlapping jurisdictions, excessive governance increases the
transaction costs for companies making India a less preferred
destination.
 4.1. There are two types of implications i.e. positive and
negative as per following:
 Positive Implications:
a) FDI provides capital which is usually missing in the target
country-long term capital is suitable for economic
development.
b) Foreign investors are able to finance their investments projects
better and often cheaper.
c) Foreign corporations create new workplaces.
d) FDI bring new technologies that are usually not available in the
target country-There is empirical evidence that there are spill-
over effects as the new technologies usually spread beyond the
foreign corporations.
e) Foreign corporations provide better access to foreign markets-
Ex. Foreign corporations can provide useful contacts even for
their domestic subcontractors.

55
 f) Foreign corporations bring new know-how and managerial
skills into the target country- Again, there is a spill-over effect –
as people leave the corporations they leave with the
knowledge and know-how they accumulated.
g) Foreign corporations can help to change the economic
structure of the target country- With a good economic strategy
that the governments can attract companies from promising
and innovative sectors.
h) “Crowding in” effect-The foreign corporations often bring
additional investors into the target country (ex. their usual
subcontractors).
i) Foreign corporations improve the business environment of the
target country-Ethical business or rules of conduct.
j) Foreign corporations bring new “clean” technologies that help
to improve the environmental conditions.
k) Foreign corporations usually help increase the level of wages in
the target economy.
l) Foreign corporations usually have a positive effect on the trade
balance.

 Negative Implications:

a) Foreign corporations may buy a local company in order to shut it

down (and gain monopoly for example).

56
b) “Crowding out” effect- We can see this effect if the foreign
corporations target the domestic market and domestic
corporations are not able to compete with these corporations.
c) Foreign corporations may cut working positions (privatization
deals or M&A transactions).
d) Foreign corporations have a tendency to use their usual suppliers
which can lead to increased imports (no problem if the production
is export driven).
e) Repatriation of the profits can be stressful on the balance of
payments.
f) The high growth of wages in foreign corporations can influence a
similar growth in the domestic corporations which are not able to
cover this growth with the growth of productivity- The result is
the decreasing competitiveness of domestic companies.
g) Missing tax revenues- If the foreign corporations receive tax
holidays or similar provisions.
h) The emergence of a dual economy- The economy will contain a
developed foreign sector and an underdeveloped domestic
sector.
i) Possible environmental damage.
j) “Incentive tourism”.

 SUGGESTIONS FOR INCREASED FLOW OF FDI INTO THE COUNTRY:-

1) Flexible labour laws needed:

57
China gets maximum FDI in the manufacturing sector, which has
helped the country become the manufacturing hub of the world. In
India the manufacturing sector can grow if infrastructure facilities
are improved and labour reforms take place. The country should
take initiatives to adopt more flexible labour laws.
2) Re look at sectoral caps:
Though the Government has hiked the sectoral cap for FDI over the
years, it is time to revisit issues pertaining to limits in such sectors as
coal mining, insurance, real estate, and retail trade, apart from the
small-scale sector. Government should allow more investment into
the country under automatic route. Reforms like bringing more
sectors under the automatic route, increasing the FDI cap and
simplifying the procedural delays has to be initiated. There is need to
improve SEZs in terms of their size, road and port connectivity,
assured power supply and decentralized decision-making.
3) Geographical disparities of FDI should be removed:
The issues of geographical disparities of FDI in India need to address
on priority. Many states are making serious efforts to simplify
regulations for setting up and operating the industrial units.
However, efforts by many state governments are still not
encouraging. Even the state like West Bengal which was once called
Manchester of India attracts only 1% of FDI inflow in the country.
West Bengal, Bihar, Jharkhand, Chhattisgarh are endowed with rich
minerals but due to lack of proper initiatives by governments of
these states, they fail to attract FDI.
4) Promote Greenfield projects:
India’s volume of FDI has increased largely due to Merger and
Acquisitions (M&As) rather than large Greenfields projects. M&A’s
58
not necessarily imply infusion of new capital into a country if it is
through reinvested earnings and intra company loans. Business
friendly environment must be created on priority to attract large
Greenfields projects. Regulations should be simplified so that
realization ratio is improved (Percentage of FDI approvals to actual
flows). To maximize the benefits of FDI persistently, India should also
focus on developing human capital and technology.

5) Develop debt market:

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.
Therefore it is said that countries with well-developed financial
markets tend to benefits significantly from FDI inflows.
6) Education sector should be opened to FDI:
India has a huge pool of working population. However, due to poor
quality primary education and higher education, there is still an
acute shortage of talent. FDI in Education Sector is lesser than one
percent.
By giving 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 education. The issues of
commercialization of education, regional gap and structural gap have
to be addressed on priority.
7) Strengthen research and development in the country:
59
India should consciously work towards attracting greater FDI into
R&D as a means of strengthening the country’s technological
prowess and competitiveness.

IMPACT OF FDI ON INDIAN ECONOMY

Foreign Direct Investment (FDI) refers to an investment made by a
company based in one country in to another company based in other
country. FDI is often preferred over Foreign Institutional Investments
(FII) as it considered to be the most beneficial and stable form of

60
foreign investment for an economy. FDI plays a multidimensional
role in the overall development of any economy. It provides a new
source for capital, can lead to technological up gradation, skill
enhancement and resultant efficiency effects. While FDI is expected
to create positive impact on economy, it has also brought in certain
negative impact on Indian economy during the past few years. The
present paper is an attempt to study the trends in flow of FDI in to
Indian economy. The paper also focuses on the correlation of FDI
inflows with various economic indicators. Finally the study tries to
analyze the impact of FDI on Indian economy.
For emerging economies like India FDI is often referred to as the
most effective way to transfer capital and technology from other
economies especially the developed ones. These economies in
return look at India as an economy with immense growth potential.
Lenoid Melnyk, Oleksander Kubatko and Serphiy Pysarenko (2014) in
their study on Analyzing the impact of FDI on the economic growth
of post communism transition economies concluded that FDI
significantly and positively influence the economic growth of host
countries. The study found out that FDI is positively correlated with
an increase in a specific region’s growth rate. As per the results a
well-developed financial and institutional sectors are the important
sources of GDP growth and FDI inflows. Basem Mohammed Louzi
and Abeer Abadi in their study analyzing the impact of FDI on
economic growth in Jordan reports that FDI inflows do not exert an
independent influence on Jordan’s economic growth. They also
reported that the impact of domestic investment (DIN) and trade
policy (TP) on GDP growth rate was found to be positive. Syed
Tabassum Sultana and Pardhasaradhi S. had made an analysis on the
impact of FDI and FII on Indian Stock Market during the period 2001-

61
2011 and concluded that there is strong positive correlation
between FDI and BSE Sensex and also with FDI and NSE Nifty. As per
the study there was moderate correlation between FII and BSE
Sensex and correlation was not significant at 1% level between FII
and NSE Nifty during the study period. The present study was
conducted to test and validate these results in the Indian context
especially in the liberalized economic scenario.
Objectives of the study:
 To study the trends of FDI in India in the last fifteen years.
 To find out the correlation between FDI and GDP of the country.
 To find out the correlation between FDI and Indian Stock market
movements.
 To analyze the impact of FDI on Indian Economy.
Scope of the study:
The present study takes in to consideration FDI inflows in the
country for the last fifteen years. The correlation between FDI, GDP
and Market Indices were examined. NIFTY and Sensex were selected
to study the relationship between FDI and Stock market movements.
Trends in the flow of FDI are studied and its impact on country’s
economic growth is studied to evaluate the country’s current
liberalized FDI regime.

Data Collection & Analysis:

This study is based on secondary data. Data have been collected
from various sources including RBI bulletins, Economic Survey
Reports, NSE India and BSE India Websites and also from various
62
 publications of Ministry of Commerce. This study considers last 15
years data i.e from 2000-01 to 2014-15.Values have been averaged
to get the most appropriate representation on an annual basis in
case of stock market movements.

YEAR FDI (US$ GDP(US$ NIFTY SENSEX

Million) Million)
2000-01 4029 476.6 1333.35 3877.55
2001-02 6130 493.9 1060.75 3388.59
2002-03 5,035 523.7 1079.3 3352.77
2003-04 4,322 618.3 1778.55 5437.05
2004-05 6,051 721.5 2026.85 6233.54
2005-06 8,961 834.2 2835.25 9346.24
2006-07 22,826 949.1 3974.25 13731.09
2007-08 34,843 1238.7 5858.35 20286.99
2008-09 41,873 1224.1 2981.2 10076.43
2009-2010 37,745 1365.4 5169.45 17401.56
2010-11 34,847 1708.5 6101.85 19242.36
2011-12 46,556 1835.81 4866.7 16488.24
2012-13 36,860 1831.78 5855.75 19426.71
2013-14 24,824 1861.8 6307.9 21032.71
2014-15 32,628 2066.9 8102.1 27507.54
The Impact Of Foreign Direct Investment In
The Retail Sector

The Indian Parliament, in December 2012, took a significant step

regarding Foreign Direct Investment (hereinafter referred to as FDI),
when it approved of the Central government’s decision which allowed

63
FDI in multi-brand retailing. This paved the way for foreign retailers to
set up retail stores with 51% ownership in major cities to sell a large
variety of products together under one roof[2]. It is to be noted that
foreign capital was already allowed in single-brand retailing and this
was, therefore, an extension of that policy to multi-brand retailing.
Furthermore, several indirect channels, such as franchise agreements,
cash and carry wholesale agreements, strategic licensing agreements,
manufacturing, and wholly owned subsidiaries have existed prior to the
Parliament’s assent to FDI, through which foreign companies including
large retailers have already had access to the Indian market.

However, an objective assessment of potential benefits and costs of FDI

in retail is difficult for several reasons in my opinion.

 Firstly, since retailing in India has largely been taking place

in the unorganized sector, most data available is unreliable
and cannot be said to be definite. Most of the studies and
reports which are published rely on estimates based on strong
assumptions and ‘smart’ guesses.
 Secondly, although FDI has been present in the retail sector
in similarly developing countries of Southeast Asia and Latin
America and we can study their experiences, the wide
variations in their experiments and outcomes have not made
it feasible.
 Also, India being the unique land that it is with all it’s typical
problems and society, a comparison with any country would
at best, give us a rough idea of the results. It can also be
argued in this respect that for some countries, not much time
has elapsed since they allowed foreign capital in retailing,
and therefore, a long-term impact assessment is not possible.

64
  Lastly, I believe that retailing is a service whose provision
depends on a number of noneconomic factors which are
difficult to factor in and go on to make an objective
assessment of the potential benefits and costs.

My primary objective in this article is to provide an overview of

retailing in India and a discussion of potential benefits and
costs of FDI in the retail sector. The rest of the article is
organized as follows. In the next section, I discuss the
economics of retailing which would cover the concept of
retailing as a service and its place in the supply chain. Following
this, I would put forward a brief discussion on India’s retail
sector highlighting its special features that need to be
considered in a comprehensive assessment of the potential
benefits of FDI in this sector. Further, I would present the case
of Wal-Mart to understand the possible effects of allowing
global players into the Indian retail sector. Lastly, the final
section will have the concluding remarks.

What Is Retailing?
According to a definition attributed to Philip Kotler, retailing includes
“all the activities involved in selling goods or services directly to the
final consumers for personal, non-business use.”[4] Although selling
goods or services directly to the final consumers constitutes the
65
primary activity in retailing, a number of auxiliary activities are also
associated with it. Figure 1 illustrates a scenario where the retailers are
involved in the distribution phase of an integrated supply chain and are,
therefore, in direct interface with the consumers.

Retailers directly sell goods or services to consumers at the front-end of

such chains. However, at the backend of the same, they are also heavily
involved in procuring (also called sourcing), storing, and transporting
the products which they retail besides being involved in processing and
packaging as well in some cases. The logistics of retailing is primarily
dependent on transportation, communication, and storage
infrastructure.

Over time, retailing has been organized in many different ways and, as
a result, one can see several different formats of retail trading. The
format which is relevant to my paper is multi brand (multi-product)
retailing. In cases of multi brand retailing, the retailer offers a wide
range of products that are produced by diverse producers who are
presumably in geographically dispersed locations and unconnected
otherwise.

Therefore, this format of retailing potentially generates several benefits

to the two sides of the market as it provides a link between a large
number of producers and a large number of consumers. However, the
logistics for such multi-brand or multi-product retailing are not as
simple as shown in the figure but actually, quite complicated. In each
stage of this supply chain, value is added and the total value addition
determines the price of the product which is paid at the last stage by
the final consumer. At the retail stage, the value addition depends on
the cost of retail logistics which is, as shown above, depends on
transportation, communication, and storage infrastructure, and the
profit margin for undertaking the retail enterprise. In the next section, I

66
would describe the retail sector in India and the potential effects of FDI
in the country.

The Retail Sector In India

Retailing has always been an important service industry in India.
Particularly, with the faster growth of the economy in recent years,
higher disposable incomes, and rapid urbanization, this sector’s growth
has seen acceleration. In fact, it has been identified as an industry with
enormous future growth potential in India.

I have discerned four stages in the evolution of retailing in India which

I’ve represent in the History, retailing was germinated in village fairs or
‘melas’- primarily a source of entertainment rather than an outlet
which focused on well-conceived economic activity[8]. Later on, with
the expansion of the consumer base, some forms of retailing started
shaping up and thereafter evolved into the traditional neighborhood
shops (kiranas, convenience stores etc.). In rural areas, these kinds of
kirana shop-owners cam about to wield tremendous market power
which left the consumers to face the wrath of a number of unfair
practices.

Since, a proper distribution network did not exist and within an

economy having geographically dispersed production locations, the
unethical and exploiting profiteering activities of these retail shops
continued unabated. It was in the face of these problems that the
government stepped in with the object to ensure that the distribution
of basic items was at a fair and competitive price and that further a
regulated public distribution system (PDS) was established. The
government intervention also helped remove major distributional
bottlenecks which in turn, ensured availability and fair price.

67
The economic reforms and liberalization of the economy in the 1990s
was a watershed moment for the entry of foreign brands in India. Due
to the rise in disposable income and the growth of a strong and rich
urban middle class, the household consumption basket got expanded
to include items which consumers in India did not typically purchase
until then. The entry of foreign goods contributed to the rising trend by
expanding the choice set available to the consumers. These
developments created ground and an environment which was and still
is conducive to the introduction of modern retailing which includes
exclusive brand outlets (EBOs), supermarkets, departmental stores, and
shopping malls. It is my opinion that it is not a coincidence that almost
all major Indian private corporate groups (The Tatas, The Reliance, The
Birlas) have also entered the retail sector in one way or another.

Although the gradual evolution of India’s retail sector saw the ushering
in of modern forms of retailing, it is interesting to note that the entry of
these modern retail giants in the Indian market has not wiped out the
other forms of retailing which were seen in the earlier stages of the
evolution process coexist. In fact, the potential changes in the relative
balance of power among these various formats and their direct
beneficiaries in the advent of large foreign retailers are at the core of
the ongoing debate.Finally, the potential for growth of India’s retail
sector is enormous. During the last two decades, the middle class has
grown significantly and its average income has increased and its
consumer aspirations. With the improvement in transportation and
communication infrastructure, there has been a convergence of
consumer tastes. Furthermore, since India has a relatively young
population, (The median age being about 26 years) it is not only a
source of very large future demand but also since their tastes and
preferences are likely to be less rigid than they were before, the market
in India has unprecedented potential to grow. I’ll now examine how FDI

68
can tap into this potential and consequently, the benefits that I feel
would arise out of it.

The Potential Benefits Of FDI In India’s Retail Sector

In this section, I will briefly discuss some of the potential benefits of FDI
in India’s retail sector. Generally, FDI helps build the stock of physical
capital in whichever sector in which investment might take place.
Particularly, in developing countries where the stock of physical capital
is low and there is a shortage of domestic funds to finance investment,
FDI can go a long way in increasing the physical capital stock and
productivity. I will discuss some of the pertinent issues which I feel are
important in realizing the benefits in my opinion.

Infusion Of Capital
As I discussed above, retailing depends on supply chain logistics. I feel
that an efficient logistics – which would largely be based upon well-
developed networks of transportation, communication, and storage
infrastructure – would not only provide us with timely and
uninterrupted market access to the producers but also ensure that
quality and lower prices are also afforded to the consumers. An
example that I can envisage is that of the farmers who, without the
development of appropriate storage infrastructure, cannot have access
to an efficient market system that will pay fair prices and therefore, fall
prey to unscrupulous middlemen.

Furthermore, since a significant portion of the produces are destroyed

in the process of being transported from the farmers to the retailers
and ultimately to the consumers, the consumers have to pay higher
prices for relatively low-quality products. In India, primarily due to the
69
unorganized and fragmented nature of the retail sector, there is a
severe shortage of funds for investment in the basic infrastructure
required mainly for back-end retail logistics. The retailers are too small
to make such large investments. Although the government has stepped
in, the infrastructure built by the government has not been adequate.
Allowing FDI in retail is expected to go a long way in alleviating this
situation because the large retailers would build the necessary
infrastructure to create an integrated back-end supply chain for
efficiency.

Technology Transfer
In addition to augmenting physical capital stock, FDI in developing
countries will also act as a conduit of technology transfer. Foreign
capital brings along advanced technology from developed countries
that increases productivity. In retailing, advanced technologies will
tremendously improve processing, grading, handling and packaging of
goods. An example of this could be the use of cold-storage facilities,
refrigerated vans, pre-cooling chambers which will reduce wastage and
thus, help maintain product quality. These efficiency gains will lower
price and improve quality for the consumers.

Higher Consumer Wellbeing

The entry of foreign retailers will provide the customers, particularly in
the organized retail sector, the opportunity to choose from a wide
variety of brands and products. A market with more choice and
consequently, more competition would improve upon the consumer
wellbeing besides making the manufacturers strive towards more
quality. In addition, larger space for product display, a hygienic

70
environment in the shopping area, availability of a large number of
products under one roof, and better customer care will increase
customer satisfaction. I discern this from various studies which show
shopping in large malls and departments also go a long way in providing
entertainment to the customers.
Competition And Inflation Control
The advent of multinational retailers will increase competition that will
benefit consumers. There will be special offers and various free or
discounted services that will accompany the products. This competition
will also keep prices low that in turn will be a check on inflation. As
discussed above, lower prices are expected because of more efficient
supply chain logistics that reduces the cost of moving goods from the
producers or wholesalers to the retailers and ultimately to consumers.
The development of transportation and storage infrastructure also
helps reduce the volatility of prices, particularly of agricultural
products.

Benefits To Farmers, Local Suppliers, And Domestic

Manufacturers
Supporters of FDI in the retail sectors argue that the farmers will
benefit immensely from the entry of multinational retailers. Primarily
through an extensive backward integration and superior technical and
operational expertise, I’m of the opinion that these retailers will be able
to provide stability and economies of scale. The construction of storage
facilities and improved transportation will reduce the losses to the
farmers due to the easily perishable nature of their products and will
provide a larger market. The farmers will receive better/fair prices by

71
directly selling to organized retailers. They will be able to get away from
excessive reliability on intermediaries who often pay lower prices.
Furthermore, local suppliers and domestic manufacturers will gain
access to larger, and potentially to global markets as the multinational
retailers will establish extensive forward and backward linkages that
will spread beyond national boundaries.
Employment And Revenue Generation
I expect that the growth of the organized retail sector because of FDI
should create jobs not only in frontend retailing but also in activities
which are related to it at the back-end of retailing. Since these jobs will
be in the organized sector, the laws that protect the interests of the
workers will be applicable to the retail sector which should, in turn,
ensure the quality of jobs which are on offer in the organized retail
sector. Higher wages and better work conditions will improve the
standard of living for those who find employment in the organized
retail sector.

Another more obvious benefit of would be that of revenue generation.

Since most retail outlets in India are in the unorganized sector, they
hardly pay any taxes to the government and are evasive which leads to
tax leakages via under-invoicing or non-reporting of sales. As FDI in the
retail sector helps the organized sector grow, it will generate revenue
for the government due to the retailers being on the record.

The Case of Wal-Mart

I will now take the case of Wal-Mart whose model of retailing I will set
as a benchmark to examine the possible effects of allowing entry of
large foreign retail firms in India. To start with, let us examine the
advantages of Wal-Mart in the USA and other countries, and whether

72
these advantages can be translated in India and if so, what could be the
possible effects in terms of net benefit or losses for different
stakeholders here.

Wal-Mart, the largest retail corporation in the world, was set up in

1962 and has an annual turnover of $400 million and employs about
two million people. The basic strategy of the owners was simple- enter
small towns with a population of 5000 to 25000- towns which were not
served by large retailers and therefore, derive a scale advantage in
relation to the size of small-town markets and consequently, eliminate
the smaller players which might be present there. This was similar to a
natural monopoly in which, due to the size of the market, one large
player with global economies of scale serves the market much more
efficiently than a large number of small players would.

Brea-Solis et al (2010) have identified six choices or a set of choices

which define Wal-Mart’s business model which is setting low prices,
investing in technology besides having specific human resource policies
and developing a Wal-Mart Culture. From its very beginning, Wal-Mart
has always focused on increasing the volume of customers that visit it
to realize economies of scale. By keeping the prices low, it increases
sales by such a margin that the decrease in the markup is more than
compensated for. It has been seen that when Wal-Mart enters a
market, the prices if general commodities decrease by 8% in rural areas
and 5% in urban areas. This unrelenting drive to attract a large number
of customers by keeping the prices low puts pressure on all the major
stakeholders- workers, managers, and suppliers. Thus, Wal-Mart
competes with the establishment in a wide array of sectors both
directly and indirectly.

Wal-Mart has derived the competitive advantage that it holds in

numerous countries by the adoption of a highly efficient logistics and

73
distribution system which was and is leveraged by new technologies,
eg: adoption of a vertically integrated distribution system.

As a counter to this analysis, Ghemawat and Mark argue that Wal-Mart

has “grown the economic pie available to be divided among its various
stakeholders instead of slicing up a fixed pie…” in a way that favors one
group over another. Given that the prices of Wal-Mart are 8% lower
than its competitors, the US consumers save on the order of $18 billion
per year. For each job lost through the Wal-Mart effect as mentioned
above by Fishman, consumers saved more than $ 7 million per year.

The following issue is whether Wal-Mart has been or would be able to

translate its success in its operations in foreign countries. The theory of
multinational firms is that a firm would be considered a multinational if
it has an intangible asset advantage in technology, brand name, and
organization.

Multinational firms have to take into account the diverse economic,

political and social institutions of different countries when they make
their entry, governance and management decisions in a particular
country. For example, Wal-Mart proved to be a success when it entered
Canada and the U.K. However, conversely, it failed in South Korea and
Germany and still struggles in countries like Japan and Russia.
Particularly for Germany, Wal-Mart management was not able to
understand and comprehend Germany’s regulatory and institutional
conditions and consumer preference for value rather than service and
therefore, failed miserably.

Similarly, in the case of South Korea, where consumers preferred to buy

small and fresh quantities and the Korean competitors attracted
consumers away from Wal-Mart with marketing strategies which
invoked nationalistic feelings.

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In the case of Mexico and other Latin American countries which are
geographically close to the U.S., Wal-Mart has been comparatively
successful. Wal-Mart entered Mexico in 1991, starting off with a joint
venture with Aurrera, the largest Mexican firm. Thereafter, it adapted
to Mexican conditions like ‘Bodega Aurrera’ stores and austere versions
of supermarkets were designed specially to meet the small-town needs
which consequently, allowed it to target different customers with
different purchasing power. Similarly, Wal-Mart entered China in 1996
and has subsequently been able to cater to the rapidly growing Chinese
market at around 18 percent annually. Thirty percent of Chinese
exports are accounted for by Wal-Mart.

Schell observes “Just as China is providing Walmart with the lifeblood of

its commercial growth, Walmart is helping the Chinese state not just to
satisfy the escalating demands of its consumers but to extend Beijing’s
regulatory writ. Together, they are engaging in a bold experiment in
consumer behavior modification, market economies, and
environmental stewardship….how Walmart and China interact with
each other over the next decade will be critical to the fate of the
planet’s environment.”

Now, coming on to the case of Bharati Wal-Mart in India whose entry in

the country has had significant implications, although its presence at
present is small due to various policy restrictions. Wal-Mart put forth a
joint venture with the Indian firm Bharati to circumnavigate India’s FDI
rules. Wal-Mart, in Mexico, had similarly entered the country with one
such joint venture with a local retail firm and had, later on, bought it off
after establishing itself in the country. However, in the case of India,
Bharati did not have prior retail business. It itself wanted to enter the
organized retail market using Wal-Mart’s expertise. Interestingly, the
partnership was a non-exclusive partnership, i.e. Wal-Mart can forge
other alliances in India. Thus, in this case, both the partners are

75
essentially using each other advantages with the lingering expectation
of breaking off in the future and become competitors.

Personally, I believe that this means that once Bharati has acquired
Wal-Mart’s expertise with regards to warehousing and the supply
chain, it would be rational for it to break-up as it would own the stores
which would be strategically placed across the country. By doing this,
Wal-Mart would gain the institutional knowledge of the Indian
economy and get to know how to adapt its American model of retailing
in India.

However, now that Wal-Mart is allowed to enter India without any

policy restrictions, the first issue that would come up in my opinion
would be its ability to adapt and modify its low cost and price model to
India’s institutional and infrastructure conditions and overtime how its’
operations change the landscape of the retail industry in India. India is
more densely populated than the USA, China or any other country
which Wal-Mart has ventured into. The high density could play out to
be an advantage and also a disadvantage for such large retailers. I feel
it would be so as once a large retailer predominantly occupies the real
estate in a high-density area, it would be ideally placed to be able to
realize economies of scale of serving a large number of customers.

Secondly, I feel that the consumer preferences and consumption

patterns, (a typical example is a vegetarian and non-vegetarian food)
which are more diverse across different regions in India, than in
countries such as the USA, would mean that a set standardized supply
chain across the entire country would not work. Furthermore, the
presence of large barriers for inter-state trade within the country along
with the different tax regime of the states and infrastructure conditions
would create further obstacles in retailers such as Wal-Mart’s path. The
fact that it is easier to bring apples from Australia to Bangalore than

76
getting them from the Himachal Pradesh state further reiterates the
point I’ve made. Thus, Wal-Mart will have to adapt and plan different
supply chains for the different regions of the country and in some
cases, even states, rather than just adopting one for the whole country.

Another important issue which I feel is important is to create linkages

with a large number of Indian manufacturers and farmers who are
spread and might just be isolated across the country. Wal-Mart has to
invest a significant amount of resources in cultivating long term
relationship with the suppliers and helping them in quality and delivery
control mechanism. One of the criticisms of Wal-Mart’s practices is that
it drives supplier firms to be cost-effective especially if the suppliers
become dependent on the large buyer.

On the other hand, if supplier firms in India learn from Wal-Mart in

improving production and delivery practices, they could improve their
bargaining by diversifying their sales to other large retailers or even by
selling in the international markets. If Wal-Mart is able to adapt its
supply chain to Indian conditions, it could benefit both large and
relatively small Indian retailers by expanding the market through
improving know-how of a large number of vendors in the country. This
was what happened in the auto-component industry in India especially
in regard to the first-tier producers as a result of the entry of TNCs in
the automobile industry.

Lastly, there are some critics of Wal-Mart or the people who

supposedly ‘represent’ the Indian retailers’ special interests who make
an argument that Wal-Mart should be kept out of retailing but that
their outsourcing and the supply chain activities that they undergo for
exporting Indian manufacturers should be encouraged. I feel that this

77
argument is unfounded simply because it is essential to allow such
foreign players to operate in Indian markets to make markets
contestable and competitive, for a realization of externalities and
benefit consumers and suppliers especially farmers.

FINDINGS:
78
The study found that to attract foreign investors government of India
has introduced amendments in existing FDI rules and regulations and
permitted FDI in 12 areas of operations in 2013. Under this new
policy of FDI 2015-16, limits in retail trading, teleports (uplink hubs),
telecommunication, pharmaceuticals, insurance sector,
infrastructure, defense, aviation sector, CICs, animal husbandry,
plantation, has been increased. The study found that service sector,
telecommunication sector, infrastructure sector and IT sector have
attracted higher FDI inflow and tourism; pharmaceuticals, services,
chemicals and construction sectors are the biggest beneficiaries of
amendments and liberalized policy initiatives. The study found that
in 2011, GOI permitted dealers to open non-interest bearing escrow
accounts in Indian rupees and permitted authorized dealers to keep
securities in possession to facilitate FDI transactions without prior
approval from RBI. Study found that GOI discontinued the physical
filing of three FDI related returns ARF, FC-GPR and FC-TRS and
introduced online filling of forms on Government E- Biz portal The
study found that in the year 2011-12, outward FDI from India
touched 112 billion US dollars and Net FDI in the year 2015-16
surged to 36 billion US dollars and Gross FDI touched 55.6 billion US
dollars. The study found that Mauritius, Singapore, Unites States and
UK are the leading investors in Indian economy. The study found that
government of India amended FDI rules and regulations in Private
Security Agencies, Investment by Foreign Venture Capital Investors
(FVCIs), Courier Services, Employees Stock Option Schemes (ESOP),
Investment by Non-Resident Indians (NRIs), Introduction of
Composite Caps, Foreign Investment into Investment Vehicles (AIFs,
REITs, INVITs etc), Liberalization in Insurance and Pension Sector,
Investment by of Swap of Shares, Limited Liability Partnerships
(LLPs), Manufacturing, Defense, Single Brand Trading (SBRT), in e –
79
commerce, Pharmaceutical, The study found that impact of FDI on
Nations economic activities and growth is positive. All the respective
sectors in which amendments are been made are performing with
growth. Employment, productivity and purchasing power has grown
with economic growth. The study found that in the year 2015-16,
India dominated in green field investment and replaced China as the
top destination for green field FDI.

1) FDI is an important stimulus for the economic growth of India.

2) Service sector is first and banking and insurance sector is second
segment of which pick the growth in second decade of reforms.
3) FDI create high perks jobs for skilled employee in Indian service
sector.
4) Mauritius and Singapore is the 2 top countries which has
maximum FDI in India.
5) FDI plays an important role in the development of infrastructure
because many countries invest in the infrastructure sector and
service and banking finance sectors.
6) Atomic Energy and Railway Transport are some important and life
line of any country. Therefore India also restricted FDI in this sector.
7) After above analysis, we can say that FDI has good future growth
in Retailing and Real estate sector in India.

A. India is attracting foreign investment at a good rapid rate of

growth. The growth rate of FDI over last year was found to be 40 %.
The main reason for this substantial growth in FDI was opening up of
80
Indian economy to foreign investment, relaxation of norms for
foreign investments and enhancing sector wise limit.
B. In region wise analysis, Mumbai was on the top with 29% to total
FDI of India. The reason behind this was the availability of service
sector, infrastructure and construction development. Six regions
offices which are at the top contribute 71% to the total FDI while rest
of the regions add 29% to total FDI.
C. As per the data, the sectors that attracted higher inflows were
Services (17%), Construction activities (9%), Telecommunications
(7%) and Computer Software and Hardware (7%).
D. A country wise FDI inflows show that Mauritius is the country that
has invested highly in India followed by Singapore, UK, Japan
Netherland and USA and so on. Nine countries contribute 83% to
cumulative FDI in India while remaining contributes only 17%.
E. FDI plays an important role in the development of infrastructure
because many countries invest in the infrastructure sector and
banking finance sector.

Recommendation

81
Therefore, for better economic growth and balance development it is
paramount important for nation policy makers to plan for further
opening up of the economy. It is advisable to open up the export
oriented sectors to attract more FDI inflows.

Political stability, corruption less and freedom to invest in desired

sector hold the key of attracting FDI. Thus, GOI has to develop
investment friendly environment along with investment protection and
ready to use infrastructure and have to keep on amending the law till it
is having positive impact on economy of the nation.

Government of India (GOI) has to adopt innovative and globally

competitive policies along with good governance according to global
standards in order to make India as a most preferred and attractive
destination for foreign capital.

The impact and level of influence of FDI on nation’s economy should be

carried out with other microeconomic variables than GDP. The
outcome of study differs from period to period depending upon global
economic environment.

Thus, government has to keep on bringing the changes in policy and

have to keep on amending the rules in comparison to international
perspectives.

REFERENCES
82
1. Asta Zilinske (2010), Negative and Positive Effects of Foreign
Direct Investment, Kaunas University of Technology, Lithuania,
ISSN 1822-6515 EKONOMIKA IR VADYBA: 2010.15.
2. Alam M. S. “FDI and Economic Growth of India and Bangladesh: A
Comparative Study”. Indian Journal of Economics, Vol. LXXX, Part
1, No 316, pp. 1-15, 2000.
3. Adhikary, B.K. “FDI, Trade Openness, Capital Formation and
Economic Growth in Bangladesh: A Linkage Analysis”.
International.
4. Journal of Business and Management, Vol. 6(1), pp. 16-28, 2011.
5. Agrawal, G. and Khan, Mohd. Aamir. “Impact of FDI on GDP: A
Comparative Study of China and India”. International Journal of
Business and Management, Vol. 6(10), pp.71-79, 2011.
6. Basu P., Nayak N.C, Archana (2007), Foreign Direct Investment in
India: Emerging.
7. Bashir, Abdel-Hameed M. “Foreign Direct Investment and
Economic Growth in Some MENA Countries: Theory and
Evidence”.
8. Topics in Blackman, A & Wu, X, (1999), Foreign Direct Investment
in China’s Power Sectors: Trends Benifits and Barriers. Energy,
Elsevier, Vol. 27(12), pages 695-711.
9. Bhavya Malhotra (2014), Foreign Direct Investment: Impact on
Indian Economy, ISSN 2278 – 3679 Volume 4, No. 1, pp. 17-23,
Research Indian Publications http//www.ripublication.com.
10. Chenery, H. B. and Strout, A. M. “Foreign Assistance and
Economic Development”. American Economic Review, Vol. 56, pp.
679-733,1966.
11. Dua, Pami and Ranjan, Rajiv (2010), “Exchange Rate Policy
and Modelling in India”.
12. Dunning H. John (1993), “The Theory of Transitional
Corporations, UN Library on Transational Corporations”, Volume I,
Routledge, 1993.

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13. Economy Survey, (2009 - 10): Ministry of Finance,
Government of India 15.
14. Epstein G. (1999). A critique of Neo-Liberal Globalization.
Third World Network Fact Sheets on FDI, Foreign Investment
Promotion, Board (FIPB).
15. Feenstra, R. C. and Markusen, J. R. “Accounting for Growth
with New Inputs”. NBER Working Paper, No. 4114, 1992.
16. Griffin, K. B. “Foreign Capital, Domestic Savings and
Development”. Oxford Bulletin of Economics and Statistics, Vol.
32, pp. 99-112, 1970.
17. Handbook of Statistics on Indian Economy. “Published by
Reserve Bank of India” 2013-14.
18. Kuliaviene, A. and Solnyskiniene, J. “The Evaluation of the
Impact of Foreign Direct Investment on Lithuanian Economy
Using Lag- Analysis”. Economics and Management, Vol.19(1),
pp.16-24, 2014.
19. Kaur, R., Nikita and Reena. “Trends and Flow of Foreign
Direct Investment in India”. Abhinav National Monthly Refereed
Journal of Research in Commerce & Management, Vol. 3 (4), pp.
42-47, 2014.
20. Mohan, Rakesh (2003), Challenges to Monetary Policy in a
Global Context”, Speech delivered at the 22nd Anniversary
Lecture of the Central banking Studies at the Central Banks of Sri
Lanka, Colombo,21 November 2003.
21. Reserve Bank of India Annual Report, 2010-11, 2011-12,
2012-13, 2013-14, 2014-15, 2015-16.

22. Aggrawal, S., Singla, A., Aggrawal, R. (2012). Foreign direct

investment in India. International Journal of Computational
Engineering & Management, 15 (5), 93-105.

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23. Azhar, S., Marimuthu, K.N. (2012). An overview of foreign direct
Investment in India. International Journal of Multidisciplinary
Management studies, 2 (1), 202-214.

24. Department of Industrial Policy and Promotion, (April 2000 to

June 2015) Annual Report.

25. Devajit, M. (2012). Impact of foreign direct investment on Indian

economy. Research Journal of management Sciences, 1(2), 29-

CONCLUSION
FDI in India has a significant role in the economic growth and
development of India. FDI in India to various sectors can attain
sustained economic growth and development through creation of
jobs, expansion of existing manufacturing industries. The inflow of
FDI in service sectors and construction and development sector,
from April, 2000 to June, 2015 attained substantial sustained
economic growth and development through creation of jobs in India.

Computer, Software & Hardware and Drugs & Pharmaceuticals

sector were the other sectors to which attention was shown by
Foreign Direct Investors (FDI). The other sectors in Indian economy
the Foreign Direct Investors interest was, in fact has been quite poor.

FDI has helped to raise the output, productivity and employment in

some sectors especially in service sector. Indian service sector is
generating the proper employment options for skilled worker with
high perks. On the other side banking and insurance sector help in
providing the strength to the Indian economic condition and develop
the foreign exchange system in country.

85
 So, we can conclude that FDI is always helps to create employment
in the country and also support the small-scale industries also and
helps country to put an impression on the world wide level through
liberalization and globalization.

Foreign capital inflow in general supplements and compliments

domestic capital and stoke the pace of economic growth along with
certain benefits like transfer of technology, competitive management
practice, employment opportunities and economy of scale in host
nation. These benefits from large capital inflows also have certain costs
such as appreciation in asset prices, appreciation in exchange rates,
balance of payment imbalance, tax holidays, low corporate tax and
income tax rates, concessions in other kinds of taxes, special economic
zones, preferential tariffs, export processing zone, Bonded warehouses,
free lands or land subsidies, infrastructure subsidies, relocating and
expatriation subsidies, job training and employment subsidies,
investment financial subsidies, soft loan or loan guarantees, research
and development, derogation from regulations usually for very large
projects, declining domestic export competitiveness etc. The outcome
of the conducted study revealed that government of India’s
amendments and policy initiatives have generated positive and
encouraging results which accelerated the nation’s economic pace. FDI
inflow at micro and macro level has accelerated the industrial
production and it has influenced the general price level in the economy.
FDI inflow has helped to raise the output, productivity, domestic
consumption, export and employment in respective sectors. In
comparison to yester year the judicious policy decisions of present
government to liberate FDI inflow at the sectoral level has been
appreciated by the global investors. The GOI in order to answer the
domestic demand and to cater the unemployment used amendments
as a leverage tool and introduced policy initiative to attract more FDI
inflows into the country. GOI succeeded in accelerating the pace of

86
industrial production and managed supply side gaps to contain
inflationary pressures in the economy and also to accumulate foreign
exchange reserves to maintain and enhance the international
creditworthiness of the country.

Analysis on the FDI in India

87
 Annexure
1. Full form of FDI:

a. Foreign Development Index.

b. Federal Department of Investigation.
c. Foreign Department of Investment.
d. Foreign Direct Investment.
88
2. FDI is the formulation policy of which nodal department?

a. NABARD.
b. SEBI.
c. Department For Promotion of Industry And Internal Trade.
d. RBI.

3. What is worldwide investment called?

a. Corporate Fund.
b. Mutual Fund.
c. Foreign Investment.
d. Public Fund Investment.

4. FDI in India is allowed by two modes Government route and __?

a. Automatic Route.
b. Trade Route.
c. Bank Route.
d. All of the Above.

5. What is the maximum amount of FDI in retail that can be brought

into India through unrestricted routes?

a. 55%.
b. 100%.
c. 45%.
d. 25%.

6. Previous work does not limit __?

89
a. Joint Venture.
b. Franchise.
c. Greenfield Project.
d. Strategic Alliance.

7. Limit of FDI for private security agencies in India?

a. 74%.
b. 69%.
c. 49%.
d. 19%.

8.  In foreign trade, an adverse balance of trade occurs when __?

a. Export < Import.

b. Export = Import.
c. Export > Import.
d. None of the Above.

9. According to India’s FDI policy, 100 percent FDI in equity via the
automatic method is not permitted in which of the following
areas?

a. Maintenance And Repair Organization.

b. Private Security Agencies.
c. Industrial Park.
d. Construction Development Project.

10. The most popular avenue for MNCs to invest in countries all
over the world is through public-private partnerships (PPPs).
90
a. new factories to be built.
b. Purchase established local businesses.
c. create alliances with local businesses.
d. All of the preceding.

11. When can withdrawals of foreign direct investment (FDI)

begin?

a. When corporations try to grow their assets abroad at the end of

the business cycle.
b. When trade liberalization and industrial regulation are impossible
to achieve.
c. When there are a lot of interest rates and investment prospects.
d. When company is dominated by domestic investment.

12. Foreign Institutional Investors (FII) and Foreign Direct

Investments (FDI) are both related to investing in a country.
Which of the following sentences best exemplifies a key
distinction between the two?

a. FII aids in the development of managerial skills and technology,

whereas FDI just brings in capital.
b. FII aids in the expansion of capital availability in general, whereas
FDI only targets specific sectors.
c. FDI only goes into secondary markets, whereas FII goes into
primary markets.
d. FII is thought to be more reliable than FDI.
91
13.  The Indian government declared in November 2015 that FDI
in ‘News and current affairs networks’ would be increased from
26 percent to.

a. 49%.
b. 100%.
c. 51%.
d. 75%.

14. Globalization has seen dramatic changes in the last two

decades in __?

a. between countries in terms of products, services, and people.

b. international trade in products, services, and investments.
c. Between countries, products, investments, and people are
exchanged.
d. None of the preceding.

15. __ is foreign direct investment?

a. Tangible Goods.
b. Intangible Goods.
c. Intellectual Properties.
d. Human Resources.

16. Foreign direct investment (FDI) increase can help __

a. Circulation of Money.
b. Unemployment.
c. Employment.
92
d. Supply.

17.  An _____ is a financial investment made by a company or

individual in another country’s business interests.

a. RBI.
b. FDI.
c. SEZ.
d. CRR.

18. Ministry of India needs to decide on FDI Proposal application

in how many days?

a. 70 days.
b. 60 days.
c. 50 days.
d. 45 days.

19. The _______ is the difference between a country’s imports

and exports of goods and services.

a. Balance of Items.
b. Depreciation.
c. International Trade.
d. Export-Import Balance.

20. __ is an investment fund that is based in a country other

than the one where the investment is made.

a. Foreign Institutional Investment. 

b. Foreign Trade Investment.
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c. Forex.
d. Foreign Trade Investment. 

94